TVs lead booming CE business

Back in the 1980s during Costco’s first years in business, consumer electronics were almost an afterthought for the warehouse club operator. Twenty years later, Costco is one of the premiere destinations for the newest and hottest products in CE.

Costco made a big push in the category in 2006 when it began carrying a wider selection of LCD and plasma TVs, a booming sector it has helped to drive with some of the lowest prices in the industry. Costco generated more than $2 billion in TV sales alone in 2006—representing more than 3% of its total revenue for the year—and is on pace to eclipse that mark in 2007.

“We don’t have a year-end total just yet, but in some months, sales have been up 30% to 50% over last year,” said Costco vp of investor relations Bob Nelson. “At the same time, [TV] prices have fallen considerably, but we’re still going to be well ahead of where we ended up last year.”

And unlike other retailers, such as Wal-Mart, that have entered the LCD and plasma business in a big way, Costco is carrying a wider selection of big screens in the 46-inch to 60-inch range that has become a sweet spot in the business. Its selection includes a 52-inch Sharp Aquos LCD for $2,199, a 47-inch Phillips LCD for $1,699 and a 58-inch Maxent plasma for $1,999.

And it’s been mining that niche, using a new home installation service it began testing last year at a handful of stores in California and has since rolled out to nearly all its warehouses. For fees starting as low as $89, customers can have their new flat-panel TVs delivered and installed rather than deal with the complex network of wires and wall mounts, themselves. Costco ceo Jim Sinegal credited the new installation service with helping to cut down on TV returns that were part of the reason Costco narrowed its unlimited return policy to 90 days, earlier this year.

“Most of the reason for the TVs coming back was that the customers couldn’t understand what to do with them,” Sinegal told the Wall Street Journal in August. “So we said, ‘We are going to help you get this thing hooked up. We’re going to give you two years of warranty. We’re going to make sure that, even if we have to send somebody out to your home, that it works.’ We think we came up with a great solution.”

Costco also entered the emerging high-definition DVD business this summer by becoming the first retailer outside of consumer electronics specialists to carry both HD-DVD and Blu-ray high-definition players. It began carrying the less expensive Toshiba HDDVD player in April for $249 and added the Sony Bluray player in August for $449. It’s also carrying a select line of high-definition DVD titles in both formats.

Analysts say Costco’s decision to start carrying high-definition DVD players this early shows that it’s taken a leadership role in CE and is helping to drive new technology trends instead of jumping on them after they’ve emerged.

“They’re much more active in consumer electronics than they used to be and it makes sense because they cater to the same middle class and upper-middle class customer base that a Best Buy or Circuit City does,” said Andy Hargreaves, an analyst with Pacific Crest Securities in Portland, Ore.

And they were instrumental in making things difficult for specialty retailers like Tweeter and Circuit City, who both cited price competition on flat-panel TVs from Costco as a factor that eroded margins and impacted their bottom line (Tweeter filed for bankruptcy in June). Hargreaves said most of Costco’s gains in CE market share have probably come at the expense of specialty retailers, since it appeals more to their customer base than a Wal-Mart or Target.

While TV sales account for the bulk of Costco’s CE revenue, it has a healthy business in other areas. It began carrying iPods in late 2005 and has since sold millions of units. It also carries personal computers from suppliers like Hewlett-Packard and is one of the few retailers to sell Dell computers.

Costco recently entered the GPS navigation system business, carrying top brands like Magellan and Garmin. It also carries a wide array of basic electronics in its CE aisles including printers, computer monitors, Bluetooth headsets, telephones and answering machines, and has nearly every top brand in the business including Sony, Philips, Panasonic and Samsung.