Flat Panels, Cratering Sales

Here’s an article from BW about how Wal-Mart’s flat-panel TV pricing for the 2006 holidays helped destroy a number of electronics stores. Looks like the chain’s decision to sell a 42-inch Panasonic for under $1,000 sent its (partial) competitors off a price-war cliff:

Along with Wal-Mart’s determination to lower prices, two other factors played key roles in last winter’s 40%-to-50% flat-panel price drop and the ensuing turmoil. For one, many more retailers such as Sears and CompUSA were starting to stock a wider selection of flat-panel TVs after seeing demand soar over the previous two years. Also, manufacturers like Samsung, Sony, Panasonic, and Westinghouse had ramped up production last year with new factories in Asia and the U.S. They began flooding the market with new TVs in the latter half of 2006. All these forces combined to make a commodity of what just six months earlier had been a solidly high-end, high-margin entertainment product. “It’s Econ 101: Best Buy and Circuit City had seen fat margins from flat-panel TVs for a while, and as it happens with any product, eventually the margins come down and the music stops,” says David Abella, a portfolio manager at New York-based Rochdale Investment Management, with assets of $2 billion.

Wal-Mart is the second-largest electronics retailer today, behind Best Buy, which has fared relatively well compared to many of its rivals. But it has done so by imitating some of Wal-Mart’s best practices, most notably an efficient supply chain, by the admission of CEO Brad Anderson himself. It also has more diversified merchandise than other specialty-electronics retailers.

I think the collapse of CompUSA — and maybe some of the other retailers — was also triggered by the post-holiday delay of Windows Vista and the ensuing realization that Vista wasn’t a compelling reason to buy a new computer, but that’s just my pet theory. I’m sure the demolition of flat-screen margins was the biggest factor, given the amount of floor space all of these chains devoted to those TVs. I’m fascinated by the way different sectors become commoditized.

The pharma biz, which I cover, has historically been insulated against that (until a drug’s patent life expires, that is), leading to less concern about reducing manufacturing costs. That’s changing nowadays, insofar as major companies are trying to wring excess costs out of manufacturing processes, but the market prices (and the high cost of regulatory compliance) still insulate them.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.