CE Specialists Faring Worse Amid Tight Credit, Technology Compression

"I think the banks are much less willing to extend credit lines and new technology is being rolled out quicker across multiple channels,” one senior manufacturer executive said. “It used to be that a high-end technology would be in the specialty channel the first year, move to Best Buy, and in the third and fourth years it would get to warehouse clubs and mass merchants. It’s been compressed down to nothing and I think you will see 3D in all these channels the first year. That doesn’t allow specialty dealers to enjoy the profitability because it gets squeezed out."

Ken Crane’s late last week said it would close its six remaining California stores in Encino, Hawthorne, Pasadena, Torrance, West Los Angeles and Westminster. It shut four outlets in January in an earlier bid to fend off bankruptcy. Flanner’s shut April 30 amid mounting debt. While Flanner’s was said to have had discussions with the investors that helped Ovation Audio Video emerge from bankruptcy, talks ended without an agreement, sources said. As a result, Flanner’s moved to liquidate its single store in Brookfield, Wis., and assets are being sold in bidding that’s expected to be completed this week. Among those seeking the inventory is Abt Electronics, which reviewed the products earlier this month, Abt Vice President Philip Hannon told us. Flanner’s lender First Milwaukee Bank sued the retailer in May in Waukesha County Circuit Court seeking to have a receiver appointed for the business. First Milwaukee was owed $811,213 on a $1.94 million loan that Flanner’s took out in 2006, according to court documents. Local attorney William Rameker was appointed receiver.

Ken Crane’s, a L.A.-area fixture since 1948, struggled through the U.S. economic crisis, cutting stores and cutting jobs, including that of Chief Operating Officer Steve Caldero. It dropped to six stores from 10 earlier this year. Flanner’s conducted an expensive remodel of its store, which left it with debt. The 25,000-square-foot outlet also was too big to sell just AV products, industry sources said. Among the other chains that closed this year in MyerEmco. Flanner’s CEO John Flanner and Crane weren’t available for comment.

"If one looks at all these people and gets all the information from those that are straightforward and honest about it, I think there could be a course in how to not get yourself in trouble,” said Bjorn’s Audio Video President Bjorn Dybdahl, whose operation also has struggled. “It’s tough right now and it’s not fun."

The specialty chains also have suffered as CE manufacturers moved away from limited- distribution product lines, PRO Group Executive Director David Workman said. While CE vendors have tried to provide specialty chains with derivative products, those same devices may find their way into Best Buy’s Magnolia Audio Video, which consumers don’t readily identify with as a specialty channel, he said. “There has been some additional segmentation of certain models, but it depends on who you are talking to,” Workman said. “The definitions of what limited distribution is today and what they were in the past are different. There has been some progress, but the fact is that the industry’s level of differentiation is far less than it was 10 years ago."

As CE specialty retailers battle to compete with national chains, unsold inventory of mid- to high-end TVs has grown as consumers choose lower-priced models, dealers we polled said. Virtually every manufacturer is carrying excess step-up inventory as a once-tight supply loosened amid slow sales in May, dealers said. The supply of entry-level sets remains tight, dealers said. The additional inventory is resulting in manufacturers resuming aggressive promotions including scan-down rebates and bundling Blu-ray players and home-theater-in-a-box systems with the sale of a TV, dealers said.

"It’s starting to look more like fourth quarter than when the products rolled out and promotions were sparse” earlier this year, said Daniel Schuh, executive director of AV products at ABC Warehouse. While only a handful products carried rebates earlier this year, now half a manufacturer’s product line has one, he said. “The manufacturers seem to be more fourth quarter-minded and we're in June,” Schuh said.

While consumer demand for CE products this year isn’t falling short of forecasts, the “mix” of sales is coming up short, Workman said. Retailers are “holding their breath” as they wait to see if consumer buying habits change, he said. “The technology and products are there, but will the consumer buy it in the numbers we have all counted on for this year to come out with the performance we were hoping for?” Workman said. “The current state of consumer spending would give everyone a reason to be cautious.” Consumers purchases of 3D TV so far “aren’t quite at the level we would have like to have seen, he said.”