The holidays belonged to sellers of video games and digital cameras.
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While most retailers reported modest sales over the holidays, consumer electronics retailers had more cheery news to give investors. Both
reported strong sales and raised their fourth-quarter earnings guidance recently, indicating that consumers still have money to spend if retailers have the merchandise.
And fancy gadgets at reasonable prices are what they want. Prices have come down for a host of high-quality electronics products such as DVD players and digital cameras, a trend that should continue, says Tom Bell, managing partner for consumer electronics at consulting firm
Fresh from last week's annual Consumer Electronics Show in Las Vegas, Bell chatted with
about his outlook for the sector and what he saw at the show.
TSC: You recently attended the annual Consumer Electronics Show in Las Vegas. What was the vibe there and what are the hot products going to be for this year?
The vibe I felt was one of a fair amount of optimism. It was a record turnout for the show. I think the thing that was most interesting to me is that it seems the analog-to-digital conversion in consumer electronics is really here. Every product we saw is really focused on that digital evolution of the product, whether it is television or audio-video. ... I think you're going to see some really interesting products over the next couple years as a result of that showing up on shelves. Some of the more interesting categories being the television and audio-visual servers, that's the best way to describe them.
There were a lot of new, fresh products, moreso than in the past. In the past you saw more upgrades to current platforms, while this was totally new. The television I thought was particularly interesting. Televisions being placed, hung, dangled from places you'd never imagine, as opposed to the traditional image of your television being in a room and your furniture being arranged around it. With these new, flat panel digital TVs, you can just pick a spot.
TSC: While overall retail sales were modest this past holiday season, electronics retailers did surprisingly well. Why were they able to do so much better than other retailers, and is this a good indicator that the consumer remains resilient?
They obviously are, by the results. I think it all comes back to the new fresh product. I spent a fair amount of time in stores over the holidays, looking for what people were buying, the sense of the crowd and the sell-through rate. It was interesting -- if you look at the new digital televisions, even the high definition televisions, there was this new fresh product available that was not available before.
Pick the categories -- digital cameras were clearly strong, because there's just a lot of new product there and it's getting to a price point for high-quality digital images that is very reasonable. DVD players clearly have reached a very economical price point, and the availability of rentals and the price of purchasing DVDs has come down. I think there was a convergence of new product and more reasonable price points, which kind of hit this holiday season.
'If you look at the particular buying pattern of electronics, it's one where people do a lot of research on the Internet, but actually purchase in the retail stores.'
TSC: Many consumer electronics products have become remarkably cheap, particularly VCRs and even DVD players. Will they continue to get cheaper, and could this potentially affect margins?
I think there will definitely continue to be price pressure on these devices, and it will really put the onus on manufacturers and retailers to continue to look hard at their overall operating costs, supply chain costs and inventory levels.
The manufacturers that can do the best job to collaborate with the retailers in terms of supply chain, inventory availability and really doing a nice job of tightly managing that are going to be the ones that see more shelf space. And they'll be the ones that have the preferred product that you'll see on the shelves.
TSC: While bricks-and-mortar electronics retailers have done well, the business has not succeeded as well online. In particular, look at Amazon.com (AMZN) - Get Report. The company's electronics business is growing fast but to date has been unprofitable. What does a company such as Amazon have to do make money from selling electronics over the Internet?
If you look at the particular buying pattern of electronics, it's one where people do a lot of research on the Internet, but actually purchase in the retail stores. The reason is primarily availability and price. There tends not to be a price advantage on the Internet for consumer electronics. So I think the challenge for the online retailers is providing value beyond what is available in the local retail stores.
TSC: What could that value be?
Well, it could certainly be value-added services, whether that is bundling other products or bundling with maybe content services. Certainly there could also be lower price points. Given that online retailers don't really have an exclusive on any particular product or service, the consumer buying behavior is to have instant gratification, especially around Christmas time, and so they tend to go more towards the retail space.
TSC: How well did retailers do in meeting demand for hot products such as video game consoles? Did they avoid the problems of years past when shops ran out of the most popular products early in the holiday season?
There were outages on certain hot products. Clearly, with the Xbox and the Game Cube, you had to search for them but you could find them. But I think that was the difference -- you didn't see people paying exorbitant premiums trying to acquire them on the gray market. If you were diligent and tenacious you could find them at the standard retail price. So I think they did do a better job.