Beating the consumer spending slowdown

Consumer spending in Australia is witnessing a sluggish period as purse strings are tightened across the country. However, be grateful for life Down
Under as the UK and US are undergoing even more precarious times, with some believing the economical super powers are edging towards a fully fledged recession.

Australian consumers spent just over $20 billion in June, to post retail’s weakest growth in six years. This signals a slowdown in overall economical performance as growth in retail trade fell by a seasonally adjusted 1.0 percent in June after a surprise 0.7 per cent increase in May, according to the Australian Bureau of Statistics.

“The retail figures for the June quarter are of concern to NSW businesses and highlight just how tough this year will be,” said Kevin MacDonald, CEO of NSW’s peak business group, NSW Business Chamber. “Higher petrol prices, uncertainty in financial markets and higher interest rates appear to have dampened consumer confidence and when confidence falls, so too does consumer spending.”

MacDonald said there have already been a number of surveys identifying a sharp fall in consumer confidence and that now appears to be being reflected in spending patterns.

“Recent increases to interest rates appear to have hit home and many NSW businesses have the double whammy of higher interest rates and a
fall in consumer spending as consumers tighten their belts,” added MacDonald.

However that data does not offer an insight into the specific performance of consumer electronics. Innovation is still rife, so are consumers spending the hard-earned pennies on consumer electronics?

The retail angle

To get a yardstick of what consumers are spending money on, it is worth assessing the fortunes of the big high street merchants. CRN spoke to JB Hi-FI last month about its full year net profit of $65.1 million and the mass merchant retailer said the impressive boom can be accredited to its IT section which has been running since June 2007.

“[Computer sales] grows bigger as the months move on and the computer business is a very happy one for JB,” said Richard Uechtritz, CEO of JB Hi-Fi. “We are relatively new – having finished rolling out computer sales in our major stores June 2007. However in our first full year, despite a number of stores still making room to sell IT, I can say that computer sales has strongly contributed to sales profit.”

According to Uechtritz, consumers only go to local IT retailers if they are intending to buy a new computer or laptop. However customers frequent
JB Hi-Fi for products such as DVD or CDs.

“Retail is about getting people into stores. We sell everything from software, music to DVD home entertainment and regular customers who come into the shop walk straight into our computer section, so in the back of their minds they know to consider going to JB for their IT needs,” he said.

Uechtritz claimed smaller operators only sell computers and only land sales for these items. “Our customers shop at JB for months on end and make us their retailer of choice for computer purchases. Unemployment levels are steady and people aren’t losing their jobs. They might not be able to afford a holiday or petrol for a long trip – so they might want to spend the money on entertainment for the home.”

He claimed that people were still earning money and they enjoy buying things that make them feel good, such as a new computer, LCD, plasma TV or a new phone. “These things are also used to keep people in touch with the world and is an integral part of a lifestyle,” said Uechtritz.
“JB is doing well because we only deal in IT and home entertainment. We don’t have to deal with furniture and whitegoods (which may be products consumers are forgoing). We are also located in shopping centres and not destination-only areas,” he said.

Harvey Norman was another high street giant which posted a healthy increase in sales figures for the financial year recently.
The firm announced that sales from the franchised Harvey Norman stores, commercial divisions and other sales outlets in Australia, New Zealand, Slovenia and Ireland (excluding Singapore) totalled $5.81 billion for the year ended 30 June. This was an increase of 8.7 percent compared to the financial year ended 30 June 2007, which was $5.34 billion.

Granted these are not traditional channel firms, but they do provide a platform for discussion of the consumer electronics landscape.
The business angle

There are close ties between the consumer electronics space and the SMB space. Put simply, due to their size and focus, SMBs invest heavily in
consumer electronics.

According to Research firm Yankee Group, consumer technologies can increase the productivity of SMBs outside the office by 30 to 40 percent.

The industry analyst claimed that the SMB work environment has not changed significantly in the past 30 years, but the impact of ubiquitous connectivity is changing the work/life balance of enterprise and SMB workers, empowering the ‘anywhere’ culture.

“SMBs are stuck in a productivity malaise using technology no more helpful than a bikini in a meat locker,” said Steve Hilton, vice president of Yankee Group’s Enterprise Research group. “Ubiquitous connectivity is becoming a reality, and SMBs must adopt consumer and business technologies to improve employees’ work/life balance and drive productivity.”

Blogs, wikis, smartphones, wireless laptops, instant messaging and online travel services have the greatest impact on SMBs, according to the report, increasing productivity by 25 to 50 percent for SMB mobile employees. But voice-only phones, Second Life, Slingbox and YouTube decrease SMB employee productivity.

Yankee Group explained that, to maximise employee productivity, SMBs must force IT staff to support the ‘just-making-its’ and ‘common folk’ in their organisations just as much as the ‘movers and shakers’ and ‘aspiring executives’.

“There’s little doubt that the current economic situation has caused a slowdown in spending by both consumers and small business,” said Phil Newton, managing director of BenQ Australia. “However IT essentials are still must-buy products. Numerous small business operators are looking to upgrade their systems rather than replace them which is driving peripheral products. The TV market has been very buoyant and is clearly bucking the global downward trend mainly thanks to the Olympics and the football finals.”

Kim Ward, national sales manager at Brother, agreed that current static spending by consumers has affected the consumer electronics market and said the trend will continue well into next year.

“Household consumption has dropped from 2007 and is predicted to drop again in 2009. As rising household costs such as interest rates, petrol, food etc, bite into household budgets, retails sales will be cut. Something has to give and the discretionary items will be the most affected,” said Ward. “Some of our resellers in the IT/office and printing space have been experiencing signs of a contraction as discretional spending is also being affected by the rising cost of living.”

However it is not all doom and gloom for every aspect of the consumer electronics space. For example analysts ABI Research has forecast that consumers will increasingly demand digital content, social networking and IP services delivered through embedded networks in the devices they buy. This will result in an increased demand for networking products as leading device categories for embedded networking in consumer electronics shift from the early market leaders – game consoles – to TVs and DVD players.

“While many TV manufacturers have been evaluating the integration of networking features into devices for some time, only recently have manufacturers such as LG, Sony and HP begun to ship products en masse with embedded networking,” said Mike Wolf, research director at ABI. “Japan
has had networked TVs for some time, but other regions are beginning to receive such merchandise as TV manufacturers begin to see the value of future-proofing their products with IP connections.”

Portable devices such as media players and game consoles will have mostly wireless networking connections such as Wi-Fi, according to the report, but fixed devices such as TVs, set-top boxes and other device categories are expected to have a mix of Wi-Fi and Ethernet connections.

“Networking connections have gone from being ‘nice-to-have’ to ‘necessary’ for some categories of devices such as portable media players and gaming consoles,” added Wolf. “We expect that, as more devices get tied to content services, other categories will follow the same route, and we are already beginning to see this today.”

Graeme Reardon, A/NZ regional director of Cisco’s Linksys division, said: “Our business is growing quite well in a flat to potentially declining market of consumer spending. This is testimony to the fact that we have the right products at the right time.

“I’m sure if you were speaking to someone within one of the mass merchant retailers they would say they have seen a slowdown, but specifically from our range of products we are in a very lucky position. We are hearing about the slowdown in consumer spending, but because of the new products we have released we are actually seeing our business increase and that is because when consumers go to purchase networking they are seeing a choice with a number of new intellectual properties available.”

Reardon said Cisco has been saying for sometime that the network is the platform for a range of other offerings and it has built its vision for the company around that ethos.

“As more and more pieces of equipment come out they will be enabled to go on a network. Therefore having a robust, secure and reliable network will be critical to support these infrastructures coming onto the marketplace,” said Reardon. “Whether it is your standard run-of-the-mill products you have today
such as phones, PCs and printers into sharing multi-media video content into your TV from the Internet, this is where the network becomes more and
more critical.”

Reardon said the key to networking equipment is hiding the complexity of it so it is simple for the average consumer to set up, run and monitor applications on their network.
“One of our big focuses recently has been on our mass merchant retailers. Some of them are finding things pretty quiet at the moment. However, with the Olympics there was some good sales with some large screen TVs,”
The channel angle

In February, distribution giant Ingram Micro launched its consumer division focused on integrating consumer electronics (CE), networking, security and digital signage into the home and office environment.

The CHOS division launch was seen as a significant push into the consumer market by Ingram, preceded in June 2007 by the acquisition of consumer electronics and accessories distributor DBL Distributing.

Matthew Sanderson, director of product management and marketing, Ingram said at the time of the division launch: “Due to ongoing digital convergence, IT and CE products are merging; in recognising this Ingram Micro has allocated dedicated personnel to cater for increasing demand in the area of consumer home and office solutions. The launch of the CHOS Division at Ingram Micro will provide a ‘one-stop’ shop for resellers.”

Jacqueline Bergin, business manager for CHOS at Ingram Micro, agreed that the slowdown in spending had affected the consumer electronics market, with interest rates starting to bite at the consumer level
and their spending habits.

“However this is very much on a product byproduct basis. Areas that are continuing to sell well are home theatre systems, GPS, Network Attached Storage, digital photo frames, peripheral products that attach to a HD solution, low-priced PA products and projectors,” she said.

In terms of products which resellers should look to supply, Bergin cited Network Attached Storage, portable and standard AV Technologies, GPS and
Blu Ray.

Rick Gawdat, general manager of sales and marketing at distributor Brightpoint, concurred that the spending slowdown is only hitting certain parts of the consumer electronics sector.

“There has been a slight slowdown in consumers upgrading their mobile handsets but this has only really been in the last four to six weeks. By slowdown, I don’t mean a complete hand brake but consumers are just being a little more cautious and selective when it comes to making a purchasing decision on handsets. On the flip side, the recent launch of the Apple
iPhone has been extremely successful and has met most expectations.”

Gawdat said many consumers are waiting to see what the Reserve Bank does with interest rates in the next few weeks and the situation may improve on the back of a cut. Plus, the price of oil has come down a bit recently and this should also play a role with spending, he stressed.

“Conditions are tough and very competitive, but this is no different to any other time in recent memory. As consumers become savvier with technology and they continue to get more choices it will be brand, efficient supply chain management and product performance that will prevail. Resellers and retailers need to continue to provide options and value adds to their customers and to focus on customer service during this period,” added Gawdat.

What to stock?

As Bergin and Gawdat explained, the consumer electronics space still has its opportunities for the channel, but it is about stocking the right products if resellers want to profit from the space. So what should resellers be pushing on the product front?

Gawdat added that Windows Mobile devices continues to sell well for Brightpoint, particularly in the SME space and GPS navigation devices also continue to perform well.

“TV is going well, convergent and multi-tasking products such as 16:9 HD LCD monitors, entry-level data projectors, storage and surprisingly the latest Centrino 2 notebooks are all healthy,” said BenQ’s Newton. “The education market is strong with considerable investment happening in the interactive whiteboard and notebook spaces so this is definitely an area worth focusing on locally.”

Newton said cash flow needs to becomes the driver for resellers’ business, as demand is weak there are plenty of bargains to be had but they can’t be taken advantage of if overstocked or resellers don’t have the cash.

“It is actually a great time for resellers if they are smart. Vendors are under significant pressure to drive sales and are looking for opportunities to make that happen,” added Newton.

Brother’s Ward said once stretched consumers will revert to their necessities, so the items that will be most affected will be fashionable products to own, the large whitegoods and consumer electronics such as plasmas and LCDs.

“The items that will continue to do well are those that are not on ‘wish lists’, items that are vital for the household and businesses. It is hard to recommend focusing on any one particular technology as a solution because it is the retail trade and manufacturing industry that will be the most affected. However, despite this downturn, I do believe that these sectors will bounce back,” said Ward.

“We just need to ride it out and I would recommend that brands and resellers should look to their competitiveness. Consumers will look for ways to save which will encourage ‘shopping around’; offer a solution that is more than just the selling of the product, for example providing helpful service solutions such as installation, additional warranties, and service. Now is the moment of truth. If you hang in there, you will be able to grab a chance to grow significantly in the future economic growth and market expansion.
Strive to maintain and expand your position in the market and overcome the difficulties,” added Ward.

Products are one aspect, but as we all know services are always an aspect the channel should look to provide. Supplying consumer support may not be suitable for all resellers, especially the more business-focused players.

However, IDC believes consumers will demand comprehensive support services as technology becomes mission-critical in the home.

The research house recently stated that the expansion of technology in the home has been accompanied by installation and troubleshooting problems that often require specialised knowledge. To help consumers overcome these challenges, IDC believes a new generation of tech support services is rising up that leverages the Internet to provide assistance remotely and directly.

“Technology has become more deeply entwined in consumers’ lives, while consumer support options have remained limited and often unsatisfying,” said Matt Healey, research manager of Software and Hardware Support Services at IDC. “However, we are quickly reaching the point where certain devices and applications are considered ‘mission-critical’ in the home. This means more consumers will require, and be willing to pay for, a higher level of support to ensure smooth operations at home.”

To better understand the technology problems that consumers are encountering, IDC analysed more than 10,000 consumer support sessions captured by support service provider PlumChoice. Key findings from this data included PC software and operating system problems were the most common, representing 41 percent of the support sessions analysed. Security problems, particularly issues associated with viruses, spyware, and malware, were the second most
common session type representing 23 percent of the sessions.

Despite the high number of security- related sessions, 82 percent of consumers indicated that they had security software installed. This suggests that consumers are not regularly updating the software to meet new threats. Other categories where consumer support is regularly needed include PC performance issues, networking, PC hardware, and peripherals that connect to the PC or network.

In conclusion, the slowdown in consumer electronics is a reality, but in times of reduced spending a more savvy approach to the market is needed. Knowing what your customers want in a time of reduced spending is an even greater black magic than normal, but there is hope in the sense that consumers do still have some money to spend and one of the things they are investing in is consumer electronics.

Above everything else, channel players need to analyse what the market is demanding and stock in-demand products and affiliated add-on offerings. Resellers doing exactly this will not only survive the slowdown, but will also be set up for any future developments
in the market, as well.