A Third of CE Retailers Will Succumb to Struggling Market, HES Dealers Told at 2012 Summit in Orlando

ORLANDO -- Allowing some “cautious optimism” due to an improved stock market and a “bottomed out” housing sector, Jim Ristow, executive vice president of Home Entertainment Source, greeted independent CE dealers at the group’s 2012 Summit at the Marriott World Center Monday with an urgent call for reinvention. “The world is changing and HES dealers have to change with it,” Ristow said, citing the rapid proliferation of the Internet in research and shopping, falling video prices, shifting demographics and new product platforms.

But the guarded optimism came with grim warnings that “the patient is very sick, and the patient is this industry,” Ristow said. It’s not just independents that are under pressure, Ristow said. While Amazon appears to be doing great -- “gaining market share and gobbling up” -- its recent earnings were down 58 percent, he said. He noted Best Buy troubles in Q4 “trying to ship goods via the Internet and be competitive via the Internet.” Best Buy is also challenged with the Internet model, he said, with consumers going into stores to look and touch but then purchasing online. He noted Sears’ recent announcement of additional store closings and a $2.4 billion loss for the last quarter. “The biggest of the big are struggling,” he said. Vendors are taking a huge hit along with retailers, Ristow said. “There are some vendors that are really struggling, losing billions of dollars,” he said.

A third of CE retailers will end up “going out of the industry” because of difficult times, said HES president and Starpower CEO David Pidgeon. “It feels tougher than ever because it is tougher than it’s ever been,” he said. “We're all struggling to find an answer,” Pidgeon said.

When people get sick and desperate, “they take action,” according to Ristow, and impending vendor actions will affect all HES dealers, he said. Meetings with video vendors at CES were “very little about product” for 2012 and more about pricing policy and how the market will look, Ristow said. “The vendors mean it,” although “none of the policies are perfect,” he said. “There’s some hope here,” he said, referring to unilateral pricing policies discussed by Sony and Samsung to shore up video margins. (See separate report in this issue.)

Manufacturers are going to “freeze plant expansion” to slow TV output “so we don’t have the big gluts of product like we used to,” Ristow said, which should help improve profitability as supply better matches demand. The transition, targeted for 2013, will provide “hopefully new growth” from next-gen technology including OLED, he said. “How about profit versus market share and profit versus production, things we haven’t heard out of their mouths in a long time,” he said, in a jab at vendors. Vendors are finally talking about pricing policies “to bring some profitability and stability back,” he said.

"Who even wants to talk about margins?” said Pidgeon. Pidgeon detailed the timeline of flat-panel TV pricing, calling out a 42-inch plasma TVs selling in 2001 for a “hot” price of $2,988. A 42-inch plasma fell to $1,588 in 2003, he said, and next week Pidgeon’s store will promote a 51-inch plasma for $528.

Declining video margins have been the impetus for HES to steer dealers to more profitable categories over the past few years. In 2010, dealers were urged to move to integration, and last year connectivity was the buzzword. Both are still areas HES is urging dealers to expand into. Other areas include lighting and shade control, headphones, specialty audio and networking, Ristow said. Technology that could fuel consumer interest for independent dealers are voice and gesture control, 4K panels and networked devices “in our categories.” By 2014, Ristow said, 60 percent of all home audio will have network connectivity, up from 10 percent this year. In 2011, 38 percent of AV receivers had network connectivity, and the share is forecast to grow this year to 62 percent and to 90 percent by 2015, Ristow said. “It’s all coming, but how are we showing it, how are we demoing it? Are we just talking about it?” he said.

HES said its 2012 initiatives are program-related. The organization will hold a line show with “four key vendor partners” and members during the year to replace the void left by manufacturers that no longer hold them. “How many of you have been to a line show in the past year?” Ristow asked member. There were no raised hands. “We're going to leverage our vendor partners and members,” he said. “In a few hours we're going to do what used to take a few days for four of our key vendor partners."

Last year was challenging for HES, too, Ristow noted. Expert Warehouse, its buying and fulfillment business, filed for Chapter 11 last summer after it defaulted on a loan and vendors, including Samsung, stopped shipping products (CED July 12 p1). Ristow described the 30-day period Monday as “going from a little rain to a category 5 hurricane, and no one saw it coming.” The group “is apologizing to everyone,” he said, saying it’s the “last time we will look backward.” The new company, Expert Warehouse II, kept the same buyers, vendors, sales team and management and went into partnership with $38 billion distributor Ingram Micro to use its warehouse logistics and “and most importantly,” its financial backbone, he said. “We're not going to have the issue we had last summer, ever."

While it was painful at the time, Ristow said the organization has come out stronger. “We were barely able to ship when we moved the business in July,” he said, but by December “we were doing almost 90 percent of what we were doing in the past.” Ninety-five percent of members were “re-engaged” through the last quarter, he said. In the last 2-3 months, the group is in a stronger position “than we ever were in Expert Warehouse I,” and inventory levels are twice what they were, he said. More improvements are coming, he said.

Marantz and Denon came into Expert Warehouse in Q4, Ristow said, along with Paradigm and Anthem. Klipsch will “hit the barn” in a couple of weeks, he said. Niche products include Art Design Group and ZVox. Expert Warehouse will be the exclusive fulfillment house nationwide for ZVox, he said. Brands not currently available to HES members, including Sling Media, will be available from Ingram Micro through the Expert Warehouse platform, he said. “Thousands and thousands of SKUs” will be available to HES members, he said. In its Custom Warehouse, HES added Lutron for lighting and shades, he said. Sim2, Runco and Vutec are new custom HES partners, too, he said.

As part of an effort to move away from selling “product” and toward solutions, HES will start carrying Cinema Acoustics, which offers turnkey theater rooms and sound panels. That offers “a great opportunity to expand the mix without adding inventory or dollars,” Ristow said. Another option for dealers is Sales Toolz, a software program that simplifies the custom process into packages, he said. Dealers can sell a room of lighting for $500 on average or create gold, silver and bronze-grade theater packages. An app for the program enables salespeople to configure a solution on-site, he said.

Home Entertainment Source Summit Notebook

Savant Systems announced an updated Savant University, a training program for integrators combining classroom and online courses that the company is rolling out “on a gradual basis.” The initial focus is on “experiential learning” for Savant’s iOS-based hardware and software systems that are designed to accelerate the time it takes to install, maintain and service a Savant system, the company said. The program includes regional training centers, classroom-based lab courses, Internet classes built around 60 interactive videos and a mandatory certification process, the company said. Classroom events are available for either residential or commercial markets and regional training sessions will be in Massachusetts, California or Florida, Savant said. At HES, Jim Ristow, executive vice president of HES, called Savant “one of the biggest growth companies in the industry” when he announced the company as a new partner. He called Savant a “huge opportunity” for HES dealers and referred to Savant’s system as a simpler approach to home control than longstanding “boutique” system Crestron. Ristow quoted a dealer when saying, in high-end homes, “the maid is afraid to touch” the Crestron controller. “A Savant control they're not afraid to touch.”