NEW YORK – Holiday pricing on consumer electronics recovered from the promotional depths that marked the start of the season, but remained sharply competitive in the last days of December as CE dealers drew large swells of last minute shoppers and post-Christmas bargain hunters.
Following the earnings drubbing from Thanksgiving weekend, the markdowns, promotions and finance offers planned for the last two weeks of December appeared more rational than the opening salvos on Black Friday. Panasonic’s now famously footballed 42W-inch plasma TV, for example, was still being touted at $1,000 on Christmas Eve — albeit for enhanced- rather than high-definition models.
Still, with 50 percent to 60 percent of retailers’ annual revenue generated in the fourth quarter according to Goldman, Sachs, and 50 percent of that garnered in the final two weeks of the year, dealers put on a full-court press for last minute business. “It’s a wrap” promotions included:
*Maxent’s 50W-inch plasma HDTV monitor for $1,500 at Best Buy;
*Sylvania’s 42W-inch plasma HDTV for $1,000 at Circuit City;
*Haier’s 42W-inch plasma HDTV for $1,000 at Nebraska Furniture Mart;
*Samsung’s 42W-inch DLP RP-HDTV for $900 at Samsung;
* Olevia’s 37W-inch LCD HDTV for $800 at hhgregg;
*Toshiba’s 32W-inch LCD HDTV monitor for $600 at Conn’s;
*Westinghouse’s 20-inch LCD TV for $300 at J&R Music World.
The extra shopping weekend, which Goldman, Sachs expected would boost comparable store sales into the plus column, also extended the annual game of chicken between merchants and shoppers angling for the best and final sales advantage. Best Buy’s doors stayed open until 5 pm on Christmas Eve, while Kohl’s, which has been encroaching the CE sector with promotionally priced LCD TVs, digital photo frames, iPod docks and other CE gifts, kept its stores open until 6 pm that night.
The extended shopping period was welcomed by many customers, if not sales associates. According to a poll by the National Retail Federation (NRF), more than 33 million consumers (15.4 percent) hadn’t started their holiday shopping by the second week of December. A similar survey commissioned by Circuit City showed that more than half of respondents would still be shopping for gifts within a week of Christmas, and one in five didn’t expect to finish until Christmas Eve.
Preliminary sales results confirmed the last-minute crush. According to ShopperTrak, which charts shopper movement and retail revenue, Dec. 23 or “Super Saturday” was the second-busiest shopping day of the season, coming up just shy of Black Friday with total sales of $8.7 billion, an increase of 61.7 percent over the prior-year period. “The total dollars spent indicate a very strong close to the holiday shopping season,” said ShopperTrak co-founder Bill Martin, “as procrastinating shoppers proved they were willing to spend.”
With CE products, particularly flat panel TV, proving the default gift of the holiday period, much of the season’s sales volume was generated in specialty stores and electronics departments. Richard Galanti, executive VP and CFO of Costco, said the warehouse club enjoyed “very strong” CE and PC sales over the holiday period, with electronics up over 20 percent in November year-over-year and total TV sales up nearly 50 percent for the month.
“The numbers are nuts in TV,” he told analysts during a conference call last month, “and CE is so darned strong. The TV thing is an anomaly. People are buying two, three [flat panel displays] at a time because of the price points. It’s a new concept.”
Still, Galanti acknowledged that the holiday period was extremely competitive. “We’re seeing a lot of discounting from our competitors,” he said. “We look at all the ads in the newspapers and we compete with them. The trick is to stay ahead with new models and products.”
Also helping holiday business was increased availability compared to the previous year. “We’re pretty much getting anything we want from vendors,” Galanti added.
While falling price points were a boon to Costco’s earnings thanks to its business model and cost structure, CE specialty retailers were singing the bottom line blues. In a conference call last month, Phil Schoonover, president/CEO of Circuit City, said moves by vendors and retail competitors led to price drops on mid to large screen LCD TVs that were 50 percent greater than the company had planned for, while price declines in plasma were three times greater than anticipated. Margins had remained comparable to the prior-year period until October, and then fell below 2005 levels for the balance of 2006, executives said.
Schoonover said the chain experienced a glut of competitive price matching in its stores over the holiday period, and expected that to continue into the New Year owing to Circuit City’s new 30-day, 125-percent TV price guarantee. Best Buy later attempted to best that with a 60-day, 110-percent price guarantee on HD sets.
Schoonover anticipated same-store increases in the mid-single digits for December, but believed that margin pressures would continue for the remainder of the holiday selling season. “We’re seeing a continuation of trends,” he told analysts, while CFO Mike Foss expected conditions “to remain pretty competitive throughout the fourth quarter.” But Schoonover predicted that the rate of decline on flat panel pricing would return to a “more normalized” pattern as the New Year progresses, based on high inventory levels and financial pressures on vendors and national discount chains.
Best Buy was similarly caught off guard by the plunging price points on flat panel. Mike Vitelli, senior VP for CE and product management, said LCD prices fell 25 percent for the year while plasma dropped 30 percent. The declines were “lower than we planned,” he conceded, and attributed them to “manufacturers anxious to move product.”
Vitelli told analysts last month that pricing was set for the fourth quarter, and that the rate of decline would slow this year. “There will always be someone out there that can do something desperate, but we don’t see that now,” he said.
Darren Jackson, Best Buy’s CFO, was also optimistic about margins. He assured analysts that the December through February period would prove less promotional than the preceding three months, when the company sustained a decline of 30 basis points in its core gross margin rate due to the intensity of holiday promotions. “Consumer electronics is the focus for the holidays,” he said, “and everyone wants a piece of the pie.”
Indeed, flat panel TVs seemingly popped up everywhere during the season, from Office Depot to Home Depot and from the corner supermarket to Kohl’s, although their success at selling big TVs is questionable. Joe McGuire, president/CEO of Tweeter Home Entertainment Group, said non-CE merchants will likely be surprised by the high rate of returns on door-buster specials, and industry observers believe the promotional environment may force flat panel newcomers like RadioShack to rethink their plans.
“Both Circuit City and Best Buy have shown how competitive the TV pricing environment is,” noted Bank of America analyst David Strasser, “and RadioShack has historically not reacted well to collapsing prices. We believe RadioShack will be forced to react competitively, and margins will collapse in this category for them, questioning their rationale for carrying flat screens going forward.”
Even category slayer Wal-Mart, which derives about 10 percent of its revenue from CE, and describes electronics as one of “five key focus areas” for the company, seemingly fell flat. Despite conveying a low-price message throughout the holidays with cascading price cuts and circulars that “communicate price leadership,” Eduardo Castro-Wright, president/CEO of Wal-Mart Stores Division U.S., projected flat to 1 percent growth in same store sales for December.
“I expect our big competitors weren’t as successful selling big TVs,” said Circuit City’s Schoonover. Discounters come up short on delivery, installation and financing, he argued, which are services that flat panel customers demand. Those offers are not yet provided by Wal-Mart and Target, although Costco will roll out home installation services nationwide this spring.