Market Sector Report: Tuning in to Electronics

Consumer electronics margins typically average 15%-20%, vs. 25%-30% in other categories

This is the third in a series of Market Sector Reports being published in Catalog Age this year. The first report, on business-to-business school supplies, appeared in the February issue; the next, on the gardening sector, appeared in April. The final report, on the children’s products market, will run in the December issue.

The consumer electronics market (excluding computers) has historically been a tough nut for most catalogers to crack. For one thing, it is largely a price-driven industry, and few catalogers can match the discounts offered by the huge retail chains, such as $13.0 billion Best Buy and $9.6 billion Circuit City.

Then, too, consumer electronics have lower profit margins than other consumer market sectors. A spokesperson for $208 million electronics cataloger Crutchfield, based in Charlottesville, VA, says that consumer electronics margins generally run 30%-50% lower than typical margins of other categories, while a representative for Minnetonka, MN-based general merchandise cataloger Fingerhut reports that its margins for electronics run 15-20 percentage points lower. An informal survey shows that while consumer electronics margins run approximately 15%-20%, margins for other products such as home goods run 25%-30%.

But some catalogers, including Crutchfield, Fingerhut, and the catalog unit of retailer J&R Music World, have managed to overcome these stumbling blocks. In lieu of offering rock-bottom prices, catalogers promote themselves as a service-oriented alternative to the discount retailers. Mailers boast that their telephone order-takers are more effective at helping customers to choose the right products for their needs than are minimally trained sales clerks at often-understaffed discount stores.

What’s more, the print catalogs themselves act as reference books, explaining the details and features of their high-tech wares without sales pressure. “I see our customers looking to our catalogs and our Website for a nonpressure environment,” says Fingerhut vice president of merchandising John Damrow. “And with electronics, you have a convergence of a lot of technologies — all becoming more complex to consumers. So buying through our catalogs and Website fits their needs better.”

Then there are the Sharper Images and Hammacher-Schlemmers of the high-tech gifts and gadgets world. These marketers have found their niche by specializing in eclectic and hard-to-find electronics, such as the Sound Soother 200, which plays nature-inspired “soundscapes” (The Sharper Image) and the 3-Functional Digital Pen Camera (Hammacher-Schlemmer).

Among the large general merchandise mailers, such as Spiegel and J.C. Penney, consumer electronics sales make up only a small portion of what they sell. In fact, from figures published in April by consumer electronics trade magazine Twice, Catalog Age concludes that mail order sales make up less than 1% of the $86.5 billion in total retail sales of consumer electronics in the U.S. for 2000. Put another way, in 2000, catalogers that prominently sell electronics accounted for approximately $850 million in consumer electronics sales. That’s up 6% from about $800 million in 1999. Overall electronics retail sales, however, rose more than 13%, from $76.3 billion in ’99, according to Twice.

In terms of merchandise subcategories, the Consumer Electronics Association (CEA), an Arlington, VA-based trade group, reports that digital videodisc players (DVD) have been the fastest-growing product introduction in consumer electronics history. DVDs first became available to consumers less than four years ago; last year total manufacturer sales to all retailers (including catalogers) hit more than 8 million units, “because consumers appreciate the vastly improved picture and sound quality,” according to a CEA statement.

Other video categories also posted record unit sales in 2000. Sales of camcorders, aided by new digital features and models, jumped 22% from ’99, to 5.8 million units; sales of TV/VCR units increased 12%, to nearly 5 million units; and more than 650,000 digital televisions were sold, as the product finished its third year of what the CEA refers to as an “introductory phase.”

Such merchandising developments are positive signs for mailers looking to sell more popular electronics. Electronics catalogers say that the more sophisticated the new merchandise becomes, the more effective the catalog/Web sales approach — selling with service and expertise — will be.

PLAYER PROFILES

Crutchfield Corp.

Founded: 1974
Located: Charlottesville, VA
2001 circulation: more than 37 million
House file: 10 million
2000 sales: $208 million
Customer profile: 85% male, ages 18-40, middle and upper income

Other catalogers sell consumer electronics, but none are completely dedicated to the niche as Crutchfield is. And rather than try to compete on price, “we compete on information and service,” says vice president of marketing Alan Rimm-Kaufman. “We provide information deeper than anyone else.”

For instance, on pages 8 and 9 of its summer 2001 mainline catalog, Crutchfield features a “what to look for” spread that defines electronics jargon such as “zero-bit mute,” which silences even the slightest hint of system noise in CD players, and “wow and flutter,” which indicates the accuracy of a cassette deck’s playback speed. Then, too, Crutchfield order-takers and customer service reps go through eight weeks of merchandise training before they take their first call.

Even after the product training, for a few weeks trainers sit beside new phone reps and listen in to customer calls. Crutchfield even has representatives from its vendors visit its corporate headquarters regularly to show merchandisers and order-takers how to use products.

“We test all products before we sell them,” Rimm-Kaufman says. “That’s because often the brochure sheets from vendors don’t match what they actually manufacture. For instance, a manufacturer may say an audio product has 12-watt output. We measure that, because we may find it to be less powerful.”

Crutchfield is perhaps best known for selling car stereos — about 50% of its products fall into the car audio category. Rimm-Kaufman says that Crutchfield reps are adept at walking its customers through the in-home installation process. By testing, “we know all the electrical specifications and ins and outs of most cars, so we can recommend the appropriate stereo for a customer’s car.”

But Crutchfield, which is projecting a 10% sales increase this year, is enjoying success with DVD players and high-definition TVs as well. Although those products represent less than 10% of its sales, “higher-end TVs do well for us, because with the larger [models], you often have to pay to have them shipped from the store anyway,” Rimm-Kaufman says. Crutchfield uses a moving firm, Eagle USA, that brings products into customers’ homes and sets them up.

On the flip side, Crutchfield is having less success this year selling stereo cassette decks, turntables, and other older-line audio components, Rimm-Kaufman says, because customers are turning more to complete systems.

And a few products have been outright flops. For instance, an $800 digital picture frame, which can be loaded with images and put on a desktop to play a slide show, “didn’t work for us,” Rimm-Kaufman laments. A $700 version of the Sony Walkman the size of a pack of gum also failed. Customers are simply unaccustomed to paying hundreds of dollars for items such as picture frames and personal portable audio players, he says.

But Rimm-Kaufman doesn’t regret including those items in the catalog. “We put them in because they are early product releases,” he says, “and there are always a few dreamlike, cutting-edge products that we like to give a little space to. Even though most customers will look at them and say, ‘Who would pay for that?’ they’re in the catalog for a purpose: to create interest. Plus, a lot of times, they tie in to other products in the book.”

Fingerhut

Founded: 1948
Catalogs selling electronics: Fingerhut, Digital Zone
2001 circulation: 1.5 million
House file: 6 million
2000 sales: $433 million (consumer electronics only; Twice magazine estimate)
Customer profile: mostly male, late 20s-early 30s, low and moderate income

Fingerhut doesn’t compete on price per se. But it does market brand-name products to consumers in the lower- and moderate-income brackets — by offering a credit line with its deferred billing option.

“Some retailers offer deferred billing,” says vice president of merchandising John Damrow. “But we do it inhouse, while they mostly have to contract out for it. This way, we can read the results better from our database than some of our competitors can. We can see how customers respond to deferred billing and can test four-month, five-month, and six-month buyers.”

Twenty-three percent of Fingerhut’s product line is consumer electronics. The cataloger, a division of Federated Department Stores, sells electronics through both its core general merchandise catalog and its Digital Zone specialty book. And while Damrow can’t cite specifics, he says that this year Fingerhut made a conscious effort to increase the breadth of its consumer electronics offerings from familiar names such as JVC, Bose, and Sony.

Damrow contends that offering scores of brand-name goods “differentiates us from discount retailers that don’t carry as many big names. It gives our customers confidence to buy from us.” The catalog presentation provides another edge, since Fingerhut is also able to show off the vivid color graphics of camcorders with slip-out screens and radar detectors with LED lights. Customers can also see such items as home shelf stereo systems — which contain numerous colorful lights — better in Fingerhut’s catalogs than on retail sales floors, Damrow claims. “Most stores don’t show color displays, because they won’t turn the units on,” he says. “But in our catalogs, we’re able to make them look good.”

And in an industry that thrives on the latest cutting-edge products, Fingerhut’s Website enables it to get new products to market faster. “Time to market on our site is almost instantaneous,” Damrow says. “It also affords us promotional opportunities with e-mail campaigns.” Specifically, Fingerhut can quickly promote merchandise on its site when manufacturers approach the cataloger with an excess of a particular product, whereas in the catalog, “we have to wait.”

In addition, Fingerhut has been working with several vendors to get exclusive merchandise. For instance, one telephone vendor made an exclusive to Fingerhut on trendy, brightly colored phones inspired by iMac computers, Damrow says. And while one of the cataloger’s camera vendors didn’t offer a product exclusive, it did sell Fingerhut a package that includes camera, lens, film, and camera bag. Bundling products and accessories this way “is another differentiator for us,” Damrow says. The cataloger also sells a total home theater package, which includes TV and stereo, as well as an entertainment storage unit.

Among Fingerhut’s product winners this year are cordless phones — particularly the new models with lighted keypads. Damrow says the features of these phones are also easy to show in the print catalog. “In print,” he says, “we can show the keypad lit up in neon green.

Other strong sellers include camcorders with screens that fold out of the camera. “We can show the color graphics of the screens in our catalog,” Damrow says, “and that catches customers’ eyes.” Radar detectors with LED lights and home stereo-and-shelf systems are also performing well.

The cataloger stays away from commodity items, such as inexpensive cordless phones and low-end clock-radios. And Fingerhut has yet to figure out how to sell cellular phones, Damrow admits. “All these regional cell phone rate plans have made it difficult for us.”

In addition to its merchandising efforts, Fingerhut has honed its circulation strategy. During the past year, it has developed a successful multistep regression segmentation model to refine its mailing lists. This strategy has enabled the cataloger to get a better return on investment from its electronics books.

Looking ahead, Damrow says he doesn’t anticipate making any drastic changes to Fingerhut’s approach to selling consumer electronics via catalog and on the Web. Electronics manufacturers “are producing better, more-exciting products than they have before that have a higher degree of complexity,” he says. “And I think customers will continue to look at us to help them through their purchasing decisions. Retailers put the products out there and leave it to customers to figure them out.”

What About the Dot-Coms?

The Internet pure-play shakeout has left the consumer electronics dot-come market with only a few major players: Buy.com, Amazon.com’s electronics business, and Outpost.com.

The $678 million Buy.com, which during the past year backed off from a lowest-price-guaranteed formula due to sinking earnings, claims to carry nearly 1 million SKUs of consumer electronics, as well as computer hardware and software, sporting goods, and office supplies.

Amazon.com took in more than $600 million in consumer electronics sales in 2000 — only its second year of selling the merchandise line. In fact, according to electronics trade magazine Twice, nearly all of Amazon’s 25 best-selling products last December were consumer electronics. Founder/CEO Jeff Bezos told Twice he anticipates that consumer electronics, already Amazon’s second-largest category, will ultimately become its top.

The $355.2 million Outpost.com, which in May agreed to be sold to cataloger PC Connection, has been able to only slightly reduce its operating loss during the past year, from $37.7 million in fiscal 1999 to $31.3 million for the year ended Feb. 28. The company did nearly double its annual sales, however, from $190.3 million in ’99.

Among the other dot-com players, the company sizes drop considerably from $46 million 800.com to $31 million eCost.com (sales figures according to Twice).— PM

U.S. Household Penetration of Consumer Electronics

January
1998
January
2001
All televisions 98% 98%
Projection TVs 12% 15%
VCRs 90% 94%
DVD players 0 15%
Camcorders 30% 39%
Wireless telephones 39% 59%
Car CD players 19% 28%
Corded phones 96% 96%
Cordless phones 70% 81%
Telephone answering machines 69% 77%
CD players 52% 57%
Rack audio systems 38% 43%
CD boomboxes 30% 39%
Source: Consumer Electronics Association

2000 Consumer Electronic Sales by Selected Retail Sectors

Channel 2000 Sales
(millions)
% of overall
electronics sales
Catalog $850 1%
Electronics-only stores $7,700 9%
Department/appliance stores $27,429 31.7%
Discount stores/mass merchants $19,093 22.1%
Warehouse clubs $3,966 4.6%
Online retailers $2,792 3.1%
Source: Twice Retail Registry, April 2001

A Sampling of Consumer Electronics Lists

List name: Damark Audio Buyers
Buyers: 969,737 total file
Price: $100/M
List manager: Novus Marketing
List name: Damark Video Buyers
Buyers: 388,068 total file
Price: $100/M
List manager: Novus Marketing
List name: J&R Music Video Buyers
Buyers: 63,629 12-month buyers
Price: $100/M
List manager: Statlistics Management Group
List name: SC Enhanced Electronics Buyers File
Buyers: 82,000 12-month buyers
Price: $90/M
List manager: SC List Management
List name: The Sportsman’s Guide Electronics Buyers
Buyers: 121,290 12-month buyers
Price: $90/M
List manager: Novus Marketing
List name: Signals Electronics Buyers
Buyers: 27,457 12-month buyers
Price: $100/M
List manager: Direct Media Consumer List Management
List name: Taylor Gifts Video/Electronic Buyers
Buyers: 50,012 total file
Price: $90/M
List manager: Novus Marketing
List name: Technobrands.com Electronics Buyers
Buyers: 1,693,974 total file
Price: $100/M
List manager: Novus Marketing
List name: Wireless Electronics Buyers
Buyers: 29,132 12-month buyers
Price: $100/M
List manager: Novus Marketing

Consumer Electronics Conferences and Shows, 2001-02

JULY 24, 2001
DTV SUMMIT
Washington
Contact: Consumer Electronics Association, 703-907-7600, CEA@CE.org
Information: www.cesweb.org

AUGUST 19-21, 2001
EDGETECH EMERGING TECHNOLOGIES SHOWCASE
Aladdin Resort & Casino, Las Vegas
Contact: Consumer Electronics Association, 703-907-7600, CEA@CE.org
Information: www.edgetech.org

SEPTEMBER 24-25, 2001
THE KILLER SOLUTIONS FOR TELECOM CUSTOMER CARE
Rosen Centre, Orlando, FL
Contact: Ann Pendleton, The Carmel Group, 312-894-6418
Information: www.it-telecomsolutions.com

OCTOBER 14-17, 2001
2001 CEA INDUSTRY FORUM AND FALL CONFERENCE
Palm Springs, CA
Contact: Consumer Electronics Association, 703-907-7600, CEA@CE.org
Information: www.ce.org/events/fallconference2001/default.asp

NOVEMBER 4-8, 2001
INTERNATIONAL AUDIO, VIDEO, BROADCASTING, MOTION PICTURE, AND TELECOMMUNICATIONS SHOW (IBTS)
Fiera Milano, Milan, Italy
Information: www.assoexpo.com

NOVEMBER 12-16, 2001
COMDEX FALL 2001
Las Vegas
Information: www.key3media.com/comdex/

JANUARY 8-11, 2002
INTERNATIONAL CONSUMER ELECTRONICS SHOW
Las Vegas
Contact: Consumer Electronics
Association, 703-907-7600, CEA@CE.org
Information: www.cesweb.org

Sources: Twice magazine; Consumer Electronics Association

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