Electronics retailers ran scared this year, and - as it often does - running scared paid off. The result was a decent season that ended strong thanks to last-minute shoppers, a late Chanukah, and buoyant Internet sales.

Ken Werner
Senior Analyst and Editor
of HDTV Retailer

Steve Sechrist
Senior Analyst and Editor
of Projection Monthly &
Microdisplay Report

Electronics retailers were justifiably worried about high gas prices, high consumer indebtedness, and aggressive selling and early promotions from Wal-Mart. They responded with earlier advertising, extended selling hours, and larger discounts - and they promoted gift cards with a vengeance. And the consumer electronics industry helped with some genuinely hot products: flat-screen TVs, iPods and other MP3 players, and satellite radios. The result was pretty good sales volume, but all those promotions were costly. Margins were low; still, it was widely agreed that low prices were the key to decent sales. “A lot of the hot items are lower margin,” said Scott Tilghman, an analyst at Soleil Securities.

“It was an OK year, not a boom, not a bust,” said Michael Niemira, chief economist at the International Council of Shopping Centers. He had predicted a 3 percent to 3.5 percent increase for this Christmas season over last year’s and believes those numbers will be about right. Because of the growing importance of gift cards, Niemira said, there are now two phases of the retail holiday season. The traditional phase ends on Christmas Eve. A second phase, the “redemption phase,” runs from the day after Christmas until the end of January, the period during which most gift cards are redeemed.

This will make for a decent January because revenues from gift cards are not posted in company books until the cards are redeemed. Roughly 60% of consumers redeem their gift cards between the day after Christmas and January 31, Niemira said. Last year, gift cards accounted for 14.5% of holiday spending, and this year it is expected to be 15 to 18%, which translates to $35 to $40B. Indeed, electronics retailers such as Best Buy should do well in 2006 in general, said Soleil Securities’ Tilghman, because of the release of higher margin items such as high-definition TVs the new generation of video games.

On-line sales were hot, with the percentage of holiday spending in all categories rising to 27 from 22% in 2004, according to the December 2005 Goldman, Sachs, Nielsen NetRatings and Harris Interactive eSpending Report. Amazon and eBay remained the two largest on-line retailers, but the on-line sales of traditional brick-and-mortar retailers are growing faster, with Wal-Mart, Target, Best Buy, and Circuit City leading this hungry pack. “There is no question this was a really good year,” said Donna Hoffman, co-director of the Sloan Center for Internet Retailing at Vanderbilt University. She attributed much of the improvement to increasingly user-friendly sites with more products.

Plus, we are seeing increasing use of the practice of on-line ordering and local store pick-up. This means that consumers expect to get the same price from the web site of Best Buy as they do in the store - and this practice avoids the crowds and lines at the stores before the Holidays.

So, heavy discounting to drive store traffic will likely continue, but we are also seeing the acceleration of newer retail trends like gift cards and on-line ordering/local store pick-up. What will the next Christmas selling season bring?