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Q&A: Distribution Execs Comment On The Economy

TWICE queried a selection of distribution executives in an attempt to get a feel for how their companies are faring in the face of a challenging economy. They shared insight on how their companies have navigated any recent challenges, their expectations going forward, and what product categories they think have growth potential despite the current macroeconomic situation.

TWICE: How has your company fared recently considering the challenges many businesses are facing due to the rocky economic situation? What has been your strategy to survive in this environment?

Warren Chaiken, president and COO, Almo: At Almo, we’ve always maintained our standards of excellence in both the brands we carry and our service levels. This philosophy serves us well in good and bad economic conditions because we offer respected, sought-after brands and we maintain a very loyal customer base.

CJ Provenzano, owner, Electronic Custom Distributors: Overall sales have increased year-to-date over 2007. Each month it is tougher to surpass last year month-to-date.

The customers that have impacted us the most are those volume contractors that work with production builders. Couple this with much tougher competition from suppliers that are desperate to sell product to meet leveraged debt payments to creditors. This is beginning to show up in prices below sustainable margins and inferior quality products. Time will tell how those tactics will fare.

Fred Towns, senior VP, New Age Electronics: So far, many of the consumer technology products that New Age Electronics is distributing —whether it is notebooks, flat-screen TVs or cameras — are still hot and in high demand, which has been exciting for us. Notebooks are growing in share, and flat-screen TVs and camera products are becoming more promotional, with new features, enhancements and savings opportunities working together to create more choices for the consumer. It’s making these products more attractive in the marketplace in spite of the rocky economic situation. We are confident the consumer is aware that the best time to shop is around promotional and seasonal events because there are some great deals available at these times — this will certainly help sustain New Age’s growth over the summer.

Gary Wermuth, president, Wave Electronics: We have not really felt it, since the region we serve — Texas, Oklahoma, Louisiana and Arkansas — has many [oil-related] businesses and many of them are adding more employees, which makes for a much better economy for our area of the country.

We have a one-stop-shop concept which makes it easy for our [custom installation] dealers to do business with us. We listen to our dealers and offer them programs that our competition falls short in providing.

Jay LaBarge, marketing VP, Wynit: We continue to be right on track with what we felt were aggressive growth projections for 2008. Our strategy remains: Deliver value with every sale and continue to find ways to improve the competitive position of our customers and suppliers.

TWICE: What’s your outlook for your business and the electronics industry as a whole for the second half?

Chaiken: Almo’s business will continue to be equal or slightly above last year for the second half of ’08. Based on current economic data, I expect business to remain this way through early ’09 when a resurgence is predicted.

Provenzano: The second half of 2008 will continue to grow in the video and media server [categories]. Video growth will be fueled by the digital TV conversion.

Towns: The electronics industry remains challenging and competitive, and companies have to be smarter and more efficient than ever before. During economic downturns and also in election years, consumers tend to be more cautious and conservative. They do the extra research and become smarter shoppers who need to see the value in their purchase decisions. This consumer outlook will contribute to a competitive market this year.

Despite the challenges, New Age is still on course for the year. Our alignment with Synnex has enabled us to bolster our operational efficiency from both a speed and service level perspective, which stands to help us earn new business and keep our current business on track.

Wermuth: We remain optimistic and look for double-digit growth throughout the rest of the year and also into 2009.

LaBarge: The seasonality of the CE marketplace naturally drives growth through the second half. We expect our business to continue to achieve strong year-over-year growth, albeit not from all of the same product categories that led 2007.

For the market as a whole, there will be growth in specific product segments, and pressure from large retailers with huge economies of scale will continue to apply downward pricing pressure on higher ticket CE items. Nimble is the watchword here, since the opportunities will be localized around specific product sets. We will be well [positioned] to take advantage of these, consequently so will our customers.

TWICE: What product categories do you consider to have growth potential in today’s challenging economic environment? How will you capitalize on that potential?

Chaiken: Where we continue to see growth at Almo is in the upper end of the market encompassing luxury appliances and electronics because this sector has not been affected by the recession.

Provenzano: Products that marry audio, video and Internet technology will grow our business. Easy access, use and understanding of both movie and music content will make us successful long term.

Towns: In addition to notebooks and flat-screen TVs, digital camera products constitute an area that is still growing and generating a lot of interest among consumers. In spite of the popular belief that consumers use their phones for taking pictures, we are still seeing a clear trend where consumers want a better-quality picture, especially for special occasions and travel. Point-and-shoot cameras have become lighter and more compact, while at the same time becoming more powerful, with larger displays and a higher number of megapixels, making it easier for consumers to put them in their purse or pocket and take them on the go. We predict camera products are going to remain a fairly hot seller now through the remainder of the year.

Wermuth: We started off as a custom installation [and] A/V-type distributor but are slowly starting to get into more of the security and IT-based categories. This is giving us a new base of dealers and getting them into our channel too.

LaBarge: Our country’s current economic environment is the direct result of the shortening supply of expendable capital in consumers’ hands. High credit card balances, falling home values, and rising food and fuel prices all have an impact. And their perception, translated into consumer sentiment, cannot be underestimated.

Bear in mind we have been here before, and the reactions will probably play out in a similar manner. When times are uncertain and money gets tight, people hunker down. That doesn’t mean there isn’t opportunity in our business — it simply means that previous opportunities morph into different opportunities.

Instead of perpetually trading up in housing, people may be more inclined to upgrade what they have, and install that home theater system in their new entertainment room. Or if fuel prices are tight, they may not travel as far or abroad and [may instead] entertain more at home — another opportunity for the right product sets.

Smaller-ticket items that augment usability and/or improve the performance of previous consumer purchases also will provide retailers with another area of potential growth. Generally, the lower retail price points of these items make them more attractive to cash-strapped consumers, while providing retailers with margins that are significantly higher than larger items. And sales of business-critical electronic devices and associated consumables will continue to grow.