Independent AV Retailers Used Audio, Headphones to Counter Holiday Video Declines

Independent retailers are coming off an erratic holiday season marked by gains in audio over the previous year but offset by steep discounting on the video side, retailers told Consumer Electronics Daily. “TV was the most challenging category and the most hit and miss business out there,” said David Workman, executive director of PRO Group. Year-over-year numbers experienced a 20 percent decline in ASPs, he said. Citing big box competition with “more aggressive” opening price points than in previous years, combined with unit increases required to offset those ASP declines, “the math didn’t work,” he said.

Video margins were hit hard by blowout sales and bundling packages that moved TV inventory at the expense of margins on supporting products. Panasonic, which had the exclusive rights to Avatar 3D in its bundle, came up short on its popular VT series of plasma 3D TVs, selling out of the 65-inch model early on, several retailers told us.

At Definitive Audio in Seattle, Panasonic VT series product scarcity was “an expensive shortage for us,” said Vice President Craig Abplanalp, who “fought tooth and nail” for the 65-inch model but didn’t have enough supply to meet demand. With the top-line plasmas gone, it didn’t leave much holiday TV business for Definitive, which is still smarting from the positioning and margin loss following Pioneer’s exit from the TV business. “We're a specialty dealer, so if you're looking for a moderately priced TV you don’t come to us,” said Abplanalp. “You buy online or go to Wal-Mart, Costco, Fry’s or Best Buy.” Overall at Definitive, floor traffic was “unpredictably down” during the holidays, Abplanalp said, although sales were “about the same as last year."

The Panasonic VT series popularity was based on picture and price, according to Richard Glikes, executive director of the Home Theater Specialists of America buying group. “Once the 65s (inches) ran out, the 58s were the next place to go and they're about out, if not out, at this point,” he said. The story was the same at Wilshire Home Entertainment in Thousand Oaks, Calif. “Panasonic is sold out,” said CEO Lyn Perry. “We could have sold more plasmas from Panasonic had they had more product.” Perry said Panasonic indicated it would replenish plasma TV supply in mid-February.

Marvin Electronics in Fort Worth, Texas, sold “as many or more” TVs than last year, according to President Stuart Schuster, “but dollars are down 30 percent,” for the season and year. The devaluation has taken its toll, Schuster said. “TVs have become like a can of beans, strictly a commodity.” Consumers now focus on price alone, he said, and few care about the quality “between a Samsung and a Sharp and a Panasonic.” In a race to the bottom among TV makers, “they got there,” he said, “and they did it to themselves.” One of the few exceptions is Mitsubishi, which still adds value to higher-end TVs with built-in surround sound, he said. 3D TV “was a big hit” when it first came out, he said, “but everybody got disappointed” because of the content lag. Schuster said 75 percent of the TVs his store sells are 3D models that “nobody minds paying between “$200 and $400 more for.” What they don’t like is not being able to buy 3D titles, he said.

In the Midwest, 3D TV sales started to pick up over the holidays, said President Vance Pflanz of Pflanz Electronics in Sioux City, Iowa. He attributed the “really good numbers” to four surround-sound demo rooms at the store showing the various 3D options built around 55-, 60-, 63- and 73-inch 3D TVs. Pflanz reported LED LCD TV shortages on Sony’s XBR-60LX900 model and on Samsung’s UN65C6500 TV. At Abt Electronics, in Glenview, Ill., 3D TV sales were “going OK,” said General Manager Philip Hannon. Wilshire Home Entertainment saw a bump in 3D sales in December, according to Perry, a direct result of a Sony “introduction-to-3D” event that drew 200 customers to the store early in the month. 3D TVs are “finally beginning to create some interest but it took several months,” Perry said.

Glikes of HTSA reported hot sales of Sony’s NSX 810 series TVs that were bundled with Alice in Wonderland in 3D and a PS3 console. While those bundles drove traffic and sales, other bundles were tough on retailers who typically reap margin from add-on sales. With vendors giving away 3D glasses, a Blu-ray player and “a movie or two,” said Schuster of Marvin Electronics, “how can I make any money giving away Blu-ray players?”

Blu-ray sales are in effect displacing DVD sales, “but we're not gaining any dollar premium,” said Workman. To move Blu-ray players in quantity, retailers had to price them “at or below where DVD product was,” he said. The decline of DVD player sales coupled with sales of Blu-ray players at DVD prices -- or free -- translated to an overall category decline, Workman said.

Devaluation is infectious, said Glikes of HTSA. Bundling a free Blu-ray player “creates a misperception that these things have little to no value,” he said. The upshot is, “how do you sell something for $300 that was free two weeks before?” he said. Once there’s price compression, he said, sales people, too, think products have been devalued and “don’t glorify products like they would have had they had more margin.” The attitude is reflected in enthusiasm for the product, which isn’t demonstrated properly on the sales floor “and results in poor sales,” he said.

Bundling and cutthroat pricing on the video side has independent retailers looking elsewhere for profits. Vendors have made that part of Definitive Audio’s business “not important,” said Abplanalp. Since bundling and trends happen “with or without our input,” he said, the company is looking at areas “where we can make a difference” and expose consumers to a “higher level experience.” Audio served that function over the holiday season, he said. Of the half a dozen gift ideas under $500 that Definitive posted on its blog, most were audio-related, including headphones, computer audio products, and a $399 turntable. Turntable sales were strong, Abplanalp said, because of a “real resurgence” in people buying vinyl and more specialty record companies printing LPs. “We're convinced it will be the last remaining disc format,” he said. “I think we'll see CDs go away way before LPs."

Headphones and earbuds showed strength during the holiday season, independent retailers told us, as users upgraded the sound quality of their digital music players and smartphones. Definitive’s headphone sales were up more than 150 percent during the holidays, and the company will continue to target that business. Kids no longer aspire to owning a high-quality sound system but are eager to dress up their iPods, Abplanalp said, and high-end headphones are “a critical introduction” to the kind of audio performance independent dealers have promoted for decades. He said there’s a big opportunity to introduce customers who have grown up listening to computer audio “in a land of mediocrity” to something better. Once salespeople put good headphones on consumers’ iPods, “they're blown away,” he said. “We're liberating them from the courtesy headphones that come with their iPod.” Definitive has done well with B&W’s new $299 headphones, and its meat-and-potato segment includes Grado models spanning the $90 to “several-hundred-dollar” range. Definitive sold a few $695 and $1,000 models over the holiday, too, he said. Margins are comparable to speaker margins, and “there’s no discounting,” he said. “We don’t have trouble getting [list] price on headphones."

PRO Group retailers saw similar growth in headphones, according to Workman, who wouldn’t provide numbers. He said the headphone category is “huge,” and “bigger than the speaker business today.” Although a lot of headphone business is in low-end $9.95 and $19.95 “pegboard” headphones, he said there’s a growing awareness among consumers that because so many of their devices are “primary points of listening,” it makes sense to invest in a better set of headphones. Even if headphones have a lower price point than speakers, the good news for dealers is that headphones don’t last forever, Workman said: “People will buy a pair of speakers and keep them for 20 years, but headphones wear out,” which he said can be turned into a “recurring revenue stream” for retailers. Once consumers get the “value proposition of headphones,” he said, “you're not going to have to wait around for 10 years to see that customer again."

HTSA dealers are also exploiting the fast-growing headphone business. “Headphones are hot at all price points, Glikes said, calling out Grado, Monster’s Beats line, Sennheiser and a new AKG line “that looks to be hot.” From $100 to $1,700 models, he said, “The whole category is exploding."

Headphones are a category that’s “not flashy” but where money can be made, Workman said, and those are the categories where PRO Group retailers are hitting their numbers. Mobile audio was strong, too, during the holiday season “pretty much across the board,” he said. He conceded some of the strength may have been due to “consolidation of share” where PRO retailers continue to carry mobile products other retailers have abandoned. “Our industry has a tendency to chase hot money,” he said, leading to migration toward demand. Less flashy categories “aren’t going to set the world on fire,” he said, “but that’s where good gains are made."

Independents are bullish on audio equipment, including home theater receivers and speakers. Schuster of Marvin Electronics said business has picked up in high-end audio, including McIntosh components and Sonus Faber speakers. “We've been getting back into the listening room, and getting not only old customers but new customers interested in higher-end audio,” he said. “It’s making a difference.” Workman of PRO Group said specialty audio dealers are benefiting from HDMI 1.4 and the need for people “to handle switching of those inputs” via AV receivers. Audio, speakers and home automation sales fueled “flat but improved” margins at Wilshire Electronics, which was down in both units and dollars on TVs this year, Perry said.

Among larger retailers, Abt had a “positive holiday season over last year,” Hannon told us. He said December revenue “should end up 8 percent” over 2009 to finish 2010 “slightly positive” over the previous year. The best-selling product at Abt for the holiday season was the iPad, which “held to retail for most of the year,” he said, but was limited to an 8-13 percent gross margin. “Overall online sales at Abt will grow “low double digits in December” versus 2009, Hannon said.

Target’s top-selling products included the Apple iPod Touch, iPad, Amazon’s Kindle, Microsoft’s Kinect motion-sensing system for the Xbox 360, Sony’s PlayStation Move motion control system for the PS3, Activision’s multiplatform game Call of Duty: Black Ops and Nintendo’s Donkey Kong Country Returns and Ubisoft’s Just Dance 2, both for the Wii, a spokeswoman told us. The company wouldn’t provide comparable sales figures. BJ’s, Best Buy, and Toys “R” Us had not issued holidays sales reports by our deadline. GameStop, Costco and Walmart didn’t respond to requests for comment.

Looking to 2011, Glikes of HTSA said consumer confidence and overall mood is “elevated,” boding well for the future. “The worst is definitely behind us.” He said dealers have cut expenses to the point where they can be “modestly profitable from a small amount of business” and should have “a pretty good 2011.” November was up 15-20 percent over 2009, and people “definitely spent more money this year than last,” he said. Consumers didn’t spend money for a year and a half, he added. “I think they felt like spoiling themselves for a change.”