Instead of raising the white flag, the home audio component industry is steeling itself for a second-half campaign that it expects to win.
Last year's double-digit declines in retail-level home component sales slowed to a low single-digit decline during the first five months of this year and are poised for a return to growth in the second half, suppliers told TWICE. They cited increased retailer aggressiveness in merchandising component audio on the sales floor, declining flat-panel TV prices that have freed up disposable income for a more satisfying surround-sound experience, and continued — though slightly slower — growth in the custom-installation channel.
Retailers seem to be preparing for a return to growth, having spent 10 percent more to buy audio components during the first four months of the year, compared with the year-ago period, Consumer Electronics Association's factory-level sales statistics show.
Factory-level sales of home audio systems, however, continued on their double-digit downward spiral during the first five months, the statistics show.
In components, The NPD Group found retail-level component audio sales falling only 5 percent in dollars through May in comparison to the double-digit declines common in recent years, but sell-through might actually be better once sales through independent custom installers and smaller A/V specialists are counted, said Bob Weissburg, North American sales and marketing president for D&M Holdings.
Whatever the statistical margin of error, “audio components are rising from the ashes and finally flattening out and are just about even with last year,” Weissburg said. The second half will mark the segment's turnaround, he said, thanks to continued custom growth, rising demand for A/V receivers with custom-friendly features, the emergence of the A/V receiver as the control center for high-performance home theater systems, and HDTV pricing declines that free up cash for component-audio sales, he said.
Consumers won't spend that freed-up cash on audio components, however, unless they're aware of the enhancements that component audio provides over HTiB systems, and retailers are increasingly making consumers aware of the component option, he said.
“There's more system selling going on,” Weissburg said. “Before, retailers were putting A/V systems together on the floor or advertising them but not merchandising them on the floor at a packaged price,” he said. The strategy not only increases the audio attachment rate but makes it easier to train salespeople and to inventory product, he said.
One retailer that has enjoyed audio sales growth is Ken Crane's Home Entertainment, which has boosted audio sell-through and audio's share of the chain's overall business, said sales VP Steve Caldero. “Before last September, we rarely advertised audio,” he said, pointing out that Ken Crane's was traditionally a “big-screen house.”
Along with more aggressive advertising, Ken Crane has also increased commissions for selling audio, implemented its first bonus program for selling audio and stepped up in-house and vendor training, he said. Every customer also gets a demo on one of three home theater audio systems connected to a video display. The first is either a Bose 321 two-speaker surround system or a Yamaha one-speaker surround system. The second is a step-up system consisting of a Yamaha receiver and Klipsch speakers, and the third is a top-end system with Denon electronics and B&W speakers.
Ken Crane's also markets in-ceiling speakers for home theater applications, mostly for the retrofit market, Caldero said.
The retrofit market and multiple-dwelling-unit (MDU) market are gaining in importance in the custom-install industry now that growth in single-family housing starts has begun to moderate, suppliers told TWICE. Single-family new-home starts grew in 2005 by 6.7 percent to an historic high of 1.72 million units following 15 years of almost uninterrupted growth, Census Bureau statistics show, but starts began to falter this year after a strong first two months . In addition, the issuance of single-family building permits fell in May by 2.1 percent to an annualized, seasonally adjusted 1.47 million units, continuing a “moderate downslide” from a September peak, the National Association of Home Builders (NAHB) said.
The housing-start numbers are consistent “with an ongoing moderate erosion of housing market activity,” the NAHB said. “The builders still are reporting reductions in housing demand, and we expect both housing starts and building permits to lose some ground as 2006 progresses.”
“The modest increase in single-family starts largely reflected a build-out of units that had been sold and permitted earlier,” added NAHB chief economist David Seiders.
Although the downturn in new-home construction will likely be responsible for slower growth in the custom market this year, suppliers nonetheless forecast growth in the channel, with Niles saying industrywide custom growth will slow but remain in the double digits at about 10 percent to 15 percent.
Niles president Frank Stern noted that over half of the company's A/V dealers believe their business is flat to slightly down during the first five months of this year, compared with the year-ago period.
D&M's Weissburg, nonetheless, believes the market will continue its fast-paced growth rate this year because consumers continue to spend great sums of money on home improvements, allowing dealers to successfully target retrofit installations. He also pointed out that some installers are sharpening their focus on upscale MDUs, where many baby boomers are moving to retire but want to preserve many of the amenities, including multiroom audio, that they enjoyed in their single-family homes.
The MDU market has been “sorely neglected” by installers in the past, Niles's Stern agreed.