Five trends affecting electronics retailers
Date December 2013
The holiday shopping season has always been a make-or-break time for retailers, with the period representing up to 40% of total annual sales for some companies. But with multiple industry shifts underway and the economy continuing to encounter headwinds on many fronts, it could be an especially important time of the year for companies in the consumer electronics sector, and their lenders.
The National Retail Federation (NRF) has predicted a modest improvement over last year, forecasting a 3.9% increase in sales during November and December, which translates to more than $600 billion in consumer spending. That’s up from 3.5% in 2012, but still well below the growth rates typically seen before the financial crisis.
Meanwhile, online and mobile spending is expected to grow at a much higher rate, up 12% and 35%, respectively. This continued consumer drift to online and mobile shopping is nothing new, but it is especially important for asset-based lenders with consumer electronics retail clients. Drawing together multiple distribution channels, various inventory strategies and an array of promotional tactics can significantly improve the performance of portfolio clients and help companies adapt to this shift. However, these comparatively new channels and their attendant infrastructures further add to the complexity of monitoring for asset-based lenders, in addition to tracking broader market pressures in the sector.
Can consumer electronics retailers capitalize on the new distribution opportunities ahead of them? Or will they become ensnared by some of the pitfalls currently plaguing the industry and impacting asset values?
Having evaluated retail businesses for over a century, Gordon Brothers Group’s Retail Division has identified the top five key trends within the consumer electronics retail segment to help guide asset-based lenders in monitoring clients.
Five Trends to Watch For
1) Continued Shift to Omni-Channel Retailing
One of the definitive trends within the consumer electronics industry has been the shift toward omni-channel retailing. With large physical properties normally associated with big box retail giants becoming outdated, retailers have transitioned to a more comprehensive business model that integrates all aspects of the customer experience and seeks to promote multiple shopping channels, from mobile to brick-and-mortar, and everything in between.
In the past, the main goal of every retailer was to increase foot traffic in stores. Now, most retailers are indifferent when it comes to whether consumers shop online, through mobile platforms or in physical stores. Put simply, what matters today is capturing the business, not the distribution medium in which the transactions occur.
Given this new reality, omni-channel retailers are best positioned to compete and win within the retail landscape moving forward. Such retailers have the flexibility to leverage a wide range of promotional vehicles – e-coupons, special events, reward programs, etc. – via multiple platforms, and as a result they will be able to retain and grow market share from all angles. The only outstanding question, however, is whether these companies have developed sophisticated logistics and fulfillment operations to support this changing business model.
2) Winning Customers – Price Matching and Advanced Logistics Offer Instant Gratification
An equally significant shift within the industry has been the willingness of retailers to employ aggressive price-matching strategies. Previously, the practice was used selectively, or limited to brick-and-mortar retailers matching competitors’ in-store coupons. Today, however, online retailers are matching in-store deals, while brick-and-mortar retailers are stepping up efforts to match online prices. In the current environment, price matching is an integral part of staying relevant and keeping customers from shopping with competitors.
Propelled by such tactics, successful retail clients are feeding the consumer’s natural compulsion to have products in their hands now, rather than later, even if later is two weeks, or even two days. The name of the game is instant gratification.
And with online retailers working to make their fulfillment process quicker and more efficient to enable same-day delivery, the final barrier between ordering products online and buying them at brick-and-mortar locations appears to be coming down.
3) Inventory Mix – Offsetting Margin Compression
In large part due to price competition, margins on many electronic devices have become wafer thin. To adapt, brick-and-mortar retailers are slashing prices on high-ticket merchandise such as flat-screen TVs, laptops and tablets in an effort to entice customers into stores, where they can more effectively capture add-on sales of items that have much higher margins, including smart phone cases, ear phones, remote controls, software and other hard goods.
As part of this effort, successful consumer electronics retailers have diversified their inventory to include a sensible mix of the season’s hottest new gadgets (Xbox One, for example) and a full suite of accessories (games, controllers, chargers, headphones, etc.). Additionally, more and more consumer electronics retailers are attempting to insulate themselves even further by carrying private label accessories and hard goods, as well as adding other products such as home furnishings, entertainment systems, couches, chairs and even mattresses to their offerings. Not only do such items have longer shelf lives and wider margins than nearly all electronics devices – substantially lowering the risk of obsolescence – but retailers can upsell them to consumers as part of a lifestyle experience.
4) Inventory Mix – Anticipating Trends and Offsetting Obsolescence Risks
Another major issue that has plagued the industry since the beginning is product obsolescence. Technology changes rapidly. Keeping pace with those changes is a challenge in itself, not to mention the importance of supplying content and accessories that match those shifts. Take for example the flop of the 3D TV release, which sputtered due to a lack of available content leaving retailers that made deep investments in the technology with excess product. Ultimately, when it comes to building inventories, diversification will help retailers protect against the inevitable “misses” they will experience.
When it comes to normal course inventory management, retailers must carefully monitor stock levels to avoid surplus inventory that can become outdated overnight. The next generation of smart phones, tablets and cameras – not to mention phone cases, battery chargers, notebook covers and content – are always right around the corner and lenders must always have a good sense of the value of collateral assets in the marketplace.
Therefore, it’s important to know the launch date of the next smartphone or tablet and how that will impact complementary accessories. By having a deep understanding of product lifecycles of assets and their impact on complementary items, retailers can gain a better appreciation of the value of their assets and best combat losses due to declining margins on older items.
5) Expense Reduction – Creative Use of Physical Space
Many pure play retail consumer electronics companies that flourished in the late 1990’s ended up getting locked into long-term leases on large spacious properties that do not effectively complement current trends within the industry. Now these lease obligations are putting significant pressure on companies’ expense structures and have forced many retailers to rethink significant aspects of their business models.
With established consumer electronics retailers such as Circuit City having already closed their doors in recent years, in part due to bad lease agreements, many major industry players have turned to ‘store-in-store’ concepts in which manufacturers partner with retailers to set up a branded store within a retailer’s floor space. Not only do such arrangements allow retailers to offset some of their outsized rental expenses but they help attract customers that might not otherwise visit these brick-and-mortar locations.
While the verdict is still out concerning whether floor sharing offers a net positive impact on EBITDA, one thing is for sure: the ever expanding influence of e-commerce, combined with the impact of outdated lease agreements, means that retailers will continue to look for creative new ways defray costs.
How will the pressure of omni-channel-business, margin compression, product obsolescence and real estate obligations affecting the industry impact consumer electronics retailers? The holiday shopping season should fill in some of the blanks for asset-based lenders with outstanding loans in the sector.
Given that the retail consumer electronics industry is undergoing major consolidation and new technologies are becoming commoditized at an increasingly rapid rate, retailers will need to significantly increase their sales volumes this holiday season in order to beat prior performance and stay competitive in an environment with ever-shrinking margins.
During the fever pitch of the holiday season, the retail clients getting the most value out of their merchandise have developed efficient processes for managing inventory to guard against margin compression, product aging and obsolescence, employed creative techniques to combat increasingly high occupancy costs, leveraged multi-channel sales platforms and developed the logistics infrastructure to support it. Implementing these mechanisms successfully will be the true test of Holiday 2013.