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Flat-Panel Dealers Brace For 2nd Half

Approaching the second half of the year, most A/V specialty dealers recently surveyed by TWICE were gearing up for strong growth in flat-panel TV sales. However, many also expressed a sense of dread that a flood of merchandise from new Chinese and Taiwanese brands, and the price-aggressive tactics of certain online retailers, would begin to wreak havoc with profit margins by the holidays.

And while some A/V specialists — who continue to represent the bulk of flat-panel TV sales — said they are exploring new lesser-known flat-panel lines to remain competitive in the rapidly changing marketplace, virtually all said they plan only limited dealings with the new companies. Most dealers surveyed said they expect the top-tier brands to continue ruling the sales floor for the foreseeable future.

Dealers said they are preparing for price compression they see as inevitable for the second half of the year.

Jon Myer, president of the Gaithersburg, Md.-based Myer-Emco A/V specialty chain, admitted to being a bit nervous about the possibility of a fourth-quarter inventory glut in one the industry’s best profit categories. He also acknowledged that he was concerned with the impact that the low-ball pricing policies of Gateway — and possibly Dell — could have on traditional brick-and-mortar players.

“So far the margins are holding up,” said Myer, who is a member of the PRO Group. “But we haven’t felt the full brunt of the new imports yet. My feeling is that by the end of the year we could see a 180-degree shift.”

In the second half, Franklin Karp, president of New York City area-A/V specialty chain Harvey Electronics, said “there is no question there is going to be major price compression [as new Far East products hit the market]. My best selling 50W-inch plasma TV that is $10,000 today, will probably be $7,000 by Christmas. That’s still a lot of money, so I don’t think it changes the dynamic that much.”

“In LCD, the landscape will be colored by the fact that one particular player [Sharp], has 50 percent market share or better and will do what it has to do to maintain it,” Karp predicted.

Myer said his chain thus far has countered the punch of Gateway’s deeply discounted mostly EDTV-level plasma displays by emphasizing high-performance HDTV-level models, which are sold to higher-end customers along with custom-installation service for the majority of sales.

Roger Heuberger, PRO Group executive director, said that thus far his group members haven’t really felt the need to run to low-priced brands because several top-tier manufacturers , such as Sharp, have so many SKUs in their lines that normal life-cycle rotations have produced attractive price reductions in end-of-year closeouts.

National A/V specialty chain Tweeter is not overly concerned about the threat that Gateway and other online dealers could have on its sales, said Frank Roshinski, Tweeter’s senior merchandising manager.

“The [margin pressure] problem isn’t so much Gateway as it is the lack of a two-tiered distribution strategy for flat-panel,” Roshinski said. “Projection televisions used to have a two-tiered distribution strategy that directed premium goods to premium channels. That distribution strategy hasn’t been moved into plasma yet. You have broad-based distribution on most of the models. The competitive nature of our business drives the price down just because everyone has it.”

He added, “I hear that some of the brands are going to try to do a better job in two-tiered distribution, which might reinstall some value back into the product.”

As prices drop, most specialty retailers surveyed said they are looking at adding a low-price flat-panel line or two but remain wary of doing business with unknown companies.

Harvey Electronics’ Karp said his company has chosen not to do business with any of the new Far East flat-panel TV companies coming into the market.

He said the established manufacturers he carries still enjoy a considerable advantage in brand name recognition, and “so far have the best products.”

“Picture quality, warranty, who the manufacturer is, and ‘are they going to be here next year or five years from now?’— those are very important questions,” Karp said.

Harvey’s top plasma-TV lines are Fujitsu and Pioneer Elite, and the top selling screen size is 50W-inches.

Despite the seemingly endless number of new aggressively priced Asian product manufacturers, Tweeter “still does the best job with the recognizable name brands,” Roshinski said. “When you are talking about premium price-level goods, the customers’ comfort level goes up exponentially when they recognize the brand.”

Tweeter recently added flat-panel displays from Taiwan’s Tatung brand to help reach critical price points, said Roshinski.

“We look at performance level and where we want to position the brand,” he explained of the line selection process at his company. “A majority of the Chinese and Taiwanese goods tend to be, for whatever reason, more entry-price-level stuff than moderate or better merchandise — even though I think that most of these manufacturers aspire to hit a little bit more than entry-level prices.”

To prepare for the potential Far East product onslaught, Myer said he brought in some more aggressively priced lines — Viewsonic and Samsung — last September to back up his assortment.

“We stuck with our existing partnerships until they stopped hitting the price points we had to be at,” Myer said, adding that he is still wary of bringing in lines that are totally new and unknown.

Similarly, Mel Hunger, president of the NECO Alliance buying group for smaller TV/appliance merchants, said his association brought in the SVA flat panel line last year and is now evaluating several other lines from Far East manufacturers.

“Serviceability is probably the most important factor to us,” Hunger said in explaining how NECO is choosing new flat panel vendors. Other important criteria are “establishing which other lines the company makes products for, length of operation in the U.S. and credibility in the management team.”

The PRO Group’s Heuberger said his organization is “being cautious about participation” with start-up flat-panel TV brands. “We tried to look at some of the brands that no one has ever heard of, but we haven’t found any compelling reason at this point to get involved.”

“In a brand, we look for reliability and the level of support behind the products, so they don’t leave us holding the bag,” he said.

Most A/V specialists expressed little interest in acquiring flat-panel lines directly from Chinese or Taiwanese factories in private-label deals, citing the costs and problems of launching a brand and inadequate sales volumes to support factory requirements.

Roshinski said Tweeter would likely not consider purchasing flat-panel TVs direct from factories to have private lines.

“Once you build the program that we get from the Japanese manufacturers into the backside of that product, along with the cost of the letter of credit, and establishing a [private-label] brand name, the math doesn’t work out,” Roshinski said.

In 2004, retailers said they expect strength from both plasma and LCD-TV lines, although many reported that interest is picking up in big-screen LCD as new models arrive.

Tweeter’s Roshinski said sales of big-screen LCD TVs are running at about a quarter the rate of plasma.

“For the most part, the larger screen LCD models carry a premium price compared to plasma. It’s still hard to substantiate the price step” from plasma to big-screen LCD, he added.

Tweeter expanded its flat-panel TV merchandising assortment considerably in the last 12 months, by adding more SKUs of smaller screen-size LCD TVs and 42W-inch plasma displays, Roshinski said. For 2004, the company is expecting to “grow the LCD-TV assortment in larger sizes. Because as stuff at the bottom [become commodities], we generally don’t sell it too well,” he said.

“As for plasma, we are pretty much set, and plan on keeping our current assortment number static, mindful that the 50W-inch size is going to grow considerably now that the price points are creeping down a little bit,” Roshinski said.

In fiscal year 2003, which ended Oct. 31, Harvey Electronics sold 1,100 plasma units and 2,100 LCD TVs (primarily in the 20-inch and up screen sizes). The business continues to be very strong in both segments going into the new year, Karp said.

Although supply shortages were a problem in 2003, so far inventories have been adequate, most retailers said.

Heuberger acknowledged there is some tightness in getting 37W-inch product, “but generally speaking, we don’t have a problem.”