Monday, May 17, 2010

Value Based Features for a Recovery

TV sets, providing the value that they do, set unit sales have held up and even grown during the global recession, even in hard hit locations. Beyond that the industry has introduced a number of new features during the recession that have sold well at premium and super premium price levels. Given recent history, it would be expected that the proportion of premium sets would continue to grow with a recovery. However, I suspect that this move to premium features may be temporary and due largely to differing demographics of the 2009 TV shopper rather than any mass move to upscale TV features.

While the recession has weighed heavily across virtually all demographic groups, something that should be self evident, it weighs more heavily on younger, working age people. The threat of job loss is much more pressing on working age and middle class people than those that are either wealthy enough to weather the storm or who are already retired. Consequently, the average TV shopper in 2009 was probably older than usual and has some characteristics that come with being older. With a recovery and a return of a more usual TV purchasing demographic, I expect sets with value based features to grow disproportionately as increasingly younger demographic returns in force.

Upscale Features:
With increasing age frequently comes decreasing eyesight. Consequently older shoppers are more likely to rely on published specs and advertising, rather than their own visual assessment of the sets on display. Further, these older shoppers will be less willing to re-arrange their living space to accommodate a new TV and may even have existing furniture that they would like the TV to fit in. Their TV purchase is invariably a replacement for a still working TV set. As such, their reason for buying is to upgrade capabilities rather than a purchase of basic functionality

All of these motivations feed into the current array of upscale features on flat screen TV sets that are quantifiable and easily promotable but not essential to basic TV viewing. Among these are elevated contrast ratios, refresh rates, LED backlights, and thinness. While these features will continue to be important to the consumer and to the retailer in promoting TV sales, I expect the market will shift.

Value Features:
One thing that is somewhat surprising given the drastic drop in TV set pricing has been a slower move to larger set sizes than would be expected. Again, an older purchaser is more likely to be replacing a working set and less likely to want to rearrange their living space to accommodate a larger set. As a larger proportion of younger purchasers come back into the market I expect the demand for larger sizes to grow disproportionately. Another feature that will be of great value to younger consumers is a gaming mode, essentially the ability to turn off the electronic visual enhancements in an LCD TV set. The visual enhancements require considerable processing power and time and most LCD TVs have a sound delay to compensate for the delay that results from the visual processing. For a serious gamer, the delay is more than enough to impede their performance so while gaming mode is currently a premium feature, it is costless and will become a value feature as we move forward.

A further premium feature that will rapidly become a value item is easy internet connectivity. While internet connectivity is attractive for younger consumers, the move from being a premium feature to a value will not be driven by demand to surf the net. As retailers increasingly seek to attach services to their TV set sales a base of connected sets provides a market to push video content. More importantly, as the retailers also seek to attach service contracts with set sales, the internet becomes essential. It takes an average of two truck rolls to service a malfunctioning TV; one to diagnose and one to make the actual repair. Truck rolls are expensive and if they can be replaced by remote diagnostics over the internet, the connectivity becomes significant to profitability for the service contracts.

A final premium feature that will move into value sets will be home delivery of the TV purchase. Although in the previous section, I address the expense of truck rolls, retailers have other expenses and challenges that can be reduced by home delivery, among them inventory. For the big box retailers with multiple locations in the same geographic area, the cost of maintaining separate inventories for each store can be considerable. Centralized inventories can yield considerable cost reduction. Further, absent the implementation of digital signage in their stores that inform the consumer of out-of –stocks, consumers commonly spend hours in the store picking out a set (the reason why they went to a brick and mortar retailer to begin with) only to find that the specific model they wanted is out of stock at that store. The store will commonly offer home delivery at a later date to keep the sale. With larger sizes, that no longer fit into smaller cars, at cheaper prices, home delivery for sub $1K sets will be essential. Home delivery will also allow the store to do away with individual packaging for each TV set.

Beyond the Green benefit of doing away with the box, damaged boxes are a common reason for aged inventory sitting around the store. No one wants the TV with the gouge in the box even though the sets are well protected. Manufacturers can ship to the retailers in multi-packs and the retailer can deliver from racks in their trucks much like replacement windshields are delivered for on-site windshield replacement. The combination of the greenness of doing away with the box along with home delivery also gives the brick and mortar retailers a leg up on internet sellers.

While advanced technological features will continue to grow sales and support profitability in the TV set supply chain, the larger portion of growth in the set market will be more driven by mundane developments. The ability to turn off some of that technology as in the gaming mode, internet connectivity for remote diagnostics, included home delivery to compete with internet sales will propel sales from the TV industry’s traditional retail outlets. Younger consumers will take advantage of the bigger set for the money offered by current pricing. As with other products, a chastened population will increasingly turn to value offerings at the relative expense of luxury features.