If There’s a High-Definition TV in Your Future, Wait Till After the Holidays
By ERIC A. TAUB
Published: August 25, 2007
LOS ANGELES, Aug. 24 — Consumers walking into an electronics store looking for a big-screen high-definition TV may find that the place looks and feels different from how it was last Christmas.
They will see more name-brand models along the wall and a lot fewer of the second-tier brands that also happen to carry lower price tags. They may also find themselves accosted by sales employees pushing expensive but nonessential services like extended warranties and professional installation. Liberal return policies are getting tougher at some stores.
“We’re abandoning the entry-level price point,” said Joe McGuire, who was the chief executive of the regional electronics chain Tweeter Home Entertainment Group until stepping down this week. “Compared to last year, we’ll be very much focused on models with superior picture quality and large sizes.” To increase profits, the company will also push customers to purchase its $399 professional installation package and its $79 picture calibration service.
Electronics retailers are doing this because, although they are selling more HDTVs than ever, they are making less money on them. Indeed, even as consumers inexorably move toward buying ever-larger screens and retailers’ revenues climb, competition is forcing price cuts. And as the low-price, high-volume mass merchants like Wal-Mart
or Costco become major vendors of big-screen HDTVs, all retailers are forced to keep their prices — and their profit margins — as low as possible.
Prices have continued to drop substantially this year. According to the research firm iSuppli, the average retail price of 42-inch HDTVs — one of the most popular sizes this year — has declined to $1,522 from $1,844 last Christmas, an 18 percent drop.
Prices will continue to fall, industry analysts say, because the retailers are powerless to prevent the declines. Not only is retail competition fierce, but flat- panel TV manufacturers, especially the Taiwanese contract manufacturers, continue to build new plants and expand production, which has created a glut in panels.
The price promotions by the minor makers propelled Vizio from the No. 4 L.C.D. television maker in the American market in the first quarter of 2007 to the best-selling maker in the second quarter of 2007. “Half the reason that consumers buy our sets is because of lower prices,” said William Wang, Vizio’s chief executive. “But our goal was never to compete on price only. We have a great product.”
While this is great news for consumers, it is not what retailers want to hear. The impact of the low, sometimes negative, profit margins has been devastating to many of them. For example, Tweeter increased its unit sales of televisions during last year’s Christmas selling season by 15 percent over the previous Christmas. Profit margin in the video category, said Mr. McGuire, was “down substantially on a year-over-year basis due to the intense competition in the category” and in June, the company sought protection from creditors in bankruptcy court. It was sold in July to Schultze Asset Management, an equity buyout firm.
Other chains were affected as well. At Circuit City
, video sales dropped from 42 percent of overall sales in 2006, to 39 percent in its first quarter, ended May 31. To cut costs, the company laid off some of its higher-paid veterans in sales. “In some cases those people were not any more productive than lower-paid people,” said Bill Cimino, a Circuit City spokesman.
During Best Buy
’s quarter ended June 2, its gross profit rate declined 6 percent, to 23.9 percent of revenue compared with 25.4 percent in the year-earlier period. The company attributed the decline partly to the “promotional environment in home video.”
Even Costco, which operates on a 9 percent profit markup on television or about half what big-box retailers manage, has been negatively affected by plummeting flat-panel TV prices.
The company said that because of its liberal return policy — almost anything can be returned at any time, no questions asked — its effective profit margin on TVs was more than halved, according to Richard A. Galanti, Costco’s chief financial officer.
Customers would buy a large flat-panel TV, use it for one year, then return it for a larger, less-expensive one. “I spoke to one customer who had bought four TVs and returned three of them for lower prices,” Mr. Galanti said. The company often got stuck with used TVs, or had to sell them to salvage companies for a fraction of their price.
Costco wants to make sure that does not happen again. It has changed its generous return policy to permit televisions to be returned only within 90 days, as it does with computer purchases. The company has doubled the manufacturer’s warranty to two years.
Perhaps as worrisome to retailers are signs that growth is slowing, said Gregory Melich, a retail-sector analyst at Morgan Stanley
. “For the past few months, growth in the total TV market has been zero or negative, because demand is not there at these price points,” he said.
Morgan Stanley research indicates that two-thirds of American households will not buy an HDTV until the price of a 37-inch or larger set drops below $600. The price of a 37-inch L.C.D. set averaged about $1,200 in June, according to iSuppli. “When the price goes to $800, 17 million more Americans will consider buying one,” Mr. Melich said.
So retailers are trying to wring as many dollars as possible from the customer’s pocket. Circuit City has increased its Web presence, hoping to appeal to Internet shoppers by offering additional information about what equipment is necessary to view high-definition programming. More information may also reduce HDTV return rates, which run 10 to 20 percent
, according to Forrester Research
The retailer is also promoting its professional installation services, called Firedog.
Best Buy, which has its Geek Squad installation and repair service, is also looking to sell higher-profit premium models through its Magnolia subsidiary, which operates both as separate locations and as stores-within-stores.
The fear is that these methods have had a spotty record of success. Retailers complain about the lack of high-profit accessories for the new flat-panel TV buyer. Consumers might add a video game console. Retailers would also like to see them buy a new high-definition DVD player that makes movies on an HDTV especially vibrant — though the format war between companies making Blu-ray and HD DVD players has stymied sales, said James L. McQuivey, principal analyst at Forrester Research.
“The high-definition DVD format war must end by 2008 if retailers are going to sell movie discs and players,” Mr. McQuivey said.
Sales of surround-sound systems have also been disappointing, Mr. McQuivey said, because TV makers have been promoting their own high-quality sound built into the TV sets. And many consumers do not understand that to get true surround sound requires the addition of external rear speakers.
“The first thing customers want is picture quality, and the next is good sound,” Mr. McQuivey said. “But the average consumer is not that sophisticated. To most people, that means a big, loud TV.”
Extended warranties, another high-profit service, are selling less well. As TV prices drop, consumers are less inclined to buy the insurance, Mr. Melich said.
Whether or not these strategies help to increase profits, analysts say, one thing is certain: HDTV prices will continue to drop. For consumers looking to buy a new HDTV, “wait until January,” Mr. McQuivey said. “You’ll get great deals. The retailers will always take on more product than they need.”http://www.nytimes.com/2007/08/25/bu...&ex=1188360000