Thursday, May 03, 2007

Circuit City and the Plasma TV mess

Digby blogs on a Washington post report that Circuit City's scheme to cut labor costs by firing its best salespeople is backfiring.

What a surprise! On one hand we might simply chalk this down to clueless 'Chainsaw Al.' Dunlap style management of the type that drove Sunbeam into bankruptcy.

There is a deeper problem though, profits at the electronics retailers have been soaring on the back of roaring sales of Plasma TVs. As the price of Plasma has come down the number of units sold is continuing to rise but revenues are falling and the margins are falling even faster.

A couple of years ago plasma was still an exotic technology that people would make a point of buying from a premium retail outlet together with an expensive purchase protection plan. Today plasma is being displaced by LCD and prices for both have dropped below $1000. Flat panel TV has entered the curious no-man's land between niche consumer and mass commodity. Buy now and you can be more or less certain that the price will drop by a half in the next two years.

As the price of plasma drops buyers become more intent on bargain hunting, not less. They are also less likely to pay for overpriced product protection plans or buy online. The lower the price, the more willing consumers will be to purchase through discount channels.

Few people have a desperate rush to buy plasma at this point, they are no longer rare enough to be 'must buy', not yet cheap enough to make replacing a perfectly functional TV worthwhile. There is also a technology transition in progress, True high definition 1080p displays cost substantially more than lower resolution 720 displays. This is clearly a temporary phenomenon as the essential cost of manufacture for the two technologies is the same. Once the existing stock of 720 panels is exhausted, all the TVs being made will be 1080. At the same time upper end manufacturers are abandoning plasma for LCD.

One issue I do not expect to be a significant factor is the federally mandated switch to HDTV. People who buy $1500+ TVs have cable or satellite. And anyone who thinks that Congress is going to cause poor folk's TVs to suddenly stop working for real needs a stiff working over with a cluebat.

The net effect here is that it is reasonable to expect to be able to buy a 42" large panel TV for $500 or so within a couple of years with mid range models fetching $750. In order to meet those numbers the manufacturers will have to cut their own margins significantly and retail will have to accept lower margins as well.

Unless people suddenly start to find new uses for large panel displays for showing wall art the outlook for middle market retailers like Circuit City is bleak. Their cost base is too high to compete in the discount sector and their value add is too low to compete with boutique high end 'Home Theatre' installers. Circuit City in particular has far too many stores.

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