Consumer Electronics Market in the US

Consumer Electronics Market in the US-Dissertation Writing Help

Executive Summary

Down, But Not Out

Consumer electronics sales stagnated in 2008 as a result of the deteriorating economic conditions in the United States. On the other hand, though the consumer electronics industry did not escape the downturn in consumer spending, there is some consolation in the fact that sales could have been worse. In fact, demand for consumer electronics has proven to be somewhat resilient to the US economic downturn as Americans hunker down and spend more time at home and less time and money on vacations, buying second homes or dining out. 

Low, Low Prices

Despite the tough economic times, Americans still have a love affair with consumer electronics products. To help them spend their money, retailers and manufacturers continued to compete heavily on price. As a result, the consumer electronics market in the United States continues to face deflationary pressures. A number of factors have contributed to this, including increased outsourcing of consumer electronics to China, the influx of competitively priced Korean, Taiwanese and Chinese brands and the surge in low-priced private- label brands.

What’s Driving the Market?

While sales of LCD and plasma televisions were rather lacklustre in 2008, the health of this product segment continues to have an important influence on the overall consumer electronics market. Nevertheless, sales were up as consumers were getting prepared for the end of analogue broadcasting in 2009. Aside from televisions, portable laptops, multimedia players and navigational devices experienced strong growth in 2008. All-in-one portable devices continue to be a strong draw for busy consumers who demand entertainment and communications on-the-go.

Maintaining the Technological Edge

Given the high household penetration rate of many consumer electronics segments in the US, the industry is constantly facing the challenge of developing innovative technologies and launching new products. They are also continually seeking to rekindle mature product segments. With prices of consumer electronics products facing extreme deflationary pressures, competing on price has become more difficult for the established brands. Continual technological innovation will be the key to future success in this sector.

Can It Get Any Worse?

Depending on the severity of the economic slowdown in the United States, the consumer electronics market could face a bumpy road in the near term. Moreover, given the maturity of many of the product subsectors, consumer electronics companies will need to address the growing challenge of ever-increasing household penetration rates. 

Key Trends and Developments

Tough Times Take Toll on Consumer Electronics Sales

As the US economy took a sharp turn for the worse, 2008 proved to be a difficult year for the consumer electronics industry. Wracked by rising unemployment, mounting consumer credit debt, a deteriorating housing market and a major downturn in the stock exchange, US consumer confidence hit an all-time low in October 2008 according to the US Conference Board. As US consumers hunkered down to pare back their spending habits, consumer electronics sales suffered.

However, the damage done to the consumer electronics sector turned out to be not as bad as expected, considering the scope of the economic downturn and the low consumer confidence levels. Overall retail sales of consumer electronics shrunk slightly in 2008, but this was in sharp contrast to the strong growth seen in prior years.

Outlook

The instability of the US housing market in 2007 was the precursor to the eventual downward spiral of the entire US economy, which culminated in flat economic growth rate in 2008 and perhaps even worse economic growth in 2009.

With recovery not expected until 2010, consumer confidence and corresponding retail spending is likely to remain weak throughout 2009. This does not bode well for the consumer electronics sector as solid consumer confidence is an important ingredient if US consumers are going to spend the several hundreds or thousands of dollars on a new LCD television or on high-end audio equipment for their homes.

Current Impact

Prior to 2008, the housing boom was the key economic stimulus behind the strong consumer spending that took place in the United States. With rising housing prices, US consumers borrowed heavily against their home equity to pay for cars, vacations, the latest LCD televisions and high-end laptop computers. However, as housing prices began to plummet across the United States in 2007 and 2008, consumers started to feel the pinch as housing-related credit tightened. High fuel prices, rising unemployment and a floundering stock market added to the general economic malaise.

While consumers may have felt that they had less money to spend, sales of consumer electronics really did not decline by very much. It appears that, even when economic times are tough, consumers still crave consumer electronics products, whether it be to entertain in the home or to telecommute in order to save gas. Strong consumer demand for smartphones and LCD televisions helped to underpin consumer electronics sales for the year.

Future Impact

The long-term economic outlook for the United States is made cloudier by high trade and budget deficits, historically low household savings rates and mounting consumer debt. According to CardWeb.com, for those US households with at least one credit card the average credit card debt is a staggering $9,200. Given this situation and the uncertain economic times ahead, US consumers are expected to cut back further on their spending and start paying off their debt. However, as prices for consumer electronics products continue to fall, the temptation to purchase the latest electronic device will still draw customers into stores.

How Much Is Too Much?

According to the NPD Group, the average US household owns more than 21 consumer electronics products. This begs the question:  how many more electronic gadgets do Americans really need? DVD players, for example, can now be found in 85% of US households, while digital cameras are found in about 76% of households. Even products from relatively new market segments, such as digital televisions, can be found in more than one-half of US households.

There is still some room to grow in many of the mature markets, but the fact is that many consumer electronic products are reaching record household penetration levels. Combine this with the weak economic conditions and it is quite surprising that the consumer electronics industry did not report even weaker sales than it did in 2008.

Outlook

Given the high household penetration of many consumer electronics segments, players in the industry must focus on reinvigorating mature categories in order to drive growth. For example, in the DVD segment, Blu-ray will become the key technology driver in the coming years as it will complement the growing number of high-definition televisions in the market. An increasing number of American households will replace their old DVD players with the next generation Blu-ray models over the forecast period.

The mature digital camera market will also see a major shift from point-and-shoot cameras to the DSLR market. While 76% of American households own a digital camera, the penetration of DSLR is still small, and it represents huge growth opportunities for digital camera companies. Only about 17% of US households with incomes over US$100,000 have a DLSR camera in their home, while 8% percent with incomes under US$100,000 own a DSLR. 

Current Impact

The NPD Group recently reported household penetration rates for a number of consumer electronics products. Among them were home DVD players with a household penetration rate of 85%; printers with a rate of 85%; desktop PCs with a rate of 84%; MP3 players with a rate of 50%; flat-panel TVs with a rate of 53%; and notebook PCs at a rate of 48%. As these product categories reached record penetration levels, the industry took steps to develop new technologies to drive further sales growth.

While consumer electronics companies think of new ways to reinvent mature categories, other relatively new market segments, such as digital televisions, still have plenty of room to grow. In fact, digital televisions will saw the highest growth in household penetration rates in 2008, helped by declining prices and the transition to digital television which was scheduled to start in February 2009.

Future Impact

Despite the many high household penetration rates, US consumers still love to spend money on consumer electronics products. According to the Consumer Electronics Association, the average US household spent US$1,405 on consumer electronics products during the period March 2007 to March 2008, $120 more than the year before. For many US consumers, owning consumer electronics is no longer considered a luxury, but a necessity. While this sentiment is good news for consumer electronics manufacturers and retailers, they still have to be aggressive in developing new technologies in order to refresh mature markets and spawn new products categories.

However, will there ever come a time when Americans ask themselves whether they have too many consumer electronic devices? It seems rather doubtful, given the American love affair with electronic gadgets and the ability of the industry to stay one step ahead in terms of technological development.

Is There Money To Be Made in Going “green?”

There is a growing awareness among many US consumers about the environmentally friendly features of many consumer electronic products. Mountains of consumer electronics waste that is generated every year is finally moving the government and consumer and industry groups to act on this growing problem. According to the US Environmental Protection Agency, only about 12.5% of US electronics waste is recycled each year, and much of that is dumped rather than recycled. The Consumer Electronics Association estimated that consumer electronics products currently consume around 11% of residential electricity in the United States, more than doubling its share over a period of 10 years.

Given these alarming facts, it is no wonder that the industry’s leading trade association in the United States, the Consumer Electronics Association, released its first Environmental Sustainability Report in 2008 showing how major electronic companies compare when it comes to environmental sustainability. The report was intended to provide consumers with a tool to determine which consumer electronic companies are the most environmentally conscious.

Outlook

Looking ahead, environmentally friendly features and manufacturing practices are expected to become key selling points for consumer electronic products. This was clearly evident at the Consumer Electronics Show held in Las Vegas in 2008, which provided a glimpse into future consumer electronics trends. With a strong focus on "green" products, the industry is simply catered to the growing demand by consumers for more environmentally friendly consumer electronic products.

Industry giant Hewlett-Packard, for example, is one of the firms spearheading the environmental movement. The company has very aggressive environmental goals that it hopes to achieve over the next several years. These include an “Eco Highlights” label, which will be placed on product packaging to inform consumers of the environmental attributes of the product. Other goals include plans to improve the energy efficiency of the company’s ink and laser printers by 40% by 2011; to increase by three-fold the use of recycled materials in its printers by 2010; and to recover two billion pounds of computing and printer equipment by 2010.

Current Impact

Both manufacturers and retailers are responding to the new "green" trend. In 2007, for example, Sony established the first nationwide electronics recycling program, which included recycling centres in all 50 states. Sony eventually plans to have sites located within 20 miles of every US household.

Apple is a company that has been criticized in the past for its manufacturing processes. Now, it is making major strides in promoting the environmentally friendly features of its new MacBook family of computers. The new MacBooks meets Energy Star 4.0, EPEAT Gold and RoHS environmental standards. The company has also eliminated toxic chemicals from its manufacturing process, such as mercury and arsenic.

As for retailers, Wal-Mart is now asking its consumer electronics suppliers to complete green practices surveys before agreeing to restock products on its shelves.

Future Impact

A 2008 consumer study conducted by Forester Research found that an estimated 25 million Americans (or 12% of the population) were willing to pay premium prices for green consumer electronics. While the market might be ready to support more green products, the reality is that consumer electronic products have relatively short life-cycles, which encourages waste. To be truly “green”, consumer electronics manufacturers will need to build more durable products to lengthen current life-cycles. However, longer life-cycles translate into fewer sales, and this is a very foreign concept for profit-driven companies.

While the growing environmental consciousness of consumer electronics manufacturers can be attributed in part to altruistic ideals, in reality part of the move to go “green” is the result of stricter environmental regulations in the United States. These regulations are likely to grow even more stringent in coming years. In the state of Washington for example, the industry is contending with new regulations concerning the sale of and recycling of covered electronic products (CEPs) throughout the state, including computers, monitors and televisions. More regulations could mean higher costs, and these higher costs will likely be passed on to consumers.

the Iphone Helps To Push Touch Screen Technology

While touch screen technology has been around for some time, its popularity has taken off recently with the launch of the Apple iPhone. The iPhone’s touch screen has proven to be a key selling feature and a popular interface for iPhone users.

Consumers are now seeing more touch screen devices emerge across a wide spectrum of consumer electronics, ranging from mobile phones to PCs. For consumers, the touch screen offers an easier interface compared to traditional keyboards and keypads. For manufacturers, the touch screen provides them with a new selling feature to attract consumers to higher-priced consumer electronics products.

Outlook

Touch screens have largely been a niche technology. However, this is no longer the case as consumer electronics manufacturers ramp up their R&D to address the growing demand for touch screens. The launch of the Apple iPod had much to do with the growing interest in touch screen technology, and it appears that Apple will continue to “push the envelope” when it launches its next generation of computers, which are expected to include touch screen technology.

Apple’s competitors are already jumping on the bandwagon and incorporating touch screen features. LG already sells an iPhone-like phone called the Voyager, and Nokia has filed for touch screen patents. Other leading mobile phone makers, such as Samsung, Motorola and Sony Ericsson, are following follow suit in order remain competitive in this emerging field.

Current Impact

The annual Consumer Electronics Show in Las Vegas offers both the industry and consumers a look at the latest consumer electronics trends. One of the key trends highlighted at the 2008 show was touch screen technology. It was evident across many consumer electronics product sectors, including mobile phones, personal navigation devices, digital cameras, televisions and PCs.

Apple may have been instrumental in bringing touch screen technology into the mainstream, but it was other established consumer electronics companies that pioneered the technology. Hewlett-Packard, for example, was the first to employ touch screen technology with its HP 150, launched about 20 years ago. This has now evolved into the TouchSmart PC, which incorporates a 22-inch multi-touch HD display. This complements Hewlett-Packard’s overall strategy of positioning the PC as an entertainment hub for the entire household. Moreover, this also represents a key strategy direction for Hewlett-Packard, as the company tries to compete on technological innovation rather than on price.

Future Impact

Touch screen development will continue to evolve rapidly over the forecast period as the technology improves and as prices come down. As an input interface, touch screen technology will also compete with speech and voice recognition input technology, both of which are making inroads in the consumer electronics industry.

However, the future success of touch screens will depend largely on how fast the costs of touch screens decrease over the forecast period. Some industry analysts believe that the cost of the technology will need to come down substantially before there is wide-scale adoption by mobile phone makers and other consumer electronics companies. According to the market research firm iSuppli, only about 30% of mobile phones sold in 2013 will incorporate touch screen technology. Aside from hardware costs, there is also the issue of software availability. Currently, there are few software applications available to support multi-touch interface technology.

Survival of the Fittest

Perhaps it was a sign of the times, but in November 2008 Circuit City, America's second-largest electronics retailer, filed for bankruptcy protection under Chapter 11 of the US bankruptcy code. This allows Circuit City to hold off creditors and to continue operations while it develops a reorganization plan. Circuit City is not alone, as tough economic times in the United States have wreaked havoc across the retail sector. Overall, American consumers are spending less. At the same time, they are facing more restrictions on consumer credit lending.

Some analysts have argued that Circuit City’s bankruptcy was the result of mismanagement, but there was little doubt that deteriorating economic conditions pushed the company over the edge. Tweeter, another major nationwide consumer electronics retailer, also filed for bankruptcy in November 2008.

Outlook

Liquidation sales conducted at 155 Circuit City stores and at all of Tweeter’s locations had a negligible effect on the marketplace. Despite flooding parts of the market with under-priced consumer electronics products, overall product pricing remained competitive.

Best Buy is likely to be the biggest beneficiary of the estimated $2 billion in lost volume from the Circuit City and Tweeter closures. According to Credit Suisse, if Circuit City fails (which is a distinct possibility in the near term), Best Buy could capture 30% to 40% of Circuit City’s approximately $10.5 billion in sales. Barclay's Capital pegged Best Buy's gains at about $450 million in incremental sales for each additional 100 Circuit City stores that are closed. Other retailers, such as Wal-Mart, Costco and Sears, are also likely to benefit from Circuit City’s woes.

Current Impact

Circuit City is facing significant declines in traffic and heightened competition from rival Best Buy and others. Circuit City maintained that it filed for bankruptcy protection because of the pressure from vendors who threatened to withhold products during the holiday season. Circuit City's creditors include Hewlett-Packard, which instituted a $118 million claim, followed by Samsung ($115 million), Sony ($60 million), Zenith ($41 million) and Toshiba ($17 million). Others include Garmin, Nikon, Lenovo, Eastman Kodak and Mitsubishi.

While a complete liquidation of Circuit City is not imminent, the company did operate “normally” through the 2008 Christmas shopping season. Prior to this, the company cut 17% of its US workforce and closed 155 of its 700-plus US stores.

While Best Buy is likely to benefit the most from Circuit City’s bankruptcy, its financial situation has also come under strain. As consumer spending tightened, Best Buy warned its investors that its previously projected 2009 revenue target of $47 billion would probably come in more in the range of $43.7 billion to $45.4 billion.

Future Impact

Despite Circuit City receiving a $1.1 billion line of credit to keep goods flowing, the long-term prospects for the chain are mixed. Scenarios range from a significant downsizing to a complete liquidation of the company. One of the more positive outlooks is from Banc of America Securities, which envisions a much smaller multi-regional Circuit City consisting of 200 to 300 stores at most. Whatever outcome emerges, one thing is certain: consumers will be less inclined to shop at Circuit City in the future for fear of losing their warranty protection on high-price purchases.

Consolidation in the industry is expected to continue, particularly as the economic downturn in the United States is not likely to improve until 2010. Weaker regional chains and independents will be vulnerable as consumer spending decreases even further. Waiting in the wings will be retailers such as Best Buy, who will take this opportunity to further expand their retail presence and gain market share.