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TVs Front and Center This Holiday Season Again, But Can They Deliver?

By Paul Gagnon, Director of North America TV Research

I am reminded every year just how critical TVs are to the success or failure of consumer electronics retailers during each holiday shopping season. In 2006 and 2007, flat panel TVs were the go-to items in luring shoppers on Black Friday and through the remainder of the shopping season. With deep discounts on highly desirable flat panels, along with relatively high average prices, it’s no wonder this is the case. There are few trends that have come along in consumer electronics history that have the strong desire, high price points, broad acceptance and huge market potential that flat panel TVs offer.

However, there’s a problem. In an effort to out-compete each other, retailers and brands have absolutely wrung out the profitability of what had the potential to be a long-term cash cow. In the short span of about four years, the North America TV market has shifted from 10% flat panel to 80%+ flat panel. That’s a quick technology shift in my book. But it didn’t have to happen that fast, and if a little more patience had been exercised, it could have been a nice long, and profitable, ride… at least until the next revolutionary CE product came along. But starting in Q4’06, margins began plunging. For example, on a standard 42” HD plasma the channel margin in Q1’06 was about 45%, but that crashed to 20% in Q4’06 amid massive price wars, and should hit about 15% in Q4’08. Prices are simply falling faster than costs, and it quickly killing the Golden Goose. Already retailers are eagerly looking for the next big CE hit, and none is visibly forthcoming.

So what about the 2008 holiday season? Sure, LCD and Plasma TVs will be watched with rapt attention by consumers looking for phenomenal deals. And retailers will be tempted to offer them to try and lure wary shoppers in what looks to be a bleak holiday shopping season. But how can they do so profitably? One way is by asking manufacturers, who are also eagerly looking to maximize sales amid worsening economic conditions, to assist in funding the promotions that will drive people to wait in front of their favorite CE store in the wee, cold hours before dawn on Black Friday.

But the $64,000 question is… will it even matter?

Do consumers even have the wherewithal to go shopping for high ticket items like flat panel TVs this year, even on huge discounts? Sure, there will be plenty of options under $500, including 32” models. But the real profits and revenues are in the 40”+ category where average prices hover at $1000 or higher. Many make the case that flat panel TVs are clearly discretionary purchases, right? Who would spend that kind of money in today’s market? And can you blame them, when consumers are faced with enormous pressure to continue spending as they have been, even with tough credit availability, rising credit card interest rates, falling home prices, increasing job risk, and the growing cost of basic needs like food and energy. The consumer has been spending large sums of money on expensive TVs during the last few years using borrowed money, either through home equity lines of credit, personal credit cards or retail financing programs. That would be hard to justify until the economy turns back to normal. Even I was looking to purchase a flat panel this holiday, but am forced to carefully consider it at the urging of my wife….

We’ve already started seeing indicators that TV sales are softening in the last month or so. Our forecast for TV shipments in Q3 and Q4’08 was revised in mid-August, before the financial markets melted down in September and captured the world’s attention. One of the downside risks we highlighted in our forecast report was deteriorating market conditions. This certainly seems to be the case, and we’ll have to carefully evaluate what the latest data means for our forecast.

But on the bright side, prices are low and the technology keeps getting better and better. Picture performance for flat panel TVs is great, and they are still highly sought after by consumers, especially in the roughly 50% of households that don’t have one yet. So when consumers get more comfortable with their new way of life after the economy starts to recover, they’ll find plenty of affordably priced, high performance TVs waiting for them… and retailers eager to welcome them into their stores, probably with lots of margin boosting accessories to recommend as well.

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