Saturday, February 14, 2009

Clearance sales and pricing power

I went back to Circuit City last night. The liquidators are building gradually to their March 31 denouement. LCD TVs are at 75% of list, only 5% cheaper than they were two weeks ago.

Plasma TVs are at 70%, as is almost everything else. In home audio, there are a lot of specialized or premium products, while the computers, cameras and camcorders are nearly picked dry. In the CD/DVD selection (60%) of list, the old chestnuts are sold out, but newer stuff still remains. Apparently Bruce Springsteen’s Super Bowl appearance sold out his latest album “Working on a Dream” (or it was released after Circuit City stopped ordering) but the sale was not enough to move the (Circuit City exclusive) single CD of the same name.

What was noticeable was the bifurcation of the remaining inventory. Stuff remained in the low end, low quality category, like the Circuit City house brand TV. There were also noticeable inventories at the very high end, like the 40" plasmas. One example of the latter was a glut of speakers from Boston Acoustics — it appears that BA has been increasing its prices with inflation over the past 20 years while the rest of the industry commoditized and moved offshore to produce real price decreases.

One brand that I saw more than any other was Sony, particularly their Wega TVs and their headphones — both priced at a sharp premium.

Several times in the past 6 months I’ve been wanting to write about Sony, which has perhaps the broadest electronics line of any manufacturer — and certainly the broadest, go-it-alone proprietary strategy of any manufacturer, bar none. But I haven’t had time to really dig deep into its situation, only to accumulate impressions here and there.

The big picture is that Sony is going through very difficult times with a quarterly losses and its first annual loss in 14 years to total nearly $3 billion. I don’t see any sign that for Sony (like the rest of the industry) 2009 will be much better.

Part of the problem is the PS3 and losses totaling more than $3 billion as of last March 2008. Sony took a gutsy gamble by bundling expensive Blu-ray players with the PS3 which guaranteed that Blu-ray won and PS3 lost. The PS3 also faced surprisingly strong competition from the Wii.

Rather than see the PS3 as bad luck, I’m inclined to see the PS2 as good luck or perhaps even a fluke. Its competitors were relatively lame, and it also tried an upward-compatibility strategy that seemed to fuel early adoption.

More seriously, the success of the PS2 hid the company’s underlying structural problems that have been festering for years. It’s highly exposed to a commoditized consumer electronics industry that has very few differentiated products (beyond the Wii and iPhone). Since the end of the PS2 era, Sony has been #2 in lots of things but #1 in nothing. And it’s spending lots of money to be #2 (or worse) in lots of things: PDAs, laptops, cellphones, TVs, and so on.

Given the worsening economy, the picture for Sony has become even bleaker. Even though Blu-ray has won and prices are falling, the category is falling below forecasts in competition with old-style DVD players. As the Circuit City closeout connotes, cost conscious consumers are carefully considering CE choices.

Sony has been paying for branding and R&D to support a differentiated product, but consumers don’t see it as differentiated and most aren’t willing to pay a premium. Even when it executes well on things like styling, it fails on other things (like ease of use or performance) while still charging a hefty price premium.

I don’t see the path out, but then 12 years ago none of us saw how Apple would be saved, either. As was true with Apple, a dramatic turnaround is not going to come from its current CEO.

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