Electronics’ continued rise music to industry’s ears
Consumer electronics sales continued their relentless rise in 2006, with sales increasing more than 10% and showing no signs of letting up. Sales last year were driven by big gains in flat-panel TVs, mp3 players and emerging sectors like GPS satellite systems and smart phones—areas that should continue to drive growth in 2007.
The largest gains last year were made in LCD and plasma TVs, which accounted for the bulk of sales in the $29 billion TV/DVD/camcorder category. And, they’ll officially enter the mainstream this year when plasma and LCD sets outsell standard TVs for the first time.
The only downside to the sales boom has been price erosion, with prices on average dropping nearly 30% in 2006 and continuing to fall in 2007.
“I think you’ll continue to see high rates of growth again this year, though the industry doesn’t expect prices to erode the way they did last year,” said Stephen Baker, vp of industry analysis for The NPD Group. “Things should be more stable and I don’t think you’ll see a repeat of the price cuts at retail we saw in 2006.”
Those rapidly falling prices had some unexpected consequences. The price wars of 2006—driven mainly by Wal-Mart’s strong move into the market—ruined margins for retailers like Circuit City, which laid off 3,400 workers in March due in large part to lower-than-expected margins on TV sales during the holidays.
Price erosion also was partly responsible for Tweeter’s decision to close 49 stores and file for Chapter 11 bankruptcy in early June. Affected to a lesser degree was Costco, which adopted a new,90-day return policy on consumer electronics in response to customers returning TVs after one or two years and trading up to newer models at lower prices.
Portable audio was another growth area, with a 4.2% increase in sales of $11.4 billion last year. Apple continued to lead the way by grabbing 72% of the mp3 market, with more than 100 million iPods sold since the format launched nearly six years ago. Attempting to stake a claim in the mp3 sector, newcomer Microsoft celebrated a lesser milestone in June with the sale of its one millionth Zune player.
NPD industry analyst Ross Rubin says Microsoft has shown it knows how to sell its products and build market share and that there’s no reason to expect it won’t duplicate its past successes with Zune. “The company has an excellent track record in making gains in market share in successive years with new products,” said Rubin. “And, they have the resources and the expertise to carve out a bigger share of the [mp3] market during the next few years.”
After making a soft entry into the market last year, smartphones are expected to make a splash in 2007, on the heels of a media blitz orchestrated by Apple for the June 29 debut of the iPhone. Apple expects to sell up to 10 million units during its first year on the market, pressuring rivals like the Motorola Q and Samsung Blackjack—which had a six month head start—to keep pace.
“It’s almost a given that Apple will sell through its entire supply of iPhones during its first six months on the market,” said Baker. “And, there’s no doubt smartphones in general will see strong sales this year.”
The home technology sector continued to slow down with a mere 2.1% increase in sales last year as computer sales leveled off along with printers and accessories. Signs of the slow-down were evident at retail this spring when CompUSA closed 126 of its 229 stores, due in part to lackluster sales and tough competition from mass retailers.
Other sectors have been burdened by slumping sales as well. Music retailers watched their fortunes continue to sink in 2006 with CD sales dropping more than 13% to $9.05 billion with the ongoing migration to digital downloads and its lower prices taking a toll.
The primary casualty in music retail in 2006 was Tower Records, which shut down last October after 45 years in business. Trans World Entertainment, which operates mall-based stores like MusicLand and Sam Goody, is maneuvering to avoid a similar fate by cutting back on CD inventory and bulking up its DVD sections.
CE & Entertainment| 2006 RETAIL SALES BY SUB-SEGMENT | |||
| FIGURES IN BILLIONS, % CHANGE OVER PREVIOUS YEAR | |||
| CHAIN | 2006 | 2005 | %CHG. |
| Best Buy 1 | $35,934 | $30,848 | 16.49% |
| Wal-Mart | 23,460e | 20,881e | 12.35 |
| Circuit City | 12,430 | 11,514 | 7.96 |
| Dell 2 | 8,009 | 7,930 | 1.00 |
| Target | 7,213e | 6,315e | 14.22 |
| CHAIN | 2006 | 2005 | %CHG. |
| Best Buy 1 | $35,934 | $30,848 | 16.49% |
| Circuit City | 12,430 | 11,514 | 7.96 |
| Dell 2 | 8,009 | 7,930 | 1.00 |
| Blockbuster | 5,524 | 5,721 | (3.44) |
| GameStop3 | 5,319 | 3,092 | 72.02 |
But that move probably won’t provide the same return it would have a few years back considering that DVD sales rose less than 1% to $16.45 billion last year and could actually drop this year. Digital downloads are partly to blame—though they account for less than 5% of the market—and lower prices didn’t help either.
Meanwhile, high-definition DVD continues to limp its way into retail, hampered by the ongoing format war between Blu-ray and HD-DVD, and confusion among consumers. To date, less than 300,000 players have been sold at retail, though the installed base tops 1 million if the Blu-ray-enabled PlayStation 3 and HD-DVD peripheral drive for Xbox 360 are included in those numbers.
The one bright spot is that player prices are coming down—now at $299 for HD-DVD and $499 for Blu-Ray—and several individual titles like “The Departed” have exceeded 100,000 units in sales. Plus, prices should drop even further during the holiday season and into