As Flat Panel Prices Plunge, Retail Margins Narrow

The downturn in margins is tied to what seemed to be a never-ending price cuts last fall. The action began in Nov. when Wal-Mart dropped the retail on the Panasonic 42W HD plasma TV to $1,378. That was $300 less than Panasonic had lowered it to, and the move set off scramble among competitors to match it. The promotions continued into this month with $100-$400 “scan down” offers and other savings -- and they aren’t expected to let up in Jan., industry officials said.

How retailers applied the scan down to their balance sheets had a significant effect on margins, dealers said. “We take the scan downs to the cost of goods when the products are sold,” an East Coast dealer said. “If you didn’t take them to the cost of goods, you would have all that money sitting on the side, but your margins wouldn’t look any good. Many retailers are taking the cost of goods based on what they receive them at, not what they sell them for. We're talking thousands of dollars there.”

The rock-bottom pricing showed little sign of easing in the last week of the holiday season or in the post-Christmas sales. Ultimate Electronics offered 40% discounts on select products on Tues. CompUSA had an HP 32W LCD TV at $699 in promotions, down from a discounted $749. Syntax-Brillian’s Olevia 32W was at $549 after $450 in “savings” for the week preceding Christmas. CompUSA also had an “After Holiday Sale” that slashed prices $200-$500 on 10 models of HDTVs (CED Dec 27 p5).

“Retailers are definitely taking shorter margins,” said a Midwestern retailer who pegged his around 25%. “I can assure you there wasn’t vendor support for some of these promotions, so some of the retailers are taking shorter margins to gain market share.”

Manufacturers have traditionally cut retails in late summer and early fall to spur holiday sales. But the emergence of warehouse clubs as a force in flat-panel TVs also had a major effect on prices. Costco overhauled the CE sections of many of its stores to feature flat-panel TVs, cutting back space dedicated to notebook and desktop PCs. The promotion of cost-conscious brands like Vizio and Syntax- Brillian’s Olevia in national cable TV ads also appeared to add to the push toward lower prices. The warehouse clubs and discounters spurred Circuit City and Best Buy to hit lower prices, industry officials said. Best Buy featured the Panasonic 42W HD plasma TV at $999 in a Black Friday sale, beating Circuit, which had it at $1,199.

“It’s just not the dot-coms” that are offering lower prices, Syntax-Brillian CEO Vincent Sollitto said. “You have the clubs and they have lower margins… 20% instead of 35%. In order to move product retailers had to lower their margins. Since historically they have made all of their profit in the 4th quarter, if they lower their margins, guess what happens to it?”

With the rapid price declines and emphasis on volume to make up the potential margin shortfalls, the flat-panel TV category appears to be adopting a business model similar to PCs, industry officials said.

“In the PC market before and I think here as well, it will not be a retailer or margin driven thing,” NPD analyst Steve Baker said. “It is all about manufacturer cost and share and the issue of how do we drive down costs fast enough to grow the volumes so that we can keep our factories running to optimize the costs we put into them. That’s what the PC market was about, and that’s what forced some of those prices down. It was about installed base and driving unit volume. It becomes how do you take stuff out of the supply chain so that you can make these prices so you can get to price points that drive large volumes.”