CE Dealers Adjusting to Shifting Demand Patterns, Spot Shortages

“We always knew that at some point in time consumers were going to balance out the discretionary spending,” ProSource CEO David Workman told us on a recent call. "It’s no secret that Americans have prioritized taking a trip, even though it’s probably harder to do now -- and more expensive,” Workman said. “We expected that consumers would eventually return to a more normalized level of discretionary spend,” he said. Now home electronics dealers are “sharing that stage with other categories of spending that maybe weren’t there in the last few years.”

ProSource is starting to see “some softening in the pipeline” for dealers heavily dependent on the contract builder business, Workman said. The “super luxury” project segment above $100,000 is holding its own, though, despite lingering supply chain issues that make it difficult to get a system part that can delay the entire system, Workman said.

During the return to more typical spending, ProSource is urging dealers to go back to existing customers and market their services for other categories that customers may not know they’re proficient in. Existing customers may not know that ProSource dealers install automated shades, for instance, and might go to a specialized shading retailer for powered shades, Workman said. Dealers need to “get the word out because the consumer ideally would like to deal with one person for all the stuff they want to do in their home."

With a recession looming, industry veterans that endured previous economic slowdowns are trying to prepare dealers for how to weather the storm. The Home Technology Specialists of America buying group is pushing dealers to “have their financial houses in order, a good understanding of their back office and to focus on details,” Executive Director Jon Robbins told us Monday. That includes making sure project deposits are received on a timely basis and having enough cash on hand “to cover what you carry,” he said.

In previous economic turndowns, “a lot of times we made money despite ourselves,” with dealers not necessarily having a good understanding of their businesses' financials, Robbins said. The 2007-2009 recession was a game-changer and took a heavy toll on the custom electronics industry.

In the past several years, “there has been so much work, dealers could do business by accident,” Robbins said. That’s changing. “If things tighten up, people are going to need to be prepared; they’re going to find themselves in whole new cash load situations.” Robbins noted dealers now are more subcontractors on a project vs. “just the electronics provider” doing cash-and-carry business. As such, they need to know how to bill projects, he said, saying there are tools that can help them that weren’t available in the past.

Outside of the custom segment, trends are more immediate, said the buying group executives. Workman noted ProSource retailers benefited more from the pandemic-driven trends of the past two years, vs. the custom installation side that was “bandwidth constrained.” Now, “where the biggest increases occurred, we’re also seeing where the business is dropping off more quickly,” he said. “E-commerce is probably dropping off a little more quickly than brick and mortar where you have somebody involved in the transaction," he said.

Shortages have eased in many areas since supply chain disruptions, said the execs. AV receivers are in a stronger position, but shortages in control systems persist, Robbins said. That’s a problem because it’s much harder to swap out a control system on a project than an AV receiver or TV, and that’s making it difficult for dealers to complete projects.

Price increases are a challenge for dealers that won’t complete a project for some time, Workman said. In many cases, dealers are specifying a product for a system that they won’t be completing for months ahead. “It’s like a guessing game of what the price is actually going to be at the time you need the product,” he said.

To reduce that pressure on dealers, ProSource asked vendors to give dealers 60-days’ notice for price hikes they’re planning “so the dealers have advance notice if there are higher prices coming, and they can incorporate that,” Workman said. Consumers largely don't know what products cost, so price hikes don’t necessarily affect demand for a product, but they do affect dealers’ bottom line, Workman said. “Dealers are being locked into a bid and then finding out that costs increased more than they had anticipated when they produced the bid in the first place: That’s margin destruction right there.”

HTSA dealers are “talking to fewer people” than during the high-demand period of the pandemic, Robbins said, citing a phenomenon the buying group has identified over the past 60 days. Robbins believes the oppressive heat in many parts of the country sent customers to “the beach or the mountains to cool off.” Revenue appears to be flat despite fewer conversations with customers, he said.

On where opportunities exist after the stay-at-home purchasing that focused largely on home office, home entertainment and networking, Workman said it’s time now for dealers to focus on underpenetrated growth categories. He cited wireless audio and outdoor electronics. The steep shortfall in AV receivers over the past two years affected the traditional audio business, a strong category for ProSource. “The more conventional and traditional the product category, the more weakness is associated with it,” he said. “We’re an audio group first and foremost,” Workman said: “We just have to shift our focus away from some of the more traditional categories.”

HTSA has been “very pleasantly surprised” by improved product supply, said Robbins, acknowledging some challenges and delays in new products. He reported growing supply of projectors and 8K TVs, and said dealers are starting to get preorders for LG’s 8K OLED TV.

HTSA is focusing on performance level across categories, Robbins said. That includes top-grade networks and higher end home theaters, including premium speakers that are “great for the margin,” he said. Outdoor entertainment continues to be “very active” even as customers are “praying for September to cool off.”