Consumer Electronics & Appliances

Synopsis

Consumer Electronics Categories Benefit During Pandemic: As coronavirus rates spiked in early 2020, offices, entertainment venues and retailers across the globe began to close, launching consumers into a largely homebound existence. Pivoting to work and attend school remotely became a necessity for a large percentage of the population, sparking a need for electronics of all types to make it possible. While people around the world shifted their lives online, companies that had previously invested in omni-channel and fulfillment infrastructure were best positioned to meet the needs of consumers when their stores were forced to shut down.
 

The largest specialty consumer electronics retailer in the U.S., Best Buy, which controls approximately 30% of the market share for the space, saw sales growth focused mainly in the second half of the year. Comparable store sales for the six months ended August 1, 2020, were basically flat but increased significantly in the third quarter at +22.6% for domestic stores and +27.3% for international. The company’s third-quarter online sales grew 174%, representing 35% of total sales against 16% for the same period in 2019 due to accelerated customer dependence on the channel during the pandemic.
 

Electronics sales have also been strong at big box retailers including Walmart and Target. Holiday sales for the consumer electronics and appliances category increased 6% based on Mastercard SpendingPulse data for the period from October 11 through December 24, 2020. As with other retailers, Walmart and Target pushed their Black Friday deals into October creating an extended holiday season, while attempting to mitigate delivery capacity constraints seen across the country for both the U.S. Postal Service and private delivery companies.
 

Amazon continues to be a leader in consumer electronics in part because of the growth of its own product lines including the Kindle and Alexa. In addition to its reliably faster delivery options, the company launched partnerships with Kohl’s and Rite-Aid in 2019 to accept Amazon customer returns at hundreds of their stores. These initiatives made the process even easier for consumers to purchase Amazon products, driving additional sales conversion during the pandemic.
 

Looking ahead, after a downturn in annual growth rate of 6.5% for the five-year period ended 2020, U.S. consumer electronics store revenue is expected to rebound at an annualized rate of 1.6% through 2025.
 

Appliances and Home Goods Prevail as Consumers Stay Home: As consumers became largely homebound in early 2020, home goods sales increased creating ongoing positive momentum for big box, local and online home goods retailers. In most regions of the country, home improvement stores were deemed essential businesses and remained open during the shutdowns, while traditional department stores that also sell appliances including Sears and JCPenney were forced to close. This accelerated the trend that began a few years ago of consumers transitioning to home improvement retailers like Home Depot and Lowe’s for large appliance purchases.
 

Continuing the positive sales trends generated in the first half of the year, Home Depot and Lowe’s both reported strong third-quarter earnings. Continued pandemic-related demand drove Home Depot’s third-quarter comp stores sales up 24% with online sales up 80%. The company reported sales of big-ticket items priced over $1,000 helped to boost growth. Similarly, Lowe’s comp stores sales increased 30% with average ticket and number of transactions up 14% and 16%, respectively, for the quarter.
 

Positive sales demand turned into delivery delays for retailers across the country as factories closed temporarily or reduced staff levels because of the pandemic. The specific nature of appliances and consumers’ needs for exact measurements and features added to the supply issues, forcing customers to wait months for their orders to be fulfilled. In turn, retailers resorted to selling floor models to accommodate customer needs. Unlike generic products, appliance and parts manufacturing is slower to recover when there are supply chain issues.
 

“The more specific a product is in the supply chain context, the harder it will be to accommodate shocks in the supply chain,” said Scott DuHadway, an assistant professor of Supply Chain Management for Portland State University.
 

GE Appliances had recently launched a digital supply-chain upgrade when the coronavirus pandemic hit, disrupting its global supply lines while consumer demand skyrocketed for kitchen appliances as homebound consumers’ usage increased exponentially. Whirlpool Corp. also struggled to meet the increased demand and said supply-chain constraints contributed to product backlogs in North America in the third quarter of 2020.
 

In terms of gross recovery values for major appliances, Gordon Brothers would not expect to see declines in valuations for the category other than temporary impacts and supply chain delays because of the typical turnover profile of top SKUs.
 

Recovery Rates Driven by Sales Fluctuations and Inventory Aging: Disposition recovery rates on a departmental basis in consumer electronics and appliances reflect individual company performance and, as a result, may fluctuate up or down based on a company’s normal gross margins and the sell-through rates achieved. Sales fluctuations related to consumer demand, product availability, obsolescence or seasonality may have a significant impact on recovery rates over a relatively short period of time.
 

For electronics in general, product obsolescence is an ongoing concern because of high rates of innovation. Companies and lenders should monitor on a regular basis either through regular inventory appraisals or through company-generated reporting. Significant levels of open-box or sample electronics inventory can negatively impact gross recovery rates and should be tracked as part of the normal course of business. Working with an experienced appraiser in this segment can offset client risk through regular collateral monitoring.
 

Sample Inventory Considerations: Like the challenges of consumer electronics retailing, one major factor impacting gross recovery values on major appliances is the issue of sample inventory. Typically, sample inventory used for display or demonstration on selling floors will not recover as well as first-quality, or non-sample, boxed goods.
 

In terms of inventory mix, it is important for borrowers to track levels of sample inventory separately from non-sample goods so an experienced appraiser can factor in the reduction to sample categories in the aggregate. Significant levels of shopworn, damaged or obsolete appliance inventory may negatively impact gross and net recovery values.
 

Note: THIS PUBLICATION IS PROVIDED FOR INFORMATIONAL MARKETING PURPOSES ONLY. THE MATERIAL CONTAINED HEREIN SHOULD NOT BE REGARDED AS ADVICE, NOR RELIED UPON TO MAKE FINANCIAL, OPERATIONAL OR OTHER DECISIONS; NOR SHOULD IT BE USED AS A SUBSTITUTE FOR AN ASSET APPRAISAL. ACTUAL RECOVERY VALUES MAY VARY FROM TRANSACTION TO TRANSACTION AND THE RECOVERY VALUES REFERENCED HEREIN ARE FOR REPRESENTATIVE TRANSACTIONS WITHOUT REGARD TO SPECIFIC KEY FACTORS. THIS MATERIAL MAY BE REDISTRIBUTED ONLY IN ITS ENTIRETY, INCLUDING NOTICE OF COPYRIGHT. ALL RIGHTS RESERVED. ©2021 GORDON BROTHERS, LLC.
 

Reference sources: BESTBUY, IBISWORLD, MASTERCARD SPENDING PULSE, CREDITNTELL, THE WALL STREET JOURNAL, KGW NEWS