Margins Take A Holiday, But CE Sales Grow - Twice

Margins Take A Holiday, But CE Sales Grow

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The holiday selling season hasn't been merry for margins.

Despite tight inventory levels and strong sales momentum in the final days before Christmas, manufacturers and big-box chains continued to mount fierce price promotions in pursuit of market share, putting pressure on profits for all.

“This has been the most aggressive 60 days in my 32-year career,” said Mike Decker, electronics marketing senior VP for the Nationwide Marketing Group, whose independent dealers sell north of $2 billion in CE annually. “Everyone is taking out all the stops in marketing, merchandising, premiums and special offers. It's one of the most difficult and challenging times for all retailers in all channels.”

Indeed, despite quadrupling its profits in the third quarter, and enjoying “excellent momentum” through the final weeks of the holiday season, Best Buy watched its share price get clobbered this month after forecasting lower fourth-quarter gross margins (see p. 1). The culprit, chief financial officer Jim Muehlbauer told analysts last week during a conference call, is “rapid growth in low-margin categories” like notebook computers and opening price-point TVs across all screen sizes.

Best Buy said it has no choice but to remain competitive, as price leaders like Walmart continue to mount aggressive promotions, including this week's offer of an 8GB iPod Nano and $50 iTunes gift card for $145. “We will remain sharp on price,” CEO Brian Dunn said during the earnings call. “It's a non-negotiable point.”

Caught in the crossfire are independent dealers and their buying groups, which are scrambling to match offers by national and regional chains. “We buy close to what the nationals do, but their profit structure is different” due to greater logistical efficiencies, Decker said.

At the same time, aggressive consumer rebates of $250 to $600 from manufacturers “squeezes margin from retailers, who have to participate in a portion of that rebate,” he said.

The holiday promotions, combined with year-long declines in average selling prices and a cost-conscious consumer, are also having a bifurcating effect on sales. The Consumer Electronics Association (CEA) is projecting a 6 percent decline in CE revenue this quarter against a 6 percent increase in units, while the NPD Group reported a 15 percent spike in unit sales of flat-panel TVs during Thanksgiving week as dollar volume fell 9 percent.

Decker said Nationwide dealers' holiday sales are up 10 percent in units and single digits in dollars, although Costco reported its massive sell-through is compensating for lower prices in CE. “Deflation is strong, but unit sales are stronger,” chief financial officer Richard Galanti told analysts this month, as demand for cameras and computers — particularly netbooks — remained robust.

To help offset price compression, Costco, like other retailers and manufacturers, is emphasizing value in its merchandising approach. “Netbooks are doing fine, but we sell more [fully featured] desktops and laptops between $600 and $800,” Galanti said. “Our goal is to still put more into it to drive up the value.”

Mike Fasulo, executive VP and chief marketing officer at Sony Electronics, said value offers by name-brand manufacturers provide a stronger draw than discounts on tier-3 products, and that bundled promotions in particular are proving to be the hit of the holiday season. “Our Bravia and PS3 offer is the best-selling bundle we've ever seen,” Fasulo said, while Bravia and Blu-ray player packages have also been very strong.

As Best Buy's Dunn noted, “Value does not always mean low prices. Despite economic conditions, consumers will spend on solutions that bring real value,” such as the chain's exclusive $1,199 Hewlett-Packard netbook, monitor, desktop, router and laptop combo with installation and home network setup, which exceeded sales expectations.

“The impact of bundling is to paint the art of connected possibilities,” Dunn said — as well as attachment sales. According to Nationwide's Decker, “Bundling opens up attachment opportunities in furniture, cabling and extended warranties,” with sales of the latter having “escalated dramatically.”

Gift cards are another “bright spot,” Dunn said, with sales up 40 percent in November and 100 percent on Black Friday and Saturday. Customers tend to spend twice the face value of cards when they redeem them, he noted, and post-holiday redemptions help carry sales past Christmas.

In the meantime, Sony's Fasulo remains “more optimistic but still cautious” about the holiday selling season, as sell-through for Sony products and its SonyStyle retail operation continues to build past Black Friday. “The hot deals worked to drive traffic, we're seeing significant step-up business, and consumers still have a lot of shopping to do,” he said. “No one is ready to celebrate yet, but we're seeing positive signs and there's more optimism than there had been.”

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