Home-theater hardware benefits from DVD boom - C.E

DSN Retailing Today, Nov 11, 2002 by Laura Heller

With the ever-popular DVD topping holiday wish lists for the third year in a row, according to the Consumer Electronics Association (CEA), and prices dropping into bargain basement territory, how are retailers expected to make money on what is, by all accounts, the most popular CE product of all time?

Last year, Tom Edwards, senior analyst at NPDTechworld, went out on a limb and predicted that 20 million DVD players would be sold in 2002, a much higher estimate than even the CEA, which tracks product shipped to retailers, compared to NPD's "sold through to consumers" data.

"I got laughed at," said Edwards. "But when all is said and done, it looks like [the total will] be 22.5 million by the end of the year." And that's not including video game consoles that double as DVD players or DVD drives for computers. As of August, 19 million units had sold through to consumers, said Edwards. And according to CEA, consumer interest in purchasing a DVD player is up 19% from last year.

But even as demand is rising, prices are plummeting, creating a good news/bad news scenario for retailers. 'The average selling prices on DVD players are having a huge effect on the sales volumes," said Sean Wargo, senior industry analyst at CEA. "With the floor around $60, these are nearly commodities. All this hurts manufacturers much more than retailers."

That's because retailers are realizing increased sales of higher-margin and bigger-ticket items, such as software and large screen TVs, largely due to DVD. "DVD is driving the whole CE business," said Edwards, relating what is fast becoming a very common scenario: Once consumers get the product home and hooked up, the old 27-inch TV seems pretty shabby and nudges that person to upgrade to a larger model. Then the sound isn't what it could be and before they know it, a new audio system is part of the mix. That $100 DVD player can turn into a $3,500 purchase.

There currently is no data on attachment rates of TVs, speakers or home theater systems, but by all reports various categories are benefiting from the boom in DVD, despite the low ASPs. To help this trend along, retailers are more actively advertising bundled systems, home theater in a box and software titles. And because DVD players are priced so low and require very little assistance with the purchase, non-specialty CE chains are finding it advantageous to expand product offerings of related purchases. The size of TV sets at discount stores are inching up, CE departments are expanding and the sheer number of retailers carrying increasingly advanced product continues to grow. ShopKo stores recently revamped its CE department with a new design and expanded assortment as a test in its Ashwaubenon, Wis., flagship store, while Sears expanded its product assortment and computer retailers CompUSA and Gateway are adding CE to the in-store mix.

"It really makes sense that all these stores are offering CE," said Wargo. "It is one of the few categories doing well in retail, so naturally they all want a piece of it."

Nearly 44 million players are installed in approximately 33 million households, according to the DVD Entertainment Group. Those households typically purchase an average of 17 DVD titles per year, adding margin to the sale and bringing customers back into stores, thus taking some of the sting out of selling sub-$100 players.

New features and functions also will help prop up hardware profitability. The average selling price is still above $100 and DVD changers and progressive scan units offer a compelling reason for consumers to pay a slight premium over entry-level units, according to Edwards.

"[Retailers] are clearly trying to balance low-price volume pieces with some higher features," said Joe Stinziano, director of marketing and home video for Sony. The progressive scan feature (which Sony calls Precision Cinema Progressive) adds between $50 and $70 to the product, while SuperAudio ups it another $50, according to Stinziano. Megachanger products in the $500 price range also are garnering considerable interest from consumers with sizable DVD libraries.

And for retailers looking for higher ticket prices to accompany these very popular items, recordable DVD is still waiting to step into the spotlight. This product introduction has been hindered by dueling formats and next to no promotional activity. Sony will release the first dual-format recordable DVD unit next spring and it is likely the industry will begin singing the benefits of this feature, as both manufacturers and retailers hope to increase average selling prices and keep the DVD cash cow profitable for a while longer.