#1 – Overall consumer spending has increased, even with wage stagflation. This is due to the combination of increased disposable income with the rapid decline in gas prices (an extra $10 to $20 per week makes a big difference) coupled with greater consumer confidence (even without wage increases, the feeling that the economy has at least stabilized coupled with the cut in gas costs) has led to greater spending. The other macro factor that has often been overlooked is the multi-year lows in interest rates, allowing many homeowners to refinance their mortgages and cut down their monthly expense. So without any wage increases, consumers have more money in their pockets!
#2 – The Holiday season seems to have started slowly … except for Consumer Electronics. Overall holiday spending looks to be up 2 to 4%, while CE spending looks like it will end out up 7 to 10%. Two key factors for this are the explosion in TV sales this season, dominated by large screen sets (55 inch and above) and Ultra High Def sets, and the fact that so many CE categories are positioned for a great season (sound bars and home theater audio, portable audio and headphones, tablets and smartphones, health and wellness CE products, action cameras, notebooks and video game systems). That there are some many hot CE categories has meant that CE stores traffic has been solid for the year – not spectacular, as overall retail traffic continues to lessen as consumers increase their share of online shopping.
#3 – This is clearly the year that we have seen a tipping point in how consumers shop, with their first search being online (as opposed to checking out stuff in stores), online shopping taking greater share and omni-channel becoming more important. This is a long term trend, one that we see moving at a more rapid speed over the next few years. This growth has not been shared by all accounts online – it is focused on the very large players (for CE online, think amazon.com, walmart.com, newegg.com and bestbuy.com). The numbers for the last ten days online are incredible, with both page views and actual revenue up in the high double digits.
#4 – The positives in the CE industry are not shared by all players or all categories. Sears/Kmart continue to see double digit declines in overall CE revenue, as do the office superstores. The camera and camcorder categories are in a repaid decline, with no hope of a recovery. Smartphones continue to take a bigger share of the overall CE business – meaning other categories are hurting. And Apple continues to increase its share of the overall CE business; alone it is responsible for roughly half of the growth in CE. And the growth in Apple and smartphones are negatives in terms of margin, as both are low margin players – and the overall CE industry looks to be down between 100 and 200 basis points this year.
#5 – One additional positive note regarding the economy is job growth over the last three months, with a gain of 840,000 jobs in the US during that time. This has a double impact: those who have jobs now have spending money (impacting about 1.2 to 1.6 million people, based on families) and increased overall consumer confidence, as people see their family members and friends getting jobs and feel better about the overall economy. This is why we believe that the spending for apparel, sporting goods, housewares and toys will pick up as the season goes on, just not to the extent of CE products.
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There has been a lot of press about how the Black Friday weekend traffic and sales were down, in terms of retail traffic/revenue. We differ specifically for CE sales, based on the following:
#1 – Although overall traffic and revenue may have been down, it is clear that CE took a much larger share of the basket, and that overall CE revenue was up!!! Total CE sales, retail plus online, were up roughly 7 to 10% for the week, in our opinion.
#2 – CE has a higher proportion of e-commerce sales than other consumer products, and CE e-commerce sales skyrocketed. The three largest CE players – amazon.com, bestbuy.com and walmart.com, all showed double digit increases this weekend and for the entire week. And it is important to note that for the e-commerce business, it was a week long event, as retailers released their BF deals online early, and many consumers took advantage. In fact, one of the key factors for the reduced traffic overall was the continual shift to online purchases – for many consumers they appreciated buying the specials without having to deal with the crowds. We want to be clear in that we expect store holiday traffic to continue to decline going forward, as we have reached that tipping point where a large number of consumers are comfortable shopping online for major purchases.
#3 – The CE industry made a concerted effort to focus on bigger ticket purchases, cutting considerably their focus on featuring DVDs to drive traffic. Yes, Walmart sold an incredible amount of DVDs and Best Buy still sold a good quantity of movies and video game software – but the promotions for these categories were down – creating considerably shorter checkout lines for all involved. Focusing on the big dollar stuff, especially TVs, iPads and notebooks, led to big numbers without correspondingly big traffic numbers.
#4 – The number of strong categories for CE was the most in more than a decade, allowing for strong overall top line growth. Start with TVs, the hot item – and especially bigger ticket SKUs. Layer on iPads and notebooks – huge revenue producers. Add video game systems – big numbers, and up from last year. And then add all the other strong categories: Beats headphones, GoPro and action cameras, low end tablets (mainly at Walmart), fitness (FitBit numbers were fantastic for the week), cellphones (solid, with much of the traffic spread through the week instead of just on BF – and greater dollars due to the sales of the iPhone 6 and 6 Plus) – and as the weekend went on we saw good sales of bluetooth speakers, cellphone accessories, SanDisk memory products and we could go on and on.
Our key takeaways from the weekend are:
#1 – This should be the best holiday CE season in at least five years (and maybe longer). The large number of hot CE categories, the strength of the TV business and the dollars that represents, the lack of other “Must-Have” holiday items (except for anything related to the movie Frozen), the fact that Best Buy is in good shape financially and operationally (they set the table for the industry), the strong CE focus by Costco and Walmart, the much, much, much stronger price points on every CE category this holiday versus last (look at the ads and it is clear that we have much more consumer friendly pricing on 4K TVs, on better quality brands such as Samsung, Beats and Apple, on iPads … the list goes on and on) and the increase in consumer confidence (the combination of lower gas prices and the thought pattern of “might not be getting a better job, but at least less danger of losing the current one”) add up to a great holiday CE season.
#2 – As of today, and it looks like for the rest of the season, Best Buy is the big winner. We are not seeing the press about “will Best Buy make it?”, and “how can Best Buy survive against amazon?”. Best Buy has the best product mix, with leadership position in every hot CE category – large TVs, 4k TVs, iPads, notebook PCs, GoPro, FitBit and other health and wellness devices, Beats and other higher end headphones and bluetooth speakers, Samsung TVs … again, on and on. The key is that Best Buy has a leadership position in every major CE brand, meaning it will have better supply, it will be better merchandised (store within a store and in-store displays) and it will have a better selection.
#3 – The other winners for the week were Costco and Walmart, both with strong merchandising (though Walmart’s TV merchandising did not seem as strong as a year ago). Most of the top brands, incredible daily traffic and improved overall CE departments lead us to believe that both will continue to be have great CE seasons – clearly taking share away from their closest competitors. There were other winners last week, including amazon.com, Vendors selling Direct (way up form 2013) and select regional CE players (not all – there were an equal number of losers).
#4 – The losers are also clear – Sears/Kmart, the office superstores, HH Gregg – these players are all strong and important retailers and they are all losing share in the CE space. And this is a slippery slope, as once you begin to lose share you become less important to the suppliers and are less likely to get the hot products and the deals. Traffic counts for the CE departments for each of these are down double digits (our best estimates) – it does not bode a good holiday CE selling season.
#5 – Top brands are becoming more dominant. We do not have the NPD numbers as of yet, but we are willing to bet that Samsung gained major revenue share in TVs, Apple in cellphones, tablets and computers, Beats in headphones, SanDisk in memory, GoPro in camcorders/action cams. These numbers will slide as the season goes on, as the supply of the top brands gets constrained – but it clearly demonstrates that consumers like the best brands, want to purchase the top brands and will do when they are competitively priced.
#6 – Consumers are willing and able to buy higher priced goods – where those more expensive goods still show a good value, a reason to buy now, and clear, easy to understand feature/benefit advantages over the products below them. This was obvious all weekend in TVs, where consumers stepped up to better products. And it was true in category after category – here it was clear the value equation made it worthwhile.
Please note that these observations are based on a large number of store visits by the Levin Consulting team, and no “inside information” was obtained – it is our best analysis of what we saw. Please send any comments or questions to me. And thanks to the Levin Consulting team for all of their help in preparing this update.
These opinions are our best opinions – we look forward to getting actual numbers and sharing those shortly.
Best wishes for a Happy and Healthy New Year, and for a Successful Holiday Selling Season!