Rough Times Ahead for the Electronics Industry

Last holiday season, Rachel Houghton and her husband were an electronics maker's dream. She bought her husband a SanDisk (SNDK) Sansa digital music player. He presented her with an Apple (AAPL) iPod touch. The Oregon pair bought a DVD player for one set of in-laws.

This year, the Houghtons represent what may become a nightmare for the consumer electronics industry. They're stuffing stockings with such cheaper items as calendars and framed photos. "A lot of our friends and family have it tough financially, and I am very aware that some folks feel they need to reciprocate at the same purchase level, so our plans should make for a more level playing field," Houghton says. Her friends are shopping for cheaper handmade gifts at sites like Etsy.com.

Evidence of belt-tightening among consumers was rife on Oct. 15, when a government report showed retail sales had their biggest decline in three years in September, falling 1.2%, almost twice as much as economists had expected. A separate report from the Federal Reserve said consumer spending was "softer" in almost all of the 12 regions monitored, with several districts reporting "a reduction in discretionary spending by consumers and lower sales on big-ticket items."

A Creeping Pace

The housing market decline, dwindling access to credit, and a plunging stock market that's depleting household wealth are causing consumers to rein in spending, and augur a bleak holiday season for sellers of consumer electronics. While overall retail spending is likely to grow 2.5% this holiday season, purchases of consumer electronics will probably gain at a far slower pace, says Carl Steidtmann, chief economist for Deloitte Research. That would be a big drop for an industry whose sales rose 3% during last year's holiday season. Almost half of all digital music players and 40% of flat-panel TVs are sold at yearend, according to the Consumer Electronics Assn..

The impact is already being felt. Spending on electronics and appliances fell 13.8% in September, compared with 5.5% in August, according to MasterCard Advisors' SpendingPulse service, which provides data on MasterCard (MA) transactions. Electronics retailer Best Buy (BBY) may have had a 9% to 10% sales decline in the second half of September, according to Bernstein Research analyst Craig Moffett, citing company filings. The financial crisis that's crimping interbank lending and dragging down stocks accelerated in the second half of last month.

Sales of big-ticket items such as flat-screen TVs may be in for the biggest drubbing, analysts say. Rather than pony up for a new high-definition TV set, many consumers with analog TVs may simply opt for sub-$100 digital TV converter boxes as they gear up for the February 2009 deadline for the digital-TV transition. "HDTV sales may be the next shoe to drop," Moffett wrote in a recent report. That bodes ill for manufacturers like Sony (SNE), Samsung, and LG. Fewer TV purchases could in turn have an impact on satellite-TV providers DirecTV (DTV) and DISH Network (DISH), whose sales of service packages are closely linked to new TV purchases, Moffett reckons.

Makers of high-end laptops also have cause for concern, says Roger Kay, founder of consultancy Endpoint Technologies Associates. Apple said on Oct. 14 that it's shaving $100 off the price of its entry-level MacBook (BusinessWeek.com, 10/15/08). Other manufacturers may follow suit or roll out more ultramobile PCs, smaller, less powerful laptops that can cost $50 to $200 less than laptops, Kay says. So far, that category of machines "has not cannibalized our notebook sales," says Mark Hill, general manager for U.S. sales. Nor has Acer detected a slowdown in demand, he says.