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Warranty Cos. Foresee Robust 4th Quarter Despite Current Headwinds

Roller-coaster stock market swings, sub-prime mortgage mayhem and plain old summertime fun may have kept consumers away from CE and appliance stores this summer. But the extended-service-plan (ESP) industry, which serves as a bellwether of consumer sentiment, is confident that shoppers will resume their acquisitive ways come the holiday selling season. Here’s what senior executives had to say.

TWICE: Retailers have been reporting sluggish traffic and sales over the past several months. Has that impacted your business?

Matt Frankel, division president, AIG Warranty: Back-to-school wasn’t as robust as we anticipated, particularly in computers, but we still experienced a good amount of growth in flat panel and portable digital products, and our business has been increasing above budgeted growth year-over-year-over-year. Due to the uncertain economy and sub-prime scare, consumers who wouldn’t ordinarily consider extended service contracts are buying them with their thousand-dollar CE purchases to protect their investments should their financial circumstances change. Those new customers have been compensating for any falloff in unit volume.

Bruce Saulnier, president, AMT Service: Our attachment rates have increased due to the emphasis we’ve placed on providing better education tools for retailer floor sales associates and consumers. Creating a more educated audience on both the push and pull side of business has really been the driver of growth for AMT this year.

Keith Meier, extended service senior VP/general manager, Assurant Solutions: Our retail accounts faced some challenges over the summer months. June and July were a bit soft, although August was somewhat better overall. Our business, however, has been strong. We have continued to win market share with the addition of several new accounts. For the first six months of 2007 our year-over-year written revenue is up 23 percent.

Frank Trigo, marketing executive VP, Bankers Warranty Group: We had a very good summer in terms of ESP attachment. Sales were particularly strong in the mobile electronics and major appliance categories.

Joe Romano, client development group VP, NEW Customer Service Companies: Across the board, most retailers have experienced soft sales over the summer which is pretty typical for this time of the year.

One of the best ways for retailers to overcome the challenges of slower traffic is to maximize each opportunity with your customers. A number of our retail partners have transformed the “summer slump” into an opportunity to increase their sales associates’ training by tapping into NEW’s seasoned team of retail experts, and the results have been pretty impressive. When sales associates are given the tools, training and the time to focus on [an] individual customer’s needs and wants, not only does the quality of the overall customer experience improve, but sales and attachment rates climb, too.

Joe Saieda, chairman, RepairTech: Although the retail business has indeed slowed during the summer months, we have noticed that there have been some positive signs of a pickup in business during the past couple of weeks. Despite job losses, inflated gasoline prices and record home foreclosures, rising wages have allowed spending to hold up so far. It is our hope that sales at the cash register and online will continue to escalate as retailers and e-tailers offer their customer base more bang for the buck once the gift-giving season comes nearer.

Jeff Oldenburg, marketing and business development VP, Service Net: Our overall business for the segment has been surprisingly strong. Some dealers are actually reporting increased sales and floor traffic in response to their merchandising activities. In particular we had a very strong back-to-school selling season across the board with our clients. In addition to the standard laptop, a whole array of consumer electronics products and accessories has become essential for today’s college students. Our dealers have also put a lot of their efforts into selling accessories and installations as a way to get an increased share of the dollars their customers are spending.

Doug Tudor, president, Warranty Corp. of America (WaCA): Our retail clients are having continued success with their service plan sales, experiencing double-digit growth over last year. While consumers may be thinking more carefully about purchasing expensive appliances and electronics, once they decide to make a purchase they want to protect their investment with a service plan rather than risk having to buy a new product or pay for expensive repairs if something happens.

TWICE: What’s your outlook for the holiday selling season?

Frankel: With the Fed [Federal Reserve] lowering rates and another decrease expected in three months, I’m thinking that the next four months will be strong. Even with Black Friday approaching, our products will help boost margins for retailers when the promotional activity picks up.

Saulnier: There are too many variables surrounding the state of the economy to really comment on what the macroeconomic situation will look like come December. Now that the Fed has taken action, all could be well in the retail markets. Regardless, if our trend of increased attachment rates for our customers continues, we will see significant year-over-year growth for the 2007 holiday season. Driving those attachments will be HDTVs, which will be a big hit as the switch to digital broadcast nears, although topping the hit list will be the new MP3 players with touchscreen technology. Sales of desktop and notebook computers, digital cameras and camcorders, and cellphones will remain strong. We might see a falloff in gaming consoles compared to 2006, but a few new game releases will keep category sales solid.

We arrange underwriting for both OEM warranties and ESPs, and provide program administration for all the potential top product categories, which supports our projections for a strong 2007 holiday season.

Meier: I believe this will be the least predictable holiday season in many years, although it’s hard to bet against consumers since they have been resilient in the past when we didn’t expect them to be. In terms of holiday hits, the iPhone will definitely be huge, especially after the drop in price, and gaming systems are always popular for the holidays. And with the upcoming release of more HDTV channels, the push for flat-panel LCD TVs should continue.

Bruce Wolfson, executive VP, Bankers Warranty Group: Despite some concerns with the current economic situation, we remain optimistic that we will see another favorable selling season in terms of ESPs. Retailers will place particular emphasis on ESP attachment in order to buoy any potential decline on product sales, although the flat panel and home theater categories should remain strong and of course the new models of Apple’s iPod and iPhone will also be very popular.

Romano: We expect to see retail sales comparable to last year’s. While there have been a few economic challenges on the horizon, they are not likely to dampen shoppers’ holiday spirits. That said, retailers can expect to see the traditional six- to eight-week holiday selling season compressed into a shorter three- to four-week period. This compression often happens when consumers delay purchasing in hopes of early price cuts from retailers.

A number of consumer electronics will experience strong sales this holiday season including HDTV as it becomes more affordable to more people. Another popular choice will be video game consoles, the challenge for retailers and manufacturers being to keep shelves stocked. With new touchscreens and enhanced capabilities, MP3 players and iPhones will also make a significant splash over the holidays.

As “going green” becomes a household theme and more efficient major appliances continue to gain popularity, we might also see a spike in high-end home appliances over the holidays, especially in the energy- and water-efficient categories, such as front-load washers and dryers.

Saieda: It is our feeling that the consumer always proves to be resilient during the crucial holiday selling period and there will be some very opportunistic electronics and appliance purchases. To predict a doomed retail business for Holiday 2007 is a little too pessimistic a view in our book. We believe that the Federal Reserve’s interest rate cut will result in a favorable [inclination] for the consumer base to spend its money on consumer electronics and appliances — which will be too favorably priced to pass up during the upcoming holiday season.

It is no secret that the excitement created in television has and will continue to be a boon to the electronics business. Flat-panel television sales are going to be strong at the reduced prices dealers are going to be offering them for during the holiday season. In addition, we look forward to continued strength in sales of iPods and high-end audio components.

Oldenburg: The prevailing opinion is that we will continue to see price compression in the consumer electronics category but probably not at the same level of intensity we saw in Q4 2006. Based on our year-to-date sales we expect another strong holiday selling season this year. We’re still seeing strong sales in flat panels, especially LCD, and we expect quite a bit of merchandising activity by our clients to keep the store sales strong. We also anticipate strong sales of gaming and PND systems and multi-media devices such as smart phones and the latest generation iPods.

Tudor: While certain markets are shaky, recent reports show consumer confidence is still high and the job market still looks strong, with the number of jobless claims down for August. As long as people are still receiving paychecks they will shop, especially at the holidays, and they will want to protect their purchases more now than they did before. What will they be buying? Flat-panel televisions, MP3 players and game consoles have been big hits in recent years and that trend will continue. With the recent price cut, the iPhone will continue to be a big seller. Laptops will also be significant sellers as prices keep dropping.

Sean Hicks, president, Warrantech Consumer Product Services: We have a very positive outlook for the holiday season. Warrantech is in the process of launching the third generation of the service contract business — we’ll not only offer the traditional products but will also include more self-assist options and real value-add enhancements. As far as holiday wish lists, it’s flat panel, flat panel and flat panel. While our retailers are telling us to expect another season of price reductions in this category, this is a positive for our business as our customers are planning to do more bundling of service contracts with these low-margin sales.