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Road Views

The state of the mobile electronics industry, as seen by some
of the industry’s most successful aftermarket dealers

May 2006 By Nancy Klosek
Dealerscope: How has your overall mobile electronics business been over the past year—are you up, down, or about on par with the same period in 2005?

Mike Cofield: It’s good—up about five percent. Business has met our expectations.

Mehdi Narimanian: We’re up, thanks to bigger-ticket items. There’s lots of negative news out there on mobile electronics in general. But our navigation, video and satellite radio business has helped other categories.

Dan Jeancola: We’re up over the year before, but within the business itself, the industry is in transition. Between categories it’s shifting pretty dramatically. Core car sources in the industry are depressed, but we’re only depressed at half the level of the industry. That business is shifting into connectivity, GPS and satellite radio. What we’re experiencing is a shift in what the customer is looking for in a mobile electronics environment.

Mike Santacruz: The year 2005 itself was up and down, like the stock market. Big gas prices and lower car sales didn’t exactly help out too much. So far this year, foot-traffic is down, and the newspaper reports even larger gasoline increases are coming soon. I think we will all need to buckle down for a wild ride this year.



Dealerscope: Is video in the car as an impetus to installation sales past its peak?

Jeancola:
It depends: What’s your definition of video? In-dash? Rear-set? In-dash navigation and video are growing at a pretty rapid clip. From the commodity-level standpoint, the price-points have come down, so there are new groups of people in the market. Also, your high-end satellite-enabled GPS navigation systems are high interest because early adopters who bought the original GPS systems want the newest and the coolest. It gives them a reason to come back in—they’ve gotta have the new toy. The flip-down rear-seat headrest business has pretty much flattened out.

Santacruz: With price-points coming down, making video more affordable to the masses, sales will continue to rise. Unfortunately, margins are also getting tougher to maintain, but what else would you expect from a video SKU? Now I know how those home stereo guys feel.

Narimanian: Video is still very strong—especially double-DIN products. It all comes back to OEM. There are lots of vehicles sold with double-DIN equipment. Consumers like to have and be able to see all their information without flipping something down.

What had been a bit disappointing last summer, though, was the roof-mount “soccer mom” video business. We lost a little of that to the OEM side because they’ve come up with better price-points on that stuff.

Cofield: Video’s certainly past its peak, and not where we’re getting growth from, but it’s still a vital part of the business. When you sell a video job, it generally has some dollars attached to it, so it’s important in terms of gross dollars.

Dealerscope: What are the hottest ME categories right now—and which are not living up to your expectations?

Santacruz:
The iPod is strong. Fourteen million unit sales in the last quarter of 2005! How long does it take for the aftermarket to sell 14 million head units? If we started carrying iPods, then we would end up going head-to-head with our big-box competitors and those lovely ten-point margins? So, for now, we are selling high-speed iPod connectors from Alpine. Our other suppliers need to follow suit—now!

Cofield: Frankly, we’re getting very good growth from the car audio segment—amplifiers, subwoofers, speakers, all the traditional categories. It’s not that surprising, because we have had some consolidation in the industry. There may be fewer of those traditional dollars in the market in general, but there are also fewer players chasing those dollars. Also, many companies have abandoned the upper-end category, and we’re niched to pick that business up. The other area of growth for us is navigation. We’re doing very well with that, particularly with double-DIN units that are totally built in. We also do a fair amount of standalone navigation and are just beginning to see some movement in portable navigation.

Jeancola: The only area not hot for us is in-dash CD, but the way people arrive at their source of music has changed, through their iPod or other MP3 device or most recently, the popular wireless aspect of being able to download music on their phones. That whole aspect of portability—even if it’s a portable satellite radio device—is strong.

Dealerscope: Talk specifically about OEM offerings and the challenges they pose today for your aftermarket-reliant business. What opportunities do you create for your business from OEM-side activities?

Narimanian: It all comes down to OEM integration. We have to adapt very quickly to these new changes in these vehicles. For certain vehicles, there is no way we can change what’s in-dash, but customers are coming in and they want better sound. So thanks to some manufacturers, we can provide them with OEM integration products. And we’ll see more and more products in that category expanding with other manufacturers.

Jeancola: Anyone at CES saw a plethora of OEM integration devices. The problem for every retailer, be they specialists or big boxes, is the general public is not aware of those offerings. You can’t take the unit, which looks like an amp or a crossover, and just mount it on a board.

The odds of customers coming in and just knowing those types of devices are available are slim. The second thing is, they look just like any other electronics piece. So the challenges are being able to demonstrate and having the knowledge to speak of these devices to the consumer. They have to be told to what extent past an FM modulator they can make an improvement on their existing system. It’s a challenge from a demonstration standpoint and a challenge from an expertise standpoint. A modulator works with anything with an FM radio, but to take it to the next level, to improve your audio quality and ergonomics, there are so many applications and devices, it becomes an inventory challenge, too. When you talk about tying into existing audio systems and screens in the car, it requires a specialization of the piece and the cabling. The $200 head deck becomes the $200 connectivity piece. It’s just a shift in dollars.

Cofield: OEM is constantly encroaching on our business. There are a lot of people out there who see OEM as a major threat. We’ve seen it that way, frankly, for so long—so what’s really changed? What has is that, as vehicles have become more difficult to integrate into, you have to be more on the ball, and make sure you’re stocking the right things in order to integrate into OEM systems. But again, because there are so many people who have abandoned the challenging installation, there’s more opportunity for us. People drive up in their car and go to a certain shop, particularly national chains, and are told, ‘We can’t integrate into your car.’ And then they come to us and say, ‘So-and-so says they can’t integrate into our car.’ And we say, ‘They’re right. They can’t. We can.’ And we proceed to show them what they can do to their vehicle. As OEM continues to make inroads, those shops unable to keep up with the ability to integrate—or those shops who take a ‘woe-is-me’ attitude that OEM is infringing on their ability to sell head units, will be left in the cold, while those who can adapt will continue on with business, just as we always have in the past.

Santacruz: At present, more and more manufacturers are producing products like Rockford’s 3Sixty or Alpine’s Vehicle Hub Pro, where we are getting the opportunity to enhance OEM sound systems. The battle lines have been drawn, but we need our suppliers to give us the right ammo.

Dealerscope: What are some other obstacles and challenges to a healthy business?

Santacruz:
Skyrocketing gasoline prices, workman’s comp fees, high rents, pricey advertising and big, expensive, group health insurance are really squeezing the bottom lines right now. Throw in an unpopular war, and you have the making for a few very tough years ahead.

Narimanian: The CD business is down double-digit, and that was once our bread and butter. Bigger tickets certainly help. Another challenge is educating consumers on navigation. We want to be able to give people a better selection of navigation products—ones that are more user-friendly. I hope the vendors are getting this point. We’re not just getting the gadget-lovers for this category any more—the customers are looking for necessity products. There are older consumers who are used to and like bigger buttons—and not as many buttons—and overall user-friendliness. Some of these devices come with dozens of buttons and features, and it just scares people away. Even though vendors are doing a very good job filling the hole on navigation, we need more user-friendly products. But we are seeing more of those.

Dealerscope: Have enhancement accessories come to the fore as a viable profit-category-set for you as yet? Which of these has meant the most to you of late, in your bottom line? Which have the most growth potential?

Jeancola: Our approach is that we are narrowed in on our assortments of things like lighting and add-on wiper blades, [and are] very focused in terms of vendors. Our enhancement business is more of selling products that will improve performance—better lighting, or better wipers—rather than selling cosmetic enhancements.

Narimanian: Performance parts and cosmetic enhancements are very trendy. They’re not as strong as we’d like them to be. We do want to stay up with the trends, but you can get stuck with inventory, so we’re very cautious in what we carry in that regard.

Cofield: Enhancement means accessories business—lights, mufflers, performance and appearance items. Some retailers are attempting to break into that market, and their success has been abysmal. The two markets are not necessarily conjoined. They don’t necessarily take the same skill set. It usually doesn’t work unless you’re adding a secondary sales staff to handle the type of customer for that kind of product. Your car audio staff isn’t going to know a whole lot about rims and tires, probably. Conversely, those people in the wheel and tire business who’ve attempted to nuzzle into the car audio business haven’t done very well with that tactic, either. But they may sell a few low-end pieces, just as we might do the same with enhancement accessories. One doesn’t do a very good job of getting into the other’s pocket.

Santacruz: It’s easy to get caught up in the hype of new, enhancement categories. As of this moment, only iPod and Bluetooth are having some impact. There is growth potential to both, but I’m not banking on huge volume in these categories to keep us going.

Dealerscope: Do you feel that satellite radio has hit its stride as a mobile category yet, or is there still much potential for that market’s growth? Will its migration into home components affect how it grows in car, to any extent?

Cofield: There’s a lot of growth still there. Tons, in fact. The fact that it has done so well in car is what’s making it happen in home. And people listen to radio in the car.

Narimanian: There’s still a lot of potential for both Sirius and XM. You see more and more people buying these products, and word of mouth is obviously the best thing for these products. People show them to their friends and buddies. We’re not even near saturation in these areas. There are even people coming in now asking for second- or third-generation products, and accessories for these things. We’re very excited. And the category helps increase business in other categories.

Santacruz: Certainly Howard Stern’s kicked it up a notch or two, but steady, not spectacular, growth will be the norm from here on out for both XM and Sirius. As far as the effect from home components that pick up satellite, that’s a no-brainer. The more people listen to it at home, the more they will expect to hear it in their car and at work.

Jeancola: There’s plenty of upside there. We’re expanding our satellite radio assortment and also our attachments within our stores. It’s going to get a dramatically increased visibility onto the floors. I think we’ve probably got another good two years of growth.

Dealerscope: What is the consumer awareness level of HD Radio, and can you comment on its potential growth curve? What needs to happen to increase awareness among consumers? Are they confusing it with satellite radio?

Narimanian: There’s not enough awareness at all about it. It comes down to the hardware being very expensive, and people not understanding the benefit of it yet. The first question people ask is will they get better coverage from it, and it has nothing to do with coverage. It will come down to OEM, up to a point. Maybe next year there will be some vehicles with HD Radio built in, so that will help some with awareness.

Cofield: I don’t know. There certainly has not been any great call from consumers to date for it. Most of our customers say, ‘What is that?’ We’ve probably sold several thousand satellite radio interfaces, and have yet to sell an HD Radio. Whether it has the ability to become viable in the marketplace is hard for me to say.

Jeancola: HD Radio’s a great technology. You’ve got multiple channels on one channel, and information. I hope it ends up being successful. New technologies are always great for the industry. We hope it gets better visibility, and that they get the price of the hardware where it’s more palatable to the consumer.

Dealerscope: Can you comment about Bluetooth and its influence on the market?

Cofield: Bluetooth is now just beginning to have some influence on the market. We have not been greatly involved until now, because it was more strictly an interface between the cell phone and the car, and we’re not cell dealers. It had been a non-entity for us till this year. What’s changed? Now, the traditional car audio vendors are making interfaces that allow you to interface it into the car stereo. The cell phone now is no longer the only operative item. Now, car stereo is the operative item. Where before, if a customer wanted Bluetooth, he’d be offered one that would interface with his factory radio, or as a standalone item. Now, we can say ‘There are Bluetooth adapters that will allow you to interface your cell phone into your car stereo. Would you like that adapter?’ So now, Bluetooth becomes a natural accessory add-on to the sale for us because we’re already selling the radio that makes it work. Where before, it had nothing to do with selling aftermarket car audio.

Narimanian: Bluetooth is definitely an area that, especially in the next few years, will grow. You’ll have “smart phones” that download and upload music, and the car audio manufacturers are working on devices. Bluetooth will be very important to us, even in terms of our installation expertise. People are going to be coming in, looking for specialists to install these products. It’s one area where the aftermarket surpasses OEM right now. OEM is advertising some of that on their luxury vehicles, but the aftermarket is offering Bluetooth-ready stereos for as low as $149 retail.

Santacruz: In the near future, we’ll need a Bluetooth “hub” that gives override hierarchy to multiple Bluetooth devices being used at the same time—the day when the driver enters his vehicle with his phone, PDA or Blackberry, and personal satellite radio, with his spouse or a co-worker, also loaded with the same gear. Which device will have priority, and when? We need some very smart engineers working on this possibility now, as well as cheaper prices for the consumer.

Jeancola: Being a big wireless retailer, Bluetooth is in our genes. Now, with the advantages of it showing up more in the aftermarket, in in-dash units that allow integration of an iPod and phones that can download is exciting for us. It’s just a natural progression for us. We hope every piece will have Bluetooth.

Dealerscope: Where do you feel the best sources for qualified installers lie these days—and what incentives are you using to draw them to you as opposed to home custom installation disciplines?

Santacruz: Hiring good installers with quality attitudes will always be a challenge. You need to find the right person who is talented and loves the car stereo business, period.

Narimanian: We’re not really in competition with home custom for installers. Our installers are now looking at their jobs as a profession. It comes down to OEM integration, and the OEM bus systems in newer vehicles. Our guys are getting training for these new systems. For consumers, the days of their buddy helping to put a stereo system in are over. It really has changed. Installers are respected a lot more for their expertise. Keeping them happy and excited about their jobs is a lot easier now.

Cofield: We’ve had a little bit of cross-pollination between home and car audio installers, but not as much as what seems to be the general consensus, because we haven’t had a tremendous amount of difficulty in finding installers. Why? Because we’re known as being a good place to work—and good people want to work in good places. And also, we don’t mess around with paychecks—we pay on time, and the checks are always good. It’s our reputation.

Jeancola: In our case, our company is 19 years old and has had a very small turn in installers. As far as tenure, some of these guys are with us so long that they are going to eventually start collecting Social Security! We’re very lucky in the fact that we’ve had a great stable of installers. There’s nothing more comfortable to the sales guy than being able to sell anything he wants to sell without having to worry about having it installed. The true mobile installer’s heart is pretty much in the car.
 

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