Audio equipment tuning in for harmonious turnaround

DSN Retailing Today, May 22, 2000 by Laura Heller

The CE market is on a roll, as DVD, home theater, wireless and other new digital technologies push sales to new heights. But every silver cloud has a gray lining, and audio, which has seen its sales either stagnant or in decline in certain categories, is turning out to be the laggard in CE.

Sales of audio products--with a few exceptions--have been far from stellar in the last five years. According to the Consumer Electronics Association, sales of rack systems are the hardest hit, declining from $515 million in 1995 to $142 million in 1999. The category is expected to further decline to an estimated $104 million this year, even as the average unit price remains relatively stable. In fact, the total number of units shipped to dealers decreased from 944,000 in 1995 to approximately 260,000 in 1999, and is expected to decline even further to a mere 192,000 units shipped in 2000.

Other categories are either flat or in decline as well, according to CEA. Unit sales of separate audio components are increasing incrementally, while dollar sales remain flat at around $1.5 billion; cassette tape and radio/tape players have slipped from $370 million in sales in 1995 to $204 million in 1999; tape and radio/tape recorders dropped from $434 million in 1995 to $221 million in 1999; and sales of separate audio components have dropped from $1.91 billion to $1.53 billion during this same time period.

What's driving this down trend? The youth market, which is increasingly using personal computers to replace or augment traditional stereo equipment, a trend being fueled by the rapidly expanding availability of digital music files. Manufacturers and retailers alike are now taking a closer look at this demographic and the effect their habits are having on the category. Hopefully, they are also formulating ways to combat shifting listening habits.

The Consumer Electronics Association (CEA) recently released an in-depth study, titled "Gen Y: Home Entertainment Market Overview," through its eBrain Market Research division. The association polled U.S. consumers ages 15 to 21 via the Internet during February 2000 in an attempt to better understand this demographic. The effort "is an indication that manufacturers are definitely concerned," said Tim Herbert, staff director of consumer research at CEA. "They are still trying to get a better understanding of this group, particularly the college market."

Clearly it's not all doom and gloom. Total sales for the audio category actually increased 6% during the first two months of this year, according to CEA, compared to the same period in 1999. The growth is largely being driven by robust sales of portable audio product, which jumped 16% with revenues of $135 million, and within this category, digital audio products such as headset CD players and CD boom boxes comprised the overwhelming majority of sales.

Compact audio systems are prospering with unit sales almost doubling from 1995 to 1999 and increasing 11% in the first two months of this year. After-market auto sound had record revenues for the first two months of this year of $315 million, and sales of home audio separates rose 7% during the same period, primarily due to consumers flocking to new CD-R products. And all these growth categories have a high degree of appeal to the elusive youth market.

True, new digital products are allowing the CE market to experience some of the highest growth of any retail sector today and are expected to keep the industry vibrant through the next decade. But in audio, the impact of digital technology remains unclear.

MP3 has caused quite a furor in the last 12 months, generating reams of press, not to mention lawsuits and copyright issues. It is also generating tremendous interest among this demographic. But despite the MP3 media hype, the study found that awareness of the format is not ubiquitous, with one in two Gen Y consumers stating they were completely unfamiliar with MP3. Not surprisingly, unfamiliarity increases with age, although males tend to have higher rates of familiarity, as do college students, according to the study. But most importantly, on-line music sources are changing the way consumers use hardware.

Among the survey group, about 14% use their PC more than a traditional stereo for music, one in four use both about the same with the remainder using the stereo exclusively or more than just the PC. Nearly 40% of Gen Yers are using their PC as much as or more than a stereo to listen to music. For the segment engaged in playing MP3 files, the number jumps to 53% using their PC as much as or more than their stereo. And nearly all consumers regardless of age say they listen to CDs via their PC.

Sound quality on PCs and MP3 players is largely inferior to that of CDs and more complex audio equipment, and there is a lot to indicate consumers don't notice or care about the difference, much to the consternation of manufacturers who tout quality above all else. "There is some concern that kids are willing to trade off quality for an abundance of product," said Herbert. "From the manufacturer's perspective, it's settling, from the consumer's perspective, it's a question of 'will the benefits of this product justify the price?"'