Electronics Retailers' World Is Flat

Circuit City upps the ante on the flat-screen TV sales blitz.
Author:
Publish date:

It's too early to tell whether this year will be a merry Christmas for retailers, but for consumer electronics chains, it's going to be flat -- flat-screened, that is.

Wall Street has already reached a foregone conclusion that digital, flat-screen TVs are

the holiday's key item for 2006.

DisplaySearch, a market research firm, estimates that flat-screen TVs made up over 50% of all TV sales for the first time in the third quarter of this year, and that figure is expected to increase. Last year, flat-screens made up only 24% of total TV sales in the same period.

"The world is going flat," says Bill Cimino, a spokesman for

Circuit City

(CC) - Get Report

. He estimates that over 200 million digital TVs will be sold in the U.S. alone before 2009 as consumers switch their sets from the traditional analog broadcast spectrum to digital. Most of those, he says, will be sales of high-definition, flat-screens.

This holiday season marks a dramatic acceleration in the transition as prices have tumbled amid bare-knuckled competition between retailers.

Best Buy

(BBY) - Get Report

and Circuit City, the two largest U.S. consumer electronics chains, have led the charge, but discount behemoths like

Wal-Mart

(WMT) - Get Report

and

Target

(TGT) - Get Report

have gotten in the game. Even the home improvement giant

Home Depot

(HD) - Get Report

is focusing on cheap flat-screens this year in hopes of juicing holiday sales.

For its part, Circuit City fired the latest salvo in the price war on Monday following a post-Thanksgiving shopping rush that saw TV-buyers across the country line up outside stores as early as Thursday evening to reap Black Friday discounts. Circuit City pledged to beat the price of any competitor on any TV, and if a customer finds a lower price elsewhere, Circuit City will sell that TV at 25% off the difference.

Both Best Buy and Circuit City have long offered that deal with a 10% discount. Now that Circuit City has raised its offer to 25%, analysts are waiting to see if Best Buy will counter. Kelly Groechler, a spokeswoman for Best Buy, declined to comment for this story.

"To me, this says that Circuit City walked away from Black Friday weekend thinking that sales weren't as good as they planned for, and maybe consumers have a perception that competitors like Wal-Mart and Target are offering their products at lower prices," says Colin McGranahan, analyst with Sanford C. Bernstein. "They're doing whatever they can to reinforce in the consumer's mind that Circuit City is the place to go this year for a TV."

Circuit City's Cimino says the offer is "not any indication of how sales went" over Black Friday weekend. He says the offer was planned well in advance and it's not relevant to some of the discounts offered on Black Friday, but McGranahan says the timing suggests the weekend was a disappointment.

"If things are cranking along and going great, you don't come in and change your policy on Monday after Black Friday weekend," he says. "To me, this is an indication that they didn't meet their plan."

If Circuit City's new price guarantee is a sign of weakness, Candace Corlett, a principal with WSL Strategic Retail, says its new strategy could help turn things around.

"This is a big TV year, and this new offer will certainly put

Circuit City on the map in the minds of shoppers looking for bargains," says Corlett.

Meanwhile, she says that retailers could be facing trouble in other categories, since expensive TVs aren't typically a gift item.

"Big flat-screens are more of a family gift -- something that heads of households will buy as a treat for the family because they can get a good deal over the holidays," she says. "One of the biggest challenges for retailers this holiday season is that our surveys show that only one-third of shoppers say there are new and interesting things to buy this year."

Even if they're not new and interesting, cheaper flat-screens will provide sales strength for the retail industry this year, but McGranahan says that may not translate into strong profits.

"

Circuit City's announcement ups the promotional intensity by one peg, and it was already high," says McGranahan. "We'll see if this continues. It's going to be a great holiday, in that retailers will sell a lot of TVs, but it may not be as profitable as hoped. We'll see how the margins look."

Furthermore, the steeper-than-expected price cuts wrought by consumers' widespread conversion to digital TVs may lower expectations for next year and weigh on stock valuations.

"These price cuts tell me that the length of the cycle is going to be shorter because it will play out more quickly," says McGranahan. "In Christmas of 2007, retailers could be facing some tough comparisons, and it may not be such a great TV Christmas next time around."