February 25, 2009
The Economy And The Specialty Consumer Electronics Industry

By Gary Reber

The meltdown of the economy is significantly impacting the specialty consumer electronics industry. What is needed is a recession action plan for manufacturers and retailers.

    Because of the industry shakeout, manufacturers, specialty dealers, distributors, and buying groups serving the high-performance product category are re-evaluating their businesses and sell-through channel strategies. If there was ever a time to re-embrace the specialty high-performance retailer with the consultative sales and product demonstration floor, now is the time.

    Traditionally, the specialty dealer has provided face-to-face education, product selection, demonstration, and service. Manufacturers traditionally supported this channel and relied on these dealers to reinforce product brand awareness and performance through education and demonstration.

    In the last decade, manufacturers began to pay more attention to new product delivery channels to grow sell-through numbers. This has resulted in manufacturers supporting discount warehouse retailers, online Internet stores, and individual or small company “custom installers,” serviced by large distributers, who stock product for these new sales channels.

    As a result of this shift in manufacturer support, the specialty retailer is now unable to compete with “sales” operations that have no comparative costly brick-and-mortar operations, nor can they avoid, as do many Internet companies, collecting the sales tax. Nor can they compete with warehouse retailers who operate on extremely low profit margins and provide no product education or consultative sales support. Warehouse discount and Internet retailers can operate on far less profit than specialty retailers, who thus cannot compete on price. Without profitability, there is no prosperity.

    For the specialty performance retailer to survive, manufacturers need to help them improve their operations, to cut costs and draw potential customer traffic. Manufacturers will have to clearly define themselves in the marketplace––manufacturing commodity products or differentiated performance products. If they opt for brand recognition as a performance-product manufacturer, then they need to support specialty retailers, and they need their distributors to provide specialty retailers with performance products with minimal inventory investment, while extending the credit to do so. Without this support, specialty retailers will not survive in an otherwise retail world that is in a race-to-bottom pricing selling commodity products at the lowest price.

    Extending support to specialty dealers is more critical than ever, especially now, since the credit system is so disfunctional and there’s limited money available for customers to buy product or to finance product purchases. There is also the reality that consumers, given the current economic environment, will be hesitant to spend without prudent consideration. It is simply an unrealistic expectation that consumers will purchase differentiated performance product without researching the product and consultative face-to-face interaction with a specialty retailer.

    Consumer electronics is a never-ending parade of new product introductions, whether based on new technologies or improvements to old technologies. Manufacturers and specialty dealers must constantly reach out to potential customers to educate them to these new introductions, otherwise, there will be no awareness. And without awareness there can be no demand for products consumers don’t even know about.

    Performance-product manufacturers need to introduce new products, through press releases, to the performance-enthusiast media and through trade shows that are attended by specialty dealers and the press. These are two fundamental steps to introduction of new products. After this is the consultative sales experience, in which the potential customer interacts with the dealer to further their education of the product and in-person evaluation. Between these two events are product reviews in trusted print and digital publications followed with Internet discussion forums. But all the research, reading, and discussion will never substitute for the consultative sales and demonstration experience in which the consumer can personally evaluate a product’s features and performance attributes. Demonstration is key to, for example, showing Plasma versus LCD,  LCD 240 Hz versus 120 Hz, 7.1-channel versus 5.1-channel surround, full-range loudspeaker performance versus limited-range loudspeaker performance, large widescreen projection versus flat panel viewing, Blu-ray Disc versus DVD, lossless versus lossy compressed audio, or the D-BOX® Motion experience versus non-motion, etc. That’s where the retail experience has the advantage, where a visceral experience can be demonstrated. And that’s what performance manufacturers and specialty retailers have to communicate to potential customers.

    The specialty retail channel offers the best opportunity for manufacturers to present their performance products and to educate current and upcoming generations to appreciate quality. But for this retail channel approach to be successful, manufacturers must stop making available their performance products for sale online and to large distributors servicing the so-called “custom installer” or other individuals, small companies, and Internet “stores” without the requirement or minimum requirement to stock and display, and demonstrate product.

    Without this policy change, the steady demise of the specialty retailer will continue. When there are too few specialty retailers left, performance-product manufacturers will find they have no other channel to replace this traditional storefront-personalized-operation that stocked, displayed, and demonstrated a variety of performance products, while providing education to consumers through face-to-face interaction and A/B product and system comparisons.

    While most of the blame for the deterioration of the specialty retailer and the differentiated performance-product category should be attributed to manufacturers, specialty retailers have played a big part over the years in the quick commoditization or reduction of profit levels, in an effort to stay competitive in the race to bottom-pricing. Retailers need to regain their competitive advantage as educators that explain and demonstrate to the consumer that there’s an experience to be had with performance products that commodity products cannot deliver.

    Now, if manufacturers decide to position their performance products as priced-shopped commodities, then profitability will significantly decline, and there will be no economic incentive to pay for R&D to develop new technologies related to product development, and less opportunity to recoup their investment through sales to quality-appreciative consumers. I don’t think that performance manufacturers could function if their products were priced at the entry or commodity level, because there would be significantly less money generated to pay for the technology. And at some point, the manufacturer will find that it is no longer profitable to manufacture upscale performance product.

    This is already occurring as, unfortunately, manufacturers have become focused on how many boxes they can move and how much marketshare they can grab, no matter how they have to get there. For far too long, short-term gains have been prized over long-term regard for the health and prosperity of specialty-performance-product retailers with a consultative sales floor and performance product demonstration capability.

    Another problem increasingly facing specialty-performance-product manufacturers is the availability of product on the Internet. New generations are developing habits where they do not shop at brick-and-mortar stores. Instead they research and purchase products online. And often when they do shop at a specialty retailer, it is for the purpose of getting educated about and experiencing the product in-person, with no intention to purchase until they have searched for the best price on the Internet. The specialty retailer simply cannot win in this scenario, in which the lowest price determines the sale, or in which price, not brand recognition and performance, is the driving force. As argued above, this trend will eventually cause the collapse of the brick-and-mortar retail experience and the demise of traditional brands who cannot compete on pricing, or who cannot sustain profitability on entry-level or low-cost products. Who is the blame here? Well, squarely, it is the manufacturers who have made the decision to sell their products to this retail channel fixated on selling at the lowest price and lowest-profit margins.

    Should performance-product manufacturers subscribe to bare margin online sales and discount warehouse sales, then the specialty retailer will die, and there will be no place for consumers to experience through demonstration differentiated performance attributes, and to become aware of real visceral performance differences. Manufacturers need to ask themselves what they will do when the specialty retail channel is gone. Who will they partner with, and which channel can actually sell the products that they make money on as a manufacturer?

    As performance manufacturers move to embrace online and discount warehouse retailers, they degrade their brand, which for most, has been established over many, many years of proven performance. Remember that specialty retailers have always helped such manufacturers by playing up the earned mystique associated with their products in their showrooms. Educated and experienced salespeople were able to explain features and demonstrate performance. And as the products gained further recognition in the marketplace, consumers had to go to the specialist retailer to experience them for themselves and purchase them. There were no alternative “wholesale” or “cost plus” online or warehouse store outlets. But once manufacturers dilute the market and spread their product out to non-specialty retailers, then the mystique is degraded to “meaningless” status. That’s what is happening now to manufacturers who make performance products and are opting to sell their products online or to discount warehouse retailers.

    A further decline in specialty retail will cause specialty products to disappear, and there will be less differentiated product. I blame the manufacturers for this, as they control whom they sell their products to. Magnolia’s, The Good Guys’, Tweeter’s, and Harvey Electronics’ lack of success was caused from the inability to compete with “discounters” who offer the lowest price but do not have to invest in operations such as these specialty retailers had to in order to properly provide consumer education and demonstration, as well as follow-up service and warranty. Manufacturers allowed this crash to happen.

    In these stressful economic times, it very important for manufacturers to declare whom they’re going to support and where they’re going to place their effort, and then for retailers to do the same. There needs to be a new partnership between performance-product manufacturers and specialty retailers to re-establish the consultative sales floor to sell step-up differentiated performance product with education and demonstration and follow-up service and warranty.

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