Feature: Consumer Electricals The New Dead Zone For Retailers, Except Apple

Hoist on an Apple?

Some commentators, analysts and retailers suggest the slow retailing conditions and cautious consumers hurting the likes of Harvey Norman and JV Hi-Hi and Dick Smith are limited to Australia.

They are not; it is part of a worldwide change in this once premier growth sector.

Local commentators ignore these trends from offshore and especially what is happening in the US and European retail markets.

They also ignore the way many of these products, such as flat screen TVs, mobile phones, laptops, netbooks and the like are enduring intense price deflation, innovation changes and the impact of currency changes, such as the yen, the Aussie dollar and the South Korean won.

It is a structural change for this sector, with the added, unwanted factor called Apple, and the way its rapid growth is at the expense of competitors and many retailers.

The ills for Harvey Norman (ASX: HVN), JB Hi Fi (ASX: JBH) and others selling consumer electronics in this country are well known, but what is less well known is the way offshore markets are feeling the same change.

For example, UK electrical retailer Dixons has been struggling with its UK and European operations for much of the past five years..

Dixons, which is one of the biggest electricals retailers across Europe, said that in the three months to January 7 this year, sales fell 5% driven by poor conditions in its UK and Ireland and in Italy and Greece.

Same-stores sales in the UK and Ireland fell 7%.

Dixons operates 640 stores in the UK but said online sales had risen in importance to make up 19% of revenues across the group, a 20% rise year-on-year.

Circuit City, the second biggest US electricals retailer, collapsed more than two years ago and its bigger peer Best Buy has joined the list of struggling retailers with a massive loss and restructuring plan announced late last month.

In fact Best Buy has quit a joint venture in the UK because sales were weak. It is continuing to expand in China, but the most important part of the announcement last month was the revelation that the company is downsizing its stores, closing so-called big boxes and going for smaller formats.

More and more existing big boxes are being refitted to shrink the selling space.

As well, producers of consumer products from flatscreen TVs to fridges, stoves, hi-fi, computers of all kinds and mobile phones are facing weak or falling margins, losses (especially in TV) and growing competition from low cost operators in Taiwan and China.

Sony is losing money, Panasonic will have a huge loss on write-downs and late last month, a Taiwanese company, Hon Hai (which is the biggest business partner of Apple through its Foxconn business in China) took a 10% stake in Sharp, the weakened Japanese consumer electronics giant.

That will position Hon Hai to move into TVs from LED flat screens (Sharp has a huge, modern TV plant in Japan that is running at 50% capacity and losing money) and the mooted TV product from Apple.

Even the South Korean giants like Samsung and LG are suffering in the consumer electronics area from the intense price deflation and weak margins.

But overlaying this intense competition is the simple fact that Apple is eating a lot of its rivals lunches and dinners, as well as those of a host of retailers, wholesalers and producers of competing products.

Its fleet of computers, iPhones, iPads and less importantly now, iPods, as well as the company's growing chain of wholly-owned outlets, seem to be sucking in consumers who might well be spending their money on rival products in other chains.

An unnamed US analyst told the CNBC network in the US last month after the Best Buy result was released that:

"The desire for electronics has changed very much in the last few years," he said.

"There is one vendor essentially taking all the oxygen out of the consumer electronics complex, which is Apple."

And that's not confined to the US, it seems to be everywhere.

In the last quarter of 2011, worldwide Apple sold 37.04 million iPhones, up 128% on the last quarter of 2010.

It sold 15.43 million iPads during the quarter, up 11% over the year-ago quarter.

The company sold 5.2 million Macs during the quarter, a more sedate 26% increase, and interestingly the 15.4 million iPods sold was down 21% from the final quarter of 2010.

In Australia Apple is estimated to be selling around $5 billion worth of goods a year, much of it through their own stores.

(It sold $4.8 billion worth in 2011.)

Five years ago, Apple's sales would have been half that amount (before the iPad launch) and much of the difference would have been available for the likes of Harvey Norman and JB Hi Fi to grab.

But no longer.

The products which are sold outside those stores are going through telcos (iPhones and iPads), as well as through established outlets such as Harvey Norman and the like.

These products are someone else's sales, but are being grabbed by Apple, especially with the yearly updates of iPhones and iPads.

The first weekend of the new iPad launch saw 3 million units sold in four days in 10 countries, worth more than $US1.5 billion.

That money would have been available for other retailers to grab, if they could, or for banks to attract for term deposits. But Apple snaffled it.

On top of this, old fashioned bricks and mortar retailers are feeling the heat from online retailers (Apple has its own successful website), like Kogan in Australia.

By all accounts, Australian retailers believe that the Apple chain of stores in this country is probably the fastest growing retailer in terms of sales growth at the moment.

Should Apple's product line falter, then that too could come to an abrupt end.

The poor results from Best Buy last month confirm the dilemma analogue retailers have.

Best Buy said it had weaker-than-expected sales for the key holiday quarter, prompting the world's largest electronics chain to close 50 US stores and cut 400 jobs across the group.

Best Buy says it will open 100 small-format, stand-alone stores in the current year to lower costs.

Under pressure from the likes of Wal-Mart and Amazon Best Buy's same-store sales fell 2.4% in the quarter.

That was better than the 4.7% slump seen in the same quarter of the previous financial year.

Sales rose to $US16.63 billion, but the cost of the closures, sackings and new stores saw it lose $US1.7 billion in the fourth quarter that ended March 3, compared with net income of $US651 million, a year earlier.

Excluding the charges, it lifted earnings 25% in the quarter.

The retailer said it expects the restructuring to save about $US800 million by fiscal 2015, including about $250 million this year.

Still, industry watchers contend that Best Buy stores increasingly serve as physical showrooms for online retailers.

Amazon enjoys its largest pricing advantage versus brick-and-mortar rivals in the consumer electronics segment, with prices 17% according to US analysts, including BB&T Capital Markets analyst Anthony Chukumba.

Oppenheimer analyst Brian Nagel said to Marketwatch.com that the closing of 50 stores is "a much larger number than people have been anticipating".

Nagel said that move was "long overdue. They've been competing with Internet retailers for quite a while so I think it's probably the right move."

Best Buy itself recognises the pressures it and its competitors are under.

In its guidance for 2013, the company forecast another decline in same store sales and lower earnings compared to the year that just ended on March 3.

"Revenue expected in the range of $50.0 billion to $51.0 billion, reflecting a comparable store sales decline in the range of 2 to 4 percent," the company said.

"Adjusted (non-GAAP) operating income (is) expected to decrease 4% to 11% when compared to adjusted operating income for fiscal 2012 from continuing operations," the company told the market.

No let up for this giant which sold $US50 billion of products in the US, Europe (now gone) and China.

The shares fell 12% in the wake of the earnings announcement, clipping the year's performance to a rise of less than half a per cent.

That is in a market up 12% for the S&P 500.

Nor will there be any let up for the likes of Harvey Norman in Australia which is either a retailer, a franchisor or a property play, with the corporate emphasis on the latter.

Harvey Norman is cutting its concentration on consumer electronics and computers and lifting is emphasis on furniture, bedding and the like, at a time when home building is weak, and won't improve for the next year at the earliest.

After peaking at $2.16 in February, Harvey Norman shares have lost 9% to yesterday's close of 9.2%.

That has more than halved the year's gains of just over 16%.

The collapse of Circuit City in the US just over two years ago sent alarm bells through the sector, but in Australia we were too pre-occupied with the rebound from the GFC and the fruits of the cash splash stimulus to notice.

Two years on the pressures on the sector are rising and there are still more casualties to be recorded.

Already Harvey Norman has abandoned its Clive Peeters stores it picked up after that company collapsed. They are being closed or rebranded.

And JB HI Fi is closing or rebranding its small Clive Anthony's chain. Myer has abandoned whitegoods and TVs, and David Jones, which is struggling, won't be far behind.

These won't be the last of the changes forced on this once booming sector in this country.

And I found this take on Best Buy (and other consumer electricals retailers) on the Forbes website this week

This is what the Best Buy CEO Brain Dunn said on the earnings conference call late last week:

"Over the last three years, the industry experienced little innovation [in] many of the large traditional consumer electronics categories such as television, PCs and gaming.

"At the same time, consumers have enjoyed greater price transparency and ease of costs shopping.

"As a result, we knew we had to accelerate our cost reduction efforts, adjust our sales mix and significantly improve on the experience we were delivering for our customers.

"All of this in the most uncertain consumer and economic environment we've ever experienced."

This what a correspondent of Forbes reported this week:

The real problem for Best Buy, as with other traditional retailers, is not that customers now know too much to take advantage of them.

It's not dwindling margins on TVs, computers, and mobile devices. It's not that some online retailers don't collect state sales tax, or have more forgiving return policies.

It's something much simpler.

Over the last fifteen years, each and every competitive advantage the big box stores had over other forms of retail has been systematically eroded or turned against them.

Best Buy, like many retailers, is struggling not with any particular competitor or channel.

They are competing with a perfect storm of disruptive technologies that have made buying, servicing, and using consumer electronics as different from a decade ago as they were during the time of Thomas Edison.

To name just a few, high-speed mobile broadband, cloud computing, tablet devices and the modular nature of app stores have utterly changed not only which products consumers buy, but how they shop for them, upgrade them, service them, and replace them.

Ironically, the culprits here are some of the very same technological innovations that Best Buy sells.

In some sense, they're arming their enemies, and giving them far better weapons than they keep for themselves.

These technologies are the foundation for a new generation of killer apps, a platform that extends vertically and horizontally in unpredictable directions but at accelerating speeds.

The blood is going to continue flowing in this sector, all the way down the supply chain.