NPD Cost Model Shows ‘Mostly Negative’ Margins for Black Friday TV Sales

CE retailers may have sold as many as 7 million TVs online and in stores during the four-day Black Friday weekend (CED Dec 3 p1), but overall TV profits remain an issue for the industry in the holiday season pricing cycle, said NPD analyst Paul Gagnon in a blog post. According to NPD’s TV cost modeling, average margins for vendors at key sizes are “in the low single digits at best, and mostly negative,” and retailers are making half what they made a decade ago on flat-panel TVs.

That means hefty discounts have to be done selectively, which has happened during the holiday season with a primary focus on Black Friday, Gagnon said. He estimated the steepest discounts for TVs on Black Friday this year probably resulted in “double-digit negative” margins combined for vendors and retailers. TV makers and retailers can continue to discount heavily to try to reel in customers to impulse buys, whether they need a new TV or not, Gagnon said. But big discounts come at the expense of margin since manufacturing costs of flat-panel TVs aren’t falling as fast as they once did, he said.

Household flat-panel TV penetration in the U.S. is currently “high” at 70 percent and most of those models are “years away” from being replaced on the typical seven-to-eight year upgrade cycle, Gagnon said. Consumers who have slashed budgets since the recession could afford doorbuster priced TVs, but there’s little need or incentive to buy another in the near term, he said. That leaves retailers having to work “even harder to reach the technology laggards” by cutting prices to replace a “relatively new TV for a newer, probably bigger one,” he said.

Gagnon referred to the TV set industry’s pricing predicament in Pavlovian terms, where consumers have become conditioned to wait for Black Friday TV prices when buying a new TV. Since the overall demand for TVs has waned, consumers’ willingness to defer purchases that might otherwise have been spread out throughout the year has grown, Gagnon said. After witnessing Black Friday 2013 promotions, Gagnon believes the situation “has gotten even worse.” Not only are consumers waiting for Black Friday deals to buy a TV, but they are focusing on the top four or five key Black Friday deals “and largely ignoring the dozens of other less spectacular TV sales,” he said.

Manufacturers’ and retailers’ hopes that consumer demand will “spill over onto other TV deals” after doorbuster items sellout hasn’t been materializing, Gagnon said. As a result, “inventory languishes and pressure mounts to clear the inventory after Black Friday, sometimes lingering into the following year, and fueling the unprofitable cycle,” he said.

There’s also competition for consumers’ TV viewing dollars now that didn’t exist a few years ago. Since the proliferation of the flat-panel TV, tablets, smartphones and laptops have emerged as viewing competition thanks to broadband streaming. “Consumers don’t need to buy a TV to watch TV” anymore, Gagnon noted.

Gagnon conceded that breaking the pricing cycle “is not an easy proposition,” but said that needs to happen as TV sales growth wanes. “A deep discussion about how to promote TVs responsibly and return profits is long overdue, but so long as competition remains fierce, the conditioned response will probably continue,” he said.

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Cheap TVs weren’t just shopping lures for the usual retail suspects including Best Buy, Target and Walmart during Black Friday sales. Free TV giveaways are helping to sell everything from automobiles to mattresses, we found. The Mattress Firm chain dangled a free 32-inch TV in front of shoppers over Black Friday weekend with the purchase of any memory foam bed. A salesman at a Brentwood, Mo., store told us that shoppers who bought Tempur-Pedic or Sealy memory foam mattresses, starting at $1,399, would get a free 32-inch Insignia TV as a bonus. It wasn’t clear whether the chain initiated its own TV buy or whether the TVs were part of a Best Buy program for its private-labeled Insignia TVs. Best Buy didn’t respond to our query by our deadline.