Consumer Electronics Market in UK

Consumer Electronics    in the United Kingdom

 

Dissertation Writing Help in Consumer Electronics Market in UK

Executive Summary

Economic Downturn Slows Consumer Electronics Growth

The UK economy is entering a period of recession which is likely to affect all aspects of the consumer electronics market. The growth in sales of consumer electronics over the review period has slowed, although they have not gone into decline. The trend of decreasing growth rates was widely expected in any case following the boom in consumer electronics over the period 2003–2008, which saw huge rises in sales of mobile phones and laptop computers and the invention of the mp3 player. Given the enormous success of this market over the review period as a whole, these growth rates could never have been sustained at such a high level. Macroeconomic factors have ultimately only exacerbated what was an intrinsic problem.

Supermarket Strength and Credit Shortage Open Up Low-cost Market

The UK has been particularly susceptible to market volatility, and it has come under pressure during 2008 on account of the world-wide shortage of credit, both corporate and personal. Interest rates have risen as has the rate of inflation, although both have been volatile while disposable income has dried up, and the consumer electronics sector has inevitably suffered. Manufacturers have responded by further driving down their costs, while at the same time, a significant budget market has opened up, powered by supermarkets and hypermarkets who are gaining distribution share across all sectors at the expense of discounters and electrical goods specialists. Costs are reduced still further by the supermarkets’ sales of own-brand generic products.

Consumer Electronics Products Survive Thanks To Consumers’ Increased Reliance on Them

The consumer electronics sector has done better than might have been expected, however, given the macroeconomic conditions, due to the momentum of success from previous years. Products have now reached their greatest levels of penetration, and many consumers now consider their products to be essential to their lives or their work. Items such as mobile phones and mp3 players are also key barometers of social standing. The digital revolution continued, and the fast-approaching deadline for the government’s implementation of the analogue “switch-off”, is generating growth in sales of high-definition televisions (HDTVs), multimedia players and navigation systems.

Market Consolidating As Technology Converges

With poor economic conditions, the competitive environment favours the leading multinational companies that still dominate the consumer electronics sector, which continue to grow thanks to their continued emphasis on research and development, which is essential to the long-term growth of the market as a whole. This most often focuses on technological convergence across formats, brands, platforms and functions. Major companies that specialise in many different areas of consumer electronics are thus better positioned to integrate the technologies of different products. They are also better placed to reduce their margins and manufacturing costs, which is essential in a downturn.

Sector in Rude Health in the Long Term in Spite of Immediate Problems

Although there is currently a much-publicised credit crisis, this is not expected to hamper growth seriously in the medium term. With prices continuing to fall, and governments doing all they can to stabilise the markets, the consumer electronics market is unlikely to suffer any decline in volume or value sales, especially given the healthy levels of market penetration and consumers’ willingness to replace their existing models. There is also still enormous room for innovation, in areas such as portability or increased integration across formats, which should guarantee the market’s health in the long term.

Key Trends and Developments

Economic Conditions Restrict Growth in Consumer Electronics

Sales of consumer electronics products were boosted in the review period by favourable economic conditions, robust income growth, and increased levels of credit card spending. Recently, however, the Bank of England has adopted a more restrictive monetary policy which has led to higher interest rates. Consequently, personal debt has risen dramatically and individual insolvencies have reached record levels.

As a result of the credit crisis, there has also been great turbulence in the financial markets. Some commercial banks have found it necessary to request emergency loans from the Bank of England, which has increased the sense of anxiety among many account holders.

This volatile environment has increased the uncertainty about the UK’s future economic performance, particularly because the magnitude of the spillover to other sectors of the economy is still difficult to assess. In these worrying circumstances, declining consumer confidence will no doubt have an impact on the performance of the consumer electronics sector.

Outlook

This trend is certainly likely to continue during 2009–2010, and its effects will be felt more strongly during this time as macroeconomic decisions made now start to affect consumers directly. These effects may be manifold, ranging from increased unemployment to higher prices, lower credit, higher interest rates and fewer retail opportunities.

In many cases, stores are less likely to offer credit deals to customers, and banks are keeping interest rates high as a deterrent against reckless borrowing, all of which is likely to affect sales of consumer electronics, which in the past have depended heavily on this source of cash. Equally, as disposable income is coming down, the UK is currently experiencing high levels of inflation, most recently reported at an eye-popping 5.2%. This is bound to impact on costs through the supply chain from production to transport and, in some cases, to the retail price.

This is also likely to affect the level of innovation in the industry as smaller companies will find it harder to compete in the absence of credit, and some firms and stores may close. It is also worth noting that this same trend across the economy as a whole will lead to a rise in unemployment, which always damages the retail sector as wages are less predictable and purchases are therefore reduced.

Current impact

Although the worst is still to come, there are already clear signs of these effects throughout the economy, which have been reflected in the reduced sales of consumer electronics products over the past year. Growth rates are generally falling over all sectors, with some areas hit harder than others. For example, sales for the television market as a whole will see a fall in volume growth from an annual average rate of 8.8% over the review period to 5.0% over the forecast period, while growth in volume sales of DVD and VCR players was also negative in 2008.

Other larger items which are considered more as luxury goods and are generally more expensive have also been affected, including desktop computers, photo printers and most products for the home audio and cinema market. In the case of desktops, the laptop provides an adequate budget alternative which continues to perform well, and the same “portability principle” applies in the case of home audio and cinema, where it may be leading people to trade in better goods for the cheaper, more portable alternatives.

It should also be noted that this means there is mixed news across all consumer electrical goods as a whole, as other sectors such as portable media players, laptops and mobile phones are maintaining moderate, steady growth, although their sales will clearly not be immune from the effects of credit restrictions.

In general, manufacturers have been able to respond to the trend by cutting prices, and this has been a trend across the board. Production costs have been greatly reduced thanks to the shift of manufacturing from Europe to Asia in recent years, and there has also been a decline in the prices of raw materials which provided retailers with lots of room to cut prices in their stores. Inevitably, however, profit margins will suffer as this trend continues, which may start to impact growth in itself.

It should also be noted that the in-car electronics sector has suffered somewhat as a result of a decline in automobile sales. The car market has slowed down sharply as a result of the economic problems, as it is obviously dependent on the availability of easy credit, and this has clearly impacted sales of all in-car products during the review period.

Future impact

The UK’s poor economic performance will clearly affect the consumer electronics market at many levels. Retailers will have to continue to cut their prices if they wish growth in sales to continue, but this in turn will restrict their returns to shareholders, and it may also impact on research and development spending which is the guarantor of this market’s future health in the long term.

There will also be a consolidation of market leaders as smaller companies suffer, since they are less able to cut costs than the multinational companies whose operations are entirely globalised. The multinationals will in turn be less likely to focus on the more niche products, and more likely to invest heavily in popular brands. This will also help to sustain the market in the short term, but such a strategy should not be pursued for too long as research and development must remain in place if the market is to grow in the long term. This may also result in increased mergers and acquisitions activity, as has already been seen with the alliance of JVC and Kenwood in 2008.

In the long term, though, it is highly unlikely that growth in sales of consumer electronics products will collapse once the current economic crisis is over. In the opinion of most commentators, that is likely to be around 2010, although the markets may well stabilise long before then. Ultimately, the penetration of leading consumer electronics products is such that there is now a wide market base. Furthermore, by its nature, the consumer electronics sector depends on constant innovation and customers are increasingly aware of this and keen to follow new trends and buy new products. As a result, not only is there the normal replacement cycle for a given product, but also when customers wish to replace a product, they are more likely to look for a more innovative alternative, and this in turn should drive growth.

Finally, market growth may also be driven further once retail prices approach their minimum levels. Price-cutting has continued in the market for a few years, and it obviously cannot be sustainable in the long term.

Digital Revolution Continues

The shift from analogue to digital products is taking place in most segments of the consumer electronics sector. Flat-panel and high-definition TVs, DVD players with blu-ray technology, digital cameras and camcorders with hard-disk recorders and associated printing devices are continuing to replace products using older technologies.

As the digital revolution is proceeding rapidly, major players are increasing both the technological contents and levels of network integration of their products.

Current impact

The consumer electronics sector is becoming closely integrated across many platforms, and because of consumers’ increasing awareness of this process and their interest and confidence in it the demand for analogue products is in decline. Not only have digital products been coming down in price, but their market has continued to broaden. Hence, for example, where once there were just two brands of iPod in 2003, there are now many such products, which differ in terms of memory, size, formatting, picture and sound quality, portability and even colour, as well as being integrated into other products such as the iPhone. Equally, their ease of use, and consumers’ increasing understanding of the uses of the Internet, for example, are both causing sales of analogue products to suffer significantly.

It is no surprise, then, that in keeping with forecasts from previous reports and a steady declining trend since the beginning of the review period, sales of analogue electrical goods are down more than ever and this decline is predicted to continue. This is not to say that they are heading for inevitable extinction as one of the many aspects of the broadening out of the market (and ironically of the digital revolution itself) is the increase in consumer choice and specialisation. This has, for example, underpinned a modest revival in sales of vinyl records in recent years (at least when compared to their lowest level).

In 2008, however, analogue products recorded significant falls in sales, on account of their almost total abandonment by mainstream retailers and suppliers. Sony announced its strategy some years ago of focusing in particular on high-definition television in anticipation of a world-wide conversion to digital. This policy has brought Sony great success, and it has also seen the release of such innovative technologies as blu-ray for DVD players, but it has happened at the expense of virtually all analogue production by the company. Sony no longer supplies analogue televisions and only about three models of its iconic Walkman cassette player are still available.

This trend has been emulated by retailers, from whom consumers now find it almost impossible to find analogue equipment of any description. John Lewis, Comet and Argos have all stopped selling analogue televisions except as novelty items, and the same applies to cassette players, videotape recorders and analogue cameras, although the latter remain more popular due to their ease of use and consumers’ affection for the printed photograph.

Outlook

In the medium term, the outlook for digital products is moderately healthy although unlikely to be anywhere near as good as has been seen in recent years. Essentially, market penetration has risen strongly over the review period, so there are now inevitably many fewer new customers being drawn into making digital purchases. Obvious examples of this trend include levels of mobile phone ownership and computers.

On the upside, however, this large consumer base is now well acquainted with these products, and it has some interest in seeing their manufacturers innovate further and increasingly in regarding digital products as in some way essential. Whether for businessmen who require their laptops to work on the plane, or children who see their mp3 players as a way of fitting in, these products are no longer perceived simply as luxury items, and this is likely to stand the market in good stead to weather any economic turbulence that may be hurled at it.

The government’s commitment to switch to digital broadcasting by 2012 is also providing consumers with an incentive to replace their televisions. Analogue television will then be entirely obsolete, that is literally inoperable, and this will surely fuel HDTV sales, for example, while falling prices will also help support other sectors.

It must be borne in mind throughout, however, that the main trend seen in 2008, the macroeconomic picture, is still likely to affect all sectors across the board despite the gains made by digital products in recent years.

Future impact

Further ahead, the outlook for digital products is very promising. As mentioned above, all televisions will be digital by 2012, and this means that a much larger base of new consumers will be inducted into the digital experience. This will bring an increasing familiarisation with the benefits of digitisation, which may well lead to further purchases in the digital market. If, for example, a television is fitted with many different channels as a result of its digital format, this experience of increased choice, and of possible integration with other platforms, is likely to increase consumers’ willingness to buy other digital products, such as blu-ray DVD players that can record programmes off the television.

This trend, coupled with a much greater emphasis on platform integration and the market’s ever-broadening ability to cater for specific tastes, along with falling prices, indicates the consumer electronics sector across the board is in rude health.

The only caveat is that companies’ research and development budgets may be affected by the current economic turmoil, and this may have an effect some years down the line, say from 2011 onwards as the unveiling of improved products is scaled back. Sony has already had to delay revisions to its blu-ray technology until 2009, and Apple’s much-touted collaboration with Volkswagen on the iCar has gone rather quiet.  As companies fight to ensure profitability, the emphasis on mainstream products may ultimately harm the progress of the market, which is after all highly dependent on novelty and functionality.

The market may also approach saturation for those consumers who see no need to renew their consumer electrical goods, although these will mostly be found at the lower end of the market. This ultimately means that growth rates are unlikely to return to their astronomically high levels of 2004–2005, although as prices start to rise again (following steady falls), the market will certainly find some room in which to expand.

Technology, Convergence and Portability Powering Forward

An important trend in the consumer electronics sector is the increasing demand for products that offer the convergence and integration of different technologies in a single product.

Convergence is affecting all subsectors within consumer electronics, in particular the portable products segment. For example, it is now not uncommon for digital cameras to include wireless connectivity or for mobile phones to be used as mp3 players, GPS navigators or Internet browsers.

Consumers increasingly value product features such as portability, ease of transport, compact size and light weight. In many cases, portable products are being purchased in addition to well-established, in-home consumer electronics products. Portable computers, media players and mobile phones are good examples of products that satisfy this consumer preference.

Current impact

Companies are aware of the value consumers attribute to features such as portability and “universal” connectivity. Portable consumer electronics is therefore becoming an increasingly important segment of the overall market and several new products (as well as improved versions of the existing ones) will be launched in this sector.

Not surprisingly, the portable consumer electronics sector had the best performance during the review period. Whilst growth of volume sales in the in-home and in-car consumer electronics sectors averaged 4.1% and 3.6% respectively, in the portable consumer electronics sector it averaged 9.4%. Portable products also represented 42.5% of the total market by volume in 2008, up from just 37.8% in 2004.

In general this means that the traditional boundaries delineating the consumer electronics market are becoming more blurred. Market leaders such as Philips and Panasonic have been expanding into any area where consumer uptake has been healthy, notably navigation systems and mp3 players. There is greater integration in technology, greater collaboration with software producers and more specific and aggressive advertising, as companies are catering for the techno-savvy consumers who want their products to do specific things with formats that only experts would have known about as recently as 2005.

This has also led to a focus on gadgetry and design, as companies have fought for consumers’ attention by positioning themselves strategically in the market.

Outlook

The portable consumer electronics sector is expected to grow in volume terms by 33.1% over the forecast period, compared with 10.6% in the in-home market, although it is the in-car market that actually stands to do best with predicted growth of 58.4% over 2008–2013, albeit from a much smaller base.

New product features, including increased media storage, better image resolution and wi-fi and network connections, have been introduced to address changing consumer preferences, and their availability will contribute significantly to sales growth in the sector.

It is also the convergence of technology that is allowing sales of portable products to grow so much faster than those of products for the in-home market. A portable mp3 or multimedia player can now be connected to a desktop computer, audio speakers or an in-car stereo system. A digital camera now has wireless connectivity and can easily be connected to a computer. These features enable portable products to become integrated with in-home or in-car entertainment systems.

This trend will force manufacturers to improve their understanding of product developments in other consumer electronics sectors and will also reduce the barriers among the different consumer electronics sectors.

Future impact

Technology integration will have an impact in the market for years to come. New product development will be good news for some subsectors but not for all. New, music-enabled mobile phones, for example, will replace many mp3 players, and home cinema and speaker systems will increasingly take market share from speakers.

The trend that has manifested itself most clearly, namely the growth of the portable market at the expense of the in-home market, is bound to continue as it is in the portable market that products are purchased more for their novelty value and functionality. For example, an audio system is more likely to be purchased by a specialist and is consequently tailored more to that consumer, and it frequently costs more, especially if it will support digital formats such as mp3. Given that sound quality is not very high on the list of the average consumer’s concerns when purchasing a product, the cheaper, portable version that also doubles up as a mobile phone, Internet browser and sat-nav system clearly has the greater appeal and also typically involves a greater emphasis on design.

This is potentially rather alarming for manufacturers that focus on the in-home sector, in which replacement cycles are longer and costs far higher. As already mentioned, however, the strength of the TV market should ensure competitive growth in this sector for years to come as well, albeit not as strongly as in the portable market.

Changes at Every Level of Supply Chain

One of the most interesting phenomena related to consumer electronics has been the revolution in the supply chain that has enabled prices to fall dramatically. Raw materials have in general become cheaper, and labour costs have been driven down by the relentless movement of production away from Europe to much lower-cost countries such as China and South Korea. This has enabled manufacturers to make large and generous price cuts in a string of ambitious attempts to lure customers into buying products in these new categories. Coupled with the flow of easy credit, this has helped stabilise a base in the consumer electronics market which will not now go away.

Current impact

These changes have now been taking place over many years, and Asian countries’ global dominance of manufacturing is no secret. Nevertheless, the changes are continuing to have an impact on the market. Besides the important social element mentioned above, namely the way in which lower prices have introduced many new customers to these products, profit maximisation in the past has enabled extra spending on research and development, which has led in turn to the creation of many new profitable products.

In addition, the market has become much deeper as a result, with a significant increase in the gap between its premium and budget ends. Sales of budget products have increased enormously as private label brands have been able to cash in on the lower manufacturing costs.

This has also significantly influenced the distribution end of the supply chain, with a shift in emphasis away from durable retailers, the traditional powerhouse of this market that still occupy the leading position, towards supermarkets and hypermarkets, many of which stock their own generic brands of consumer electrical goods.

Outlook

This trend is certain to continue, although with consumer credit drying up it remains to be seen whether the lowering of prices will continue to attract customers into the market. Most obviously, in the case of in-home electronic products, which still have a relatively high average unit price (at least by comparison with the portable sector), there is a distinct possibility that prices will start to increase. This is why the in-home sector is expected to do much better in the forecast period relative to the review period than the previously booming in-car and portable sectors.

There are also implications for the distribution channels, which are likely to continue moving in the direction mentioned above, as hypermarkets and supermarkets gain ground at the expense of durable goods outlets, the traditional retail base of the consumer electronics market. The share of mixed and durable goods retailers in distribution will continue to decline as issues such as after-sales service and expertise on product specifications become less important. Consumers are increasingly able to acquire the information they need through other communication channels, such as the Internet. An investment in Internet retailing may therefore be one way for durable goods retailers to reduce their costs and address the increased competition.

Future impact

The pressure, indeed the need, to reduce prices is likely to continue for some time, and with it will continue the transformation of the whole supply chain that has been seen over the last few years. Particularly given the current economic situation and its likely after-shocks, customers will be looking for ever-lower prices for their consumer electronics products – the obvious consequence of lower wages, lower employment and increased scarcity of credit. Although some consumers will remain interested in the technologically sophisticated end of the market, and will be prepared to pay a premium for these products, even suppliers to the top end of the market may well be forced to reduce their prices to cater for consumers’ increased reluctance of to part with their cash.

Prices will also inevitably fall as competition increases among both manufacturers and retailers, since profit margins have been fairly large until now and there is clearly some flexibility here. Equally, the growing strength of the hypermarkets and their tendency to focus on more budget products that still contain moderately sophisticated technology will force other retailers to bring prices down just to compete. It is also the case, inevitably, with technology that the rate of progress is such that whatever is considered “advanced” and “sophisticated” now will actually be outdated within a year, and can therefore be sold at a much lower price.

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