Now you CE them... Now you don't

Now you CE them... Now you don't

This time last year, Home Zone Digital World seemed a vibrant and viable business. With two high-profile Sydney locations in George Street and Moore Park's Supacenta, the Retravision franchise was doing a brisk trade in everything from TVs and cameras to Hi-Fi systems and white goods.

However, both locations are now closed, the phone rings out and the website claims it is currently under construction but will open within four weeks.

Shoppers could be forgiven for not noticing, given the Supacenta also houses Bing Lee, Harvey Norman and Dick Smith stores. A couple of hundred metres along George Street, another Retravision store has opened in the World Centre shopping complex.

The market conditions that led to the demise of HomeZone are still present and many CE retailers continue to face the same challenges. Group coordinator of the Sydney Hi-Fi retail chain, Paul Haines, has been through the wars and come out the other side.

Four years ago, Sydney Hi-Fi had a stable chain of franchised outlets throughout the NSW capital. However, branches closed one by one due largely to high commercial rents in major shopping complexes.

"Ten years ago it seemed the shopping centre was the place to be but first we lost the Penrith store, then Liverpool and Brookvale," Haines said. "This year our Parramatta store went into receivership. Then the Miranda store also closed, despite attempting to change premises and continue operating.

"Shopping centre rents are always increasing, which is OK so long as your sales and margins are also on the rise. In our business, margins and profits have been going backwards while costs went the other way."

Having suffered massive losses, the franchise owner sold the venture to remaining franchisees earlier in the year and the company seems to have found a workable structure. Sydney Hi-Fi now operates a buying group rather than franchise model, with two stores and a separate custom installation service.

"We're just not prepared to compete on price and sell the cheap brands," Haines said. "Custom installation is what's keeping us alive quite frankly. We stock quality products and pride ourselves on providing services to match."

As the recent experience of the Sydney Hi-Fi chain demonstrates, closures are by no means new to the CE channel. However, the rate appears to have increased dramatically during the past 12 months.

Audioworks managing director and Custom Electronic Design and Installation Association (CEDIA) board member, David Small, said the industry has long been subject to store closures in the slow sales period through February and March. However, he said this traditionally slow period claimed more than its fair share of victims this year.

"Stores might often be running on the edge but survive through Christmas because it's a good time for sales," Small said. "Then the February slowdown hits, the kids go back to school and everyone is busy paying off debts they chalked up over Christmas. Sales drop away. A business that's already shaky will usually fall over around that period."

Last year saw massive price reductions on audio-visual equipment such as flat-screen TVs, forcing down margins and commoditising what had been a lucrative but niche market. At the same time, audio-visual technology became increasingly converged with the traditional IT sector, an ongoing trend that is increasing product complexity.

"Costs were already coming down but now there is so much pressure to keep your volumes up that retailers are further reducing prices to keep products moving," Small said. "They are almost losing money on each sale."

Category manager for technology imaging and communications for Retravision, Peter Brown, agreed CE retailers have had a difficult time as massive reductions in average selling price of home entertainment goods coincided with increases in training costs and retail rents.

"CE retailers are facing the same challenges faced by most categories, but in the home entertainment space it's been particularly difficult because the technology is becoming more complex and the approach many retailers have been using needs to change," Brown said. "Survival still comes down to display, management and training but the rate of change is much faster in this sector."

The stores that would survive and even thrive in the new retail environment were those that combined CE and IT environments, he said.

"The stores that are successful at it are displaying products in a converged environment," Brown said. "[Stores like] Retravision have a natural advantage because they already stock all the components needed to make a digital home entertainment system work. They just need to figure out how to display them all in one place so consumers can appreciate the experience."

At the same time, CE retailers are learning to deal with product lines with much shorter replacement cycles and much higher rates of technological change.

"Products in the digital home entertainment space are going from being aspirational to affordable very quickly," Brown said. "As the technology turns over, staff training is becoming more of a challenge while margins continue to fall."

After 30 years in the consumer electronics space, industry veteran, Len Wallis, has seen more consumer electronics retailers go out of business in the past year than ever before. In an attempt to keep ahead of the market during these troubled times, he has taken a couple of counter-intuitive measures.

Not only has he stuck doggedly to leading brands and converged digital home entertainment environments, he has also focused on maintaining highly trained staff. But that training needed to go beyond vendor assisted product knowledge and into associated but more costly areas such as networking and installation.

"As the market becomes more complex you're going to need specialists more than ever," Wallis said. "Traditionally, people didn't replace Hi-Fi system for 10-15 years. Now we are looking at much shorter replacement cycles and customers rely on retailers for up-to-date information.

"Personally, I think the potential for the consumer electronics channel has never been better, so long as we can provide customers with the service they expect."

In a similar vein, managing director of Pacific HiFi, Frank Di Bartoli, predicted independent retailers would live and die according to the quality of the sales support they were able to provide. Competing on price, he said, was simply not an option for most.

"Customers are walking into stores because of the cheap screens on display outside, but then they are frustrated when they can't get any clear advice," Di Bartoli said. "So we set about training staff in a variety of technologies, which is a huge investment in terms of cost and time out of the shop. But qualified staff is what will keep our business going, so it's worthwhile."

General manager of Betta Stores Limited (BSL), Gerard Squire, represents a buying group of more than 300 consumer electronics and white goods retailers across Australia.

"Emerging technologies has been the real growth area in this sector and we haven't embraced them as well as we might have done," he said. "As a result we have lost a number of members."

The problem with encouraging member outlets to embrace converged home entertainment technology, according to Squire, is the need for regular high-level training of staff who are already working hard.

"If a sales team has already been on their feet all day, the last thing you can ask them to do is stay back and do 3-4 hours training at 6pm. It's just not fair," he said. "We are building the in-house skills by offering training on the floor and during the day where possible."

Having seen a number of longstanding Betta retailers disappear in the current maelstrom, Squire identified improving the skill base as essential in helping member stores to improve profitability. However, once consumer electronics retailers are supporting a crew of highly trained staff, they also need to look at other ways to make the most of team potential.

"You can offer installations and service without charging people extra, but you need to charge a premium price on your product line," Squire said.

According to industry pundits this struggle to determine a fair price for service and support is the key challenge facing the consumer electronics sector at the present time.

"This industry has historically been one where we've give the service away," Wallis said. "The survivors in the IT industry have been those who learned to deal with low margins by charging for service a long time ago. We need to learn to do the same."

CEDIA president, Garrett Mills, is also the proprietor of audio-visual retailer, New Fidelity. He singled out the need to set appropriate charges for service and installation as the single largest challenge facing CE retailers in the current environment.

"CE retailers just don't know how to charge for services. They have spent their professional lives recouping the costs of installations through higher margins," Mills said.

"Now, because they can't pay for staff to do it, you'll find independent retailers trying to make installations function properly in customer homes at 10pm. And they're working after hours for nothing."

According to Mills, CE retailers need to learn how to charge for their skills before they are left behind in a rapidly changing sector.

Pacific HiFi boss, Di Bartolo, agreed. As the CE industry became more deeply involved in IT, retailers needed to overcome the consumer electronics mindset in order to survive.

"Most of us got into this business because we love what we do and we want to share it with people," he said. "We have created this mindset where we deem it to be good customer service to give our skills away. It's not an approach that can continue."

The transition period, which has already taken a serious toll on the sector, is far from over. Installation and delivery charges vary wildly across the consumer electronics channel, even for complex work, and Di Bartolo said businesses would continue to go to the wall until standard service charges were established.

"I'd love somebody to show me a simple standard of charges that reflects what it costs to have trained professionals on the road," Di Bartolo said. "In most cases, retailers don't even know what it is costing them to offer the service they are providing to customers. How can they even begin to charge for it?"

Mills, on the other hand, encouraged retailers to make the most of professional associations such as CEDIA to keep abreast of changing technology and maintain skills levels.

"At the end of all this we will have a few highly skilled retailers that will be able to provide much better client services," he said. "You can't sell on low profits and make a living so we need to look for ways to add value and charge for them."

Having worked in a number of different retail environments, BSL's Squire said the pressures currently being faced by CE retailers were nothing new. In fact, he suggested looking backwards in order to go forwards.

"It's like the corner stores that for years relied on local business and traditional buying patterns," Squire said. "Then the big retailers opened up, traded for extended hours and suddenly a big part of the corner store business was swallowed up. Either they went out of business or they found the right balance to keep people walking through the doors."

If the industry consensus is right, that balance for CE retailers is converged digital entertainment, premium installation services and highly trained staff.

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