In Home Consumer Electronics Market

The World Market for In-home Consumer Electronics

Key Drivers and Prospects

Headlines

·         Volume sales in the global in-home consumer electronics market grew in 2007, registering a CAGR of 7.9% over the review period. The introduction of digital products over that period compensated for the declining demand for analogue formats, and that pulled value sales up by 9.2% in 2007.

·         The most dynamic growth in the subsector came from sales of high-definition televisions, especially those with sophisticated flat-panel displays. Demand was highest in the Asia Pacific and Australasia regions.

·         The market for in-home consumer electronics was characterized by intense competition brought about by declining retail prices. Major global players looked to offset the increasing costs of labor and raw materials by transferring their production facilities to low-cost countries.

·         With the rise in competitive pricing, values sales are expected to grow at a relatively low CAGR of 4.8% over the forecast period.

Private Label Products Are Increasing

Private label consumer electronics products made their mark during the review period as large retailers, such as Best Buy, Circuit City and Wal-Mart, saw the potential growth in margins generated by selling these lower-priced products rather than the higher-priced, established consumer electronic brands. By increasingly sourcing their consumer electronics from low-cost countries such as China, retailers are enjoying much higher margins on their private label offerings. As private label brands grew their share of the consumer electronics market, leading brands tried to fend them off by reducing prices. Multiple retail specialists are not the only ones looking to private label brands to help increase sales. A growing number of non-traditional channels, such as drug stores and grocery stores, are adding private label brands.

Outlook

Private label products are a relatively recent retail phenomenon in the global consumer electronics market. In the United States, for example, Best Buy only introduced its Insignia brand in 2004. Nevertheless, the company's private label brands are now available across a broad spectrum of products, ranging from digital televisions to MP3 players. In Argentina, private labels and imported brands from low-cost countries entered the market. The success of the most important brands in the sector is a result of their slightly higher price compared to generic or private label products.

There is little doubt that private labels in the consumer electronics market will continue to grow in importance. A successful private label program will often result in higher profit margins since there are no licensing fees or costly advertising and marketing initiatives. This has driven Best Buy over the years to expand its private label program, and it is forcing other retailers to play catch-up. Best Buy's leading competitor, Circuit City, is trying to revive its private label strategy after dropping its Liquid Video and Esa private label brands in 2006. Circuit City is now marketing both LCD and plasma televisions under its Element private label brand.

Current impact

Private label brands are common in the in-home consumer electronics sector, and the concept is expected to expand further into portable consumer electronics subsector. Wal-Mart now sells MP3 players under its iLo and Siren brands, while Best Buy offers low-priced DVD and MP3 players under its Insignia brand.

Although private label brands offer retailers meatier margins, these store brands are also being increasingly used as "loss leaders" to entice consumers into their stores.  In Western Europe, the price drop for desktop computers can be attributed in large part to the activities of food discounters, mainly Aldi, who flooded the market in the early 2000s with low-priced private label products. In Asia Pacific, the presence of private label products eventually pulled down the unit prices.

Future impact

A good private label program will be careful not to supplant higher-priced products from leading brand name companies. Instead, it will build a brand that provides shoppers with a reliable product for less money. The risk going forward is that lower-priced private label products may erode sales of low-end brand names that compete for the same retail space.

The main challenge for domestic companies will be competing with the private labels of large retail chains, which have managed to gain good positions within the market over the past years due to their low prices and acceptable quality. It is possible that more and more retail channels will be prompted to produce their own private labels or to order them from local manufacturers.

China Shows Market Dominance

China's emergence as a global manufacturing powerhouse is having a profound impact on the global consumer electronics market. However, that impact has been mixed. China becoming the factory shop floor for many consumer electronics companies has led to the outsourcing of many manufacturing jobs from developed regions where labour and raw materials are much more expensive. On the other hand, the deluge of Chinese-made consumer electronics has been a key reason behind the steep decline in prices, which has been a great benefit to consumers.

Outlook

China is following in the footsteps of Japan, which was able to dominate the global consumer electronics market by beating the Americans and Europeans with lower prices and more reliable products. In addition, Chinese suppliers are now moving beyond commodity products such as DVD players and shifting their research and production efforts towards more advanced consumer electronics, such as liquid crystal display (LCD) televisions, DVD recorders and eight-megapixel or higher digital cameras. However, China still has some way to go before its consumer electronics products attain Japanese quality, and it may take even longer before American consumers are convinced that this is the case.

China's relatively low wage structure, skilled labour force and convenient logistics are expected to continue to be key factors attracting foreign outsourcing. According to the research firm In-Stat, about two-thirds of China's electronics manufacturing revenue comes from foreign-funded or Sino-foreign joint ventures.  Chinese manufacturers still build consumer electronics products according to the specifications of US retailers and brand-name companies such Hewlett Packard and Dell, and taking part in these joint ventures allows them to improve their own levels of quality.

Current impact

To date, indigenous Chinese consumer electronics companies have largely focused on product imitation and low-cost strategies. However, this is changing as the Chinese Government looks to establish China as a global supplier of high value-added consumer electronics products. This new strategy is embodied within the Government's 11th Five-Year Plan (2006-10) which intends to encourage domestic consumer electronics innovation through increased investment and domestically owned patents, while at the same time reducing dependence on foreign technology and intellectual property. One area targeted for development is LCD, plasma and rear projection television manufacturing.

With the emergence of China as the leading low-cost production centre for consumer electronics, US, Japanese and European companies find themselves forced to re-evaluate their business strategies. As a result, many of the companies have shifted their manufacturing facilities from traditional high-cost locations to China and other Asian countries. US camera icon Kodak, for example, moved its camera production to China in 1999. China's Hon Hai Precision Industry is the exclusive supplier of Apple's iPhones and one of the few makers of iPods. In addition to the outsourcing strategy, contract manufacturing is also helping US retailers expand their private label offerings. Both Wal-Mart's iLo brand and Best Buy's Insignia brand are made by contract suppliers in China. The result of this outsourcing has been lower prices for US consumers.

Future impact

It is expected that regional economic blocs may place stricter regulations on the flow of products from Chinese manufacturers in order to guarantee that local market characteristics change gradually rather than suddenly. Nevertheless, the consumer electronics market will remain highly competitive and prices and margins will continue to decline.

Major manufacturers will continue to relocate their production to countries where labour and raw materials are cheaper. Global market leaders such as Sony, Panasonic and Philips will continue to respond to the rapidly changing market conditions in a number of ways, including undertaking continual efforts to reorganize their businesses and reconfigure their product lines.

To ensure robust growth and to maintain their market leadership, global leaders will focus on “champion” products, where quality and innovation capture the attention of consumers. As a result, it’s anticipated that there will be significant product enhancement and new product development in subsectors such as multimedia players, navigation systems and PDAs, DVD players, laptops and HDTVs.

Falling Prices Further Drive the Global Market Demand

The strong demand present in the consumer electronics market is largely driven by declining prices. In most subsectors, growth rates for volumes sales were higher than the rates for values sales over the review period. Falling prices make consumer electronic products more affordable. As new innovative products launched, their relatively low price levels stimulate demand. As a result, the household penetration rates of consumer electronics products in the global market grew significantly over the review period.

Current impact

Most consumer electronics products saw their prices decline in 2007, including in-home, portable and in-car consumer electronics products.  Short product lifecycles are among the reasons for the downward pricing trend. For most of consumer electronics products, replacement periods range from two to three years. Prices for new innovative products are no longer as high as they were in the early 2000s.  Currently, package sales and free gifts are widely used to promote products in the market.

Other than leading brands, local brands are struggling in their sales performances due to the declining price trend. In the past, local brands found themselves positioned in the middle of the market, between the international brands and the white boxes. With the international brands having reduced their prices, local brands now face stronger competition. In response, local players need to move into niche market segments rather than directly competing on price with international brands.

Outlook

The trend of falling prices will continue over the forecast period, and average unit prices of products in most subsectors are projected to decline. As a result, market demand will be stimulated as more consumers replace their older products.  Volume sales growth in most subsectors will outperform value sales growth.

Falling prices will also make the market more competitive. Brand preference and product features will not be the only criteria for purchasing decisions, and it will be more difficult for players to market and promote their products. In fact, players will need to price their newly developed products in line with existing products in view of this market trend. Product differentiation is another direction for market players to take. For example, local mobile phone manufacturers can focus on the production of smart phones to avoid the pitfall of the falling prices.

Future impact

Over the forecast period products in many subsectors, including televisions, in-home entertainment, mobile phones, personal portable media devices, portable computers and digital cameras/camcorders, will benefit from the demand, led by declining prices, to replace older products. For example, falling prices for LCD TVs will drive the replacement of traditional CRT models, allowing consumers to enjoy the new technology.

Integrated Technology

In 2007, the trend of integrating different technologies into consumer electronics products continued. A typical example of this trend is the mobile phone, which has been transformed into handheld computer that can now also be used as a media player, TV, internet browser, GPS navigator, planner and digital camera. In the home, home cinema is assuming the role of hi-fi equipment. In the car, the traditional car audio system is becoming a multi-media player, integrating radio, DVD player and GPS navigator.

Outlook

The trend toward integration will increase as new technologies are developed and different devices are made more compatible. A portable music player can now be connected directly to speakers, the home computer or the car stereo, becoming part of the in-home or in-car entertainment system. Integration reduces the barriers between different consumer electronics sectors and forces producers to improve their understanding of developments in the other sectors. This gives an advantage to companies that are present in many sectors. This is one of the main reasons why Apple released a mobile phone, iPhone, in 2007.

Current impact

The trend toward integrated technology is currently most apparent in the mobile phones subsector, but it is also an important trend in in-home consumer electronics. This is illustrated by the increasing sales of home cinema equipment at the expense of hi-fi equipment. In the car industry, the term “infotainment” has come to mean devices designed to provide internal information about the performance of the vehicle, external information (such as that provided by GPS navigation systems) and audio visual entertainment, in the form of digital video, radio and music. The trend toward integration is also confirmed by the increased sales of memory cards for mobile phones, which shows that mobile phones are increasingly used as music players and digital cameras. As a result, there has been a decline in the sales of MP3 players.

Future impact

As a result of integration, sales of single media devices such as MP3 players, handheld computers, GPS navigation systems and hi-fi equipment will decline over the forecast period. A possible response to this might be that manufacturers develop new technology that might be integrated into these devices. As well, they could look for new ways to emphasize the features and benefits of these devices. For example, there currently is a retro trend that has stimulated sales of hi-fi equipment designed in old styles. 

Overall, the trend towards integrated technology will result in decreased volume sales in a number of subsectors, as fewer units will be needed to deliver the same functionality. It may also mean that more manufacturers will move into new product subsectors to survive, or they may begin to collaborate with other manufacturers. Again, the winners will probably be manufacturers already present in many different consumer electronics subsectors.

Online Shopping Becoming An Acceptable Channel

With more and more consumers online and with the advent of the online shopping, retailers find themselves with an alternative distribution channel they can use to increase sales. Internet shoppers seeking consumer electronic products are developing smarter purchasing habits and becoming more critical in their shopping options. Their demands for higher-quality at low prices have increased. The growth in internet shopping has contributed to price reductions for a wide range of electronic products.

Outlook

Internet shopping will continue to grow over the forecast period. It is estimated that a greater number of consumers will buy personal computers and laptops in the future, thereby increasing the number of consumers using the internet on a daily basis. As a result, sales of electronic products via internet will increase substantially. It’s projected that the biggest growth in sales will come from digital cameras, MP3 players and LCD TVs.

Impact

The growing importance internet shopping in the sector will lead to lower prices and more competition in the market. Moreover, it is estimated that more small and large retailers will begin to offer products via their internet websites. It is also probable that consumers will resort to internet websites to purchase electronic products. As in the case of internet banking, sales of in-home consumer electronics over the internet will become more popular as it increasingly becomes perceived as an efficient and faster way of purchasing products.

Global and Regional Competitive Landscape

Headlines

·         Sony, Panasonic, Matsushita and Philips were leaders in volume sales in the global in-home consumer electronics subsector.

·         Major players built and maintained manufacturing bases in the Asia Pacific region, particularly in China, due to the lower cost of raw materials and cheaper labor costs found there.

·         All major companies in the sector maintain global distribution networks in order to increase their consumer bases. They all aim to respond to the growing demands for advanced and converged consumer electronic gadgets, and they aggressively engaged in research and development.

·         Hewlett Packard and Dell are also leading players in this sector. Samsung, LG and Lenovo also experienced dynamic growth in 2007.

·         Lenovo continues to make its mark after acquiring the IBM PC business in 2004.

Intensified Market Competition

Intense competition in the sector continued. Manufacturers aggressively invested in R&D over the review period, launching products with new features such as greater storage capacity and digital plug-and-play that allowed for greater interactivity and time-shifting. The demand for analogue televisions was eroded dramatically by LCD and plasma TV manufacturers. Industry standards moved toward manufacturers offering smaller, lighter and more portable devices. These standards applied to a wide range of products, from cameras and media players to mobile phones compatible with software and services delivered via wireless technology. 

Lcd Panels Becoming More Attractive

The strong development of the LCD TV panel market is largely supplier-driven, with massive investments in new production facilities increasing the availability of LCD TVs and driving down the prices, making them more attractive to consumers. Brand-name sellers of consumer electronics and PCs entering the LCD TV subsector served to intensify competition and drive down prices as well, further expanding demand. 

In the Asia Pacific region, the shift to LCD is making competition more intense. With the advantage of local supplies of TFT LCD panels, domestic players have the capability to develop advanced products with lower material costs. Products with display screens over 40 inches are expected to be the best-selling products over the forecast period. The growing trend of big HD LCD TV panels presents a challenge to manufacturers in their capacity to deliver. In 2007, Sharp announced it will open a new LCD factory in Poland in order to meet the European demand for HD LCD TV panels. In similar moves, Sony is planning to build a new factory in Slovakia and Matsushita (Panasonic) is building a new factory in Japan.

As demand for LCD televisions ramped up in 2007, Toshiba made a strategic decision to abandon the plasma category and focus instead on expanding its LCD product line. Toshiba getting out of the plasma business is a signal that competition in the LCD market will grow even fiercer as the company focuses on its new Regza line of LCD televisions, which are designed to take on high-end brands such as Sony's Bravia, Sharp's Aquos and Panasonic's Viera.

High Definition Video Format Takes Shape

As digital technology replaces analogue, VCRs are becoming less common and they are being replaced by DVD players or, in some cases, by VCR/DVD combinations. However, the advent of HDTV brings with it new technological demands. In 2007, Blu-ray technology was introduced and supported by Samsung, LG and Panasonic. Blu-ray technology provides both better image and sound. In addition, increasingly video players have a built-in hard drive for recording TV programs.

Internet As An Alternative Distribution Channel

The internet continues to greatly affect the market for consumer electronics. Consumers have become more comfortable making major purchases through online stores. The internet also is a major source for product and price information. The introduction of new methods of paying for products online is driving rising sales in the channel, though many consumers still do not have full confidence in using their credit cards online. As in other markets, the popularity of online stores in the global consumer electronics market is growing.

Regional Trends and Prospects

Headlines

·         Sony topped the Asia-Pacific market for consumer electronics in 2006 with a volume share of 12.5%. Sony was followed closely by Samsung with a 12% share and Nokia with 8.4%.

·         The Asian Pacific market was dominated digital TV manufacturers. More expensive products included PDP TVs, usually sold as home theatre sets or as premium products through department stores.

·         The market in Western Europe was characterized by booming sales of high definition televisions. In the Eastern European market, major players shifted completely to digital formats and products such as LCD and plasma displays became prevalent in the region. 

·         Sales of consumer electronics in North America reached 532.9 million units in 2007, while in Latin America they reached 153.4 million units. These figures reflected an increase in CAGR during the review period of 8.9% and 17.7% respectively.

·         At the end of the review period, Nokia was the leader in Africa and the Middle East consumer electronics market, followed by Samsung and Sony in volume sales.

From West To East

The competitive conditions under which firms in the consumer electronics sector operate have forced many leading manufacturers, including Sony and Panasonic, to abandon manufacturing in the West and transfer those operations to East European countries and East Asia. Other companies, such as Alba, Toshiba and Sharp, are increasingly sourcing raw materials from East Asian countries and extending their operations to high-growth geographical areas, such as countries in the Asia Pacific region and BRIC (Brazil, Russia, India and China).

During the review period, an influx of Asian market leaders entered the in-home consumer electronics market.  Some of the most aggressive competitors are coming from China and Taiwan. Lenovo, the Chinese computer maker that acquired IBM's PC business in 2005, announced at the 2008 Consumer Electronics Show in Las Vegas that it was entering the US consumer market with the launch of its high-end IdeaPad brand.

Over the forecast period, the sector will see the massive arrival of Asian products with unknown brands being offered at very low prices. This will shape the sector in the future, and most multinationals will lose market share.

Is Poland Becoming Europe’s ‘china’

It is expected that by 2010 Poland will become the leader in the production of TVs for the European market.  In 2007, the Polish government signed a significant number of agreements with foreign investors seeking to produce TVs in Poland. The Polish Economics Ministry confirmed Poland will serve as the manufacturing site for 80% of European TVs. It is estimated that Poland will produce approximately 38 million TVs for the European market in 2010.

Latin Americans Go for Portable Electronics

While there were numerous quality products available in 2007, consumers tended toward buying portable and digital devices, including laptops, portable media and multimedia players, and cameras and camcorders. Another trend affecting the overall market in Latin America is the decline of audio in favour of video. Digital televisions, portable DVD players and mobile phones with the capacity to reproduce video benefited most from this trend.

Demand for portable products is expected to increase, courtesy of the growing demand for portable multimedia players and portable computers.

Convergence will continue to drive demand for portable consumer electronics. Examples of current convergence include digital cameras that include wireless connectivity and mobile phones that can be used as MP3 players, GPS navigators and internet browsers.

Products from China will continue to enter the Latin American market, resulting in local companies shifting their manufacturing from traditional high-cost locations to low-cost locations like China and other Asian countries.

Integrated Home Audio Features Drive Global Market

The integration of new features into home audio and cinema products has characterized new product launches in the global market. To maintain its top position in the market, Sony introduced a hard disk component stereo with MD slot NA-M7HD. This paved the way for the next-generation stereo systems, in which the integration of the hard disk enhanced the capability of the system to store and download music files. In response to the rapid changes in audio home entertainment, Matsushita strengthened its Panasonic product line by launching a D-dock mini-component stereo system equipped with hard disk drive. It also launched new products that linked audio equipment through SD Memory cards. 

Consumers are likely to benefit from these new technological trends, and they will be more willing to acquire new products, particularly those with high interactivity and multimedia features. Manufacturers, wholesalers/distributors, retailers and others in the sector are also likely to benefit from this trend by seeing higher sales, since consumers will be more willing to replace their current products with newer models.

Home cinema and speaker systems are expected to exhibit the highest growth over the forecast period. Manufacturers will direct their production toward audio separates. Consumers will likely be benefit from this as smaller and more portable products become increasingly available.

Baby Boomers in North America As Potential Market

Baby Boomers in North America (those born between 1947 and 1966) are the wealthiest generation in the region. Their impact on the retail sector, in particular the consumer electronics segment, has been keenly felt over the years. However, as an increasing number of Boomers enter retirement, their interest in consumer electronics is likely to decline as they pursue other interests.

Many Baby Boomers are now in the midst of their peak earning years, and they are eager to enjoy the finer things in life, including high-end consumer electronics. This demand has helped to support sales of more expensive consumer electronics products, such as large-screen digital televisions, computers and digital camcorders.

Baby Boomers remain the most important demographic group in North America. With their high levels of disposable income, Boomers embrace many of the latest consumer electronics technologies, such as digital televisions.

In addition, as the cocooning phenomenon becomes more pronounced over the forecast period, Boomers will look to consumer electronics as a way of bringing their families together.

Major players will need to adapt to the new demands of ageing Boomers by redesigning some of their products to include larger and easier-to-read screens. They will also have to provide uncomplicated operating manuals, as hard-to-read numbers and endless pages of instructions are not good selling features for this demographic group.

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