Consumer Electronics & Appliances
Date December 2015
Approximate net recovery on cost
- The industry has been in decline as per capita disposable income growth remains sluggish, growing at an annualized rate of only 1.3 percent during the past five years
- Consumers are flocking to discount and online retailers offering lower prices, threatening well-established retail models and triggering innovation
- Industry revenues: $100 billion (Consumer Electronics & Appliance Stores); $20 billion (Household Appliance Manufacturing)
- Major product categories: Computers, tablets, TVs, phones, camera and video equipment, audio equipment, electronic gaming equipment, appliances
- Market share at the top: The top 50 consumer electronics and appliance stores generate 70 percent of revenue. The top 20 household appliance manufacturers generate 90 percent of revenue
- Recent sales trends:U.S. retail sales for electronics and appliance stores decreased 1.9 percent in the first 10 months of 2015 compared to the same period in 2014
Best Buy bets on appliances to drive revenue: Best Buy is betting that appliance sales will drive significant revenue growth in the future. Based on a comparable store sales increase of 0.5 percent for the third quarter of 2015 (excluding installment billing) and a domestic segment revenue increase of 1.2 percent for the same period, the company seems to be experiencing positive trends. As noted by Reuters, appliances have emerged as one the fastest-growing segments within the company, with 19 quarters of comparable sales growth. As of the fiscal quarter ended August 1, 2015, appliances had contributed to 10 percent of Best Buy’s domestic revenue, up from 4.7 percent in fiscal 2010. Regarding the potential for growth in the appliance segment, Best Buy’s CEO Hubert Joly notes “It is a growing market and it is a market also where our market share has been lower historically so there is a significant growth opportunity.” One of Best Buy’s goals is to capture market share previously held by traditional appliance retailers such as Sears. Capturing the higher-end segment of the appliance market with products from existing brands including Samsung, LG and Whirlpool is a priority. Demand for laptops, and consequently revenue from laptop services, has been under pressure, and electronics are not expected to perform well based on Best Buy’s as well as Target’s recent sales decreases in that category. Alternatively, Best Buy is hoping that growth in appliances can offset losses in the electronics segment of the business. Continued recovery in the housing market will encourage appliance sales as more consumers are looking to purchase or upgrade existing appliances.
To the extent that demand remains strong as a result of the continued improvement in the housing market, gross recovery values on major appliances should maintain current rates. Similar to the challenge in consumer electronics retailing, one major factor impacting gross recovery values on major appliances is the issue of sample inventory. Typically sample inventory used for display or demonstration on selling floors will not recover as well as first quality (non-sample) boxed goods. In terms of inventory mix, it is important for borrowers to track levels of sample inventory separately from non-sample goods so that an experienced appraiser can factor in the reduction to sample categories in the aggregate. Significant levels of shopworn, damaged or obsolete appliance inventory may negatively impact gross and net recovery values.
Falling electronics sales impacting major retailers: Best Buy and Target both reported slow third-quarter consumer electronics sales. MarketResearch.com notes that Target saw a double-digit decline in electronics sales, which is a category for which it offered significant promotions in early 2015. Best Buy saw decreases in sales of tablets, mobile phones and digital imaging products during the same period. Given that Best Buy currently makes up 46.5 percent of the U.S. consumer electronics market share, it remains to be seen how the company’s holiday sales will perform given its disappointing third quarter in such a key category.
Conversely, Macy’s will soon open Best Buy shops within some of its department stores as a way to test consumer electronics sales. The two companies announced the arrangement, which began in 10 Macy’s stores across the country in November 2015. The 300-square-foot departments are staffed by Best Buy employees and feature Samsung smartphones, tablets, smart watches and audio devices and accessories from Samsung and other brands.
Two significant reasons behind the drop in electronics sales for major retailers include the shift to online purchasing in addition to falling prices. The Wall Street Journal notes that, since the recession ended in mid-2009, the price of electronics is down 33 percent, which is the largest decrease of any category tracked by the Commerce Department. Overall prices on all other categories are up approximately 10 percent for the same period, as measured by the personal-consumption expenditure price index. Price drops in electronics have a number of causes. Input costs for technology tend to decrease over time, making one-time status symbols such as smartphones and flat-panel TVs everyday items. In addition, the number of truly innovative, blockbuster products has slowed; most product releases are variations of current models. New innovations tend to be more expensive and prop up overall prices. The global economy is also likely playing a role as many electronics are produced overseas. The dollar has gained strength against global currencies, making foreign-produced electronics cheaper for American consumers.
Disposition recovery rates on a departmental basis in this category reflect individual company performance and, thus, may fluctuate up or down based on a company’s normal gross margins and the sell-through rates achieved. For electronics in general, due to high rates of innovation, product obsolescence is an ongoing concern that companies and lenders should monitor on a regular basis either through regular inventory appraisals and/or through company-generated reporting. Similar to the appliance segment, significant levels of open-box or sample inventory can negatively impact gross recovery rates and should be tracked as part of the normal course of business. Working with an experienced appraiser in this segment can offset client risk through regular collateral monitoring.