Consumers walking into an electronics store looking for a big-screen high-definition TV (HDTV) may find that the place looks and feels different than it did last Christmas.
They will see more name-brand models along the wall and a lot fewer of the second-tier brands that also happen to carry lower price tags. They may also find themselves accosted by sales staff pushing expensive but nonessential services like extended warranties and professional installation. Liberal return policies are getting tougher at some stores.
"We're abandoning the entry-level price point," said Joe McGuire, the chief executive of the regional electronics chain Tweeter Home Entertainment Group until stepping down this week. "Compared to last year, we'll be very much focused on models with superior picture quality and large sizes."
To boost profits, the company will also push customers to purchase its US$399 professional installation package and its US$79 picture calibration service.
Electronics retailers are doing this because, although they are selling more HDTVs than ever before, they are making less money on them. As consumers inexorably move toward buying ever-larger screens, revenues climb, and competition among the retailers forces price cuts. And as the low-price high-volume mass merchants like Wal-Mart or Costco become major vendors of big-screen HDTVs, all retailers are forced to keep their prices -- and their profit margins -- as low as possible.
Prices have continued to drop dramatically this year. According to the research firm iSuppli, the average retail price of 42-inch HDTVs -- one of the most popular sizes this year -- has declined to US$1,655 from US$2,140 last Christmas, representing a 23 percent drop.
Prices will continue to fall, industry analysts say, because the retailers are powerless to prevent the declines. Not only is retail competition fierce, but flat panel TV manufacturers, especially the Taiwanese contract manufacturers, continue to build new plants and expand production, creating a glut in panels.
Price promotions by the minor makers propelled Vizio from the No.4 LCD TV maker in the US market in the first quarter of this year to the best-selling maker in the second quarter.
"Half the reason that consumers buy our sets is because of lower prices," said William Wang, Vizio's chief executive. "But our goal was never to compete on price only. We have a great product."
While this is great news for consumers, it is not what retailers want to hear. The impact of the low, sometimes negative, profit margins has been devastating to many of them.
For example, Tweeter increased its unit sales of televisions during last year's Christmas selling season by 15 percent over the previous Christmas. Profit margin in the video category, McGuire said, was "down substantially on a year over year basis due to the intense competition in the category" and in June, the company sought protection from creditors in bankruptcy court. It was sold last month to Schultze Asset Management, an equity buyout firm.
Other chains were affected as well. Circuit City saw its video sales drop from 42 percent of its overall sales last year to 39 percent in its first quarter ending May 31. It fired some higher-paid veteran sales people to reduce costs.
"In some cases those people were not any more productive than lower-paid people," said Bill Cimino, a Circuit City spokesman.