Tough Economy Muddies Q4 Digicam Outlook

-- TWICE, 8/24/2009

NEW YORK — As we do annually, TWICE invited some of the movers and shakers of the digital imaging industry to our offices to discuss the current state of the market. Excerpts from the free-wheeling discussion appear here. For a transcript of the entire session, see www.twice.com.

TWICE: What are your expectations for the digital camera market this holiday season?

Ross Rubin, The NPD Group: We don't really do forecasts, but NPD has been conducting an economy tracker that gauges consumers' feelings about their own future spending expectations, as well as how they perceive the economy, and it's really been unclear. We saw some more optimism in the early spring and then that went back down in June, so it's been a bit of a roller coaster ride. I can say that right now we are seeing point-and-shoot cameras down about 20 percent year over year — that's year to date in May; digital SLRs are down about 13 percent year over year. Accessories are down about 10 percent … As far as pricing goes, we've seen in 2009 year to date the $100 to $129 price become the largest segment that we are tracking, with over 29 percent of unit share. Second has been $130 to $149 with 15 percent. The silver lining, if you will, is that the rate of price erosion has slowed in 2009, so it was only down 8 percent or 9 percent this year as opposed to double-digit declines in the past two years.

Bill Zani, Pentax: We think that consumers have delayed their spending for quite a while now, and there have been a lot of innovations, especially in the d-SLR market, that we think will make them spend greater than last holiday season at an undetermined level. We think technology is going to continue to drive additional sales and additional interest in the categories. It's all about the right price at the right time.

Darin Pepple, Casio: The sweet spot last year was the $150 to $200 price point. This year it is really below $150 — the $100 to $150 price point seems to have taken the lead. That is a significant change. It says that consumers are looking for a bargain. But the higher price point cameras are critical to the industry. Without them, margins drop and companies need to sell more in volume. We are seeing a lot of the higher price points moving to Europe, and in doing so that creates open opportunities with some retailers that will only carry a limited supply at their best stores. So that creates opportunities for other brands to come in and take those open spots with the higher price points in shorter buys in the U.S.

Casio is investing is dynamic photo technology with the ability to add moving animated art to a picture while it is in the camera to create this sort of electronic greeting format. We are going to use dynamic photo as our fourth-quarter hero to get the attention of the consumer using viral marketing on e-greetings they could send with their cameras.

Dave Troy, Fujifilm: Fujifilm's taking a very cautious approach with the economic outlook but I think the good news for all of us is that a digital camera has become a staple. It's not just nice to have one anymore. It's now you have to have one. We are dealing with a more educated consumer now. They have had a couple of digital cameras. They know what the problems were with their old ones and they're looking for solutions. Fujifilm is using this opportunity to expand the lineup with the addition of our water [resistant] group Z33 camera this summer. We have taken a lifestyle approach to looking at what people need to fit within their world to capture those moments they want to remember.

Lucy Pellegrino, Nikon: Taking the current economic situation into consideration, we are actually very bullish on the market and cautiously optimistic as we head into the holiday selling season. Our complete range of products really ensures we have a product for every type of photographer out there, and that's supported by the fact that even though the overall market is declining, Nikon is actually gaining market share.

We've positioned the company to be very nimble and flexible, so we are able to react very quickly to the changing market. We are working very hard to make sure our dealer base is healthy and strong, and putting products out there that make sense for this type of market.

Mark Weir, Sony: We are somewhat optimistic for the fourth quarter as well. It's clear to everyone that household penetration of digital cameras is high. So, particularly in difficult economic times, those looking for another digital camera are looking for something that does more than what their current camera can do. Certainly the challenge in low-light photography is something that people are fully aware of and what you can do with high-speed processing, like panorama built into the camera, is gaining interest. We think those are some of the new features that will cause people to consider a new camera purchase this holiday season, even in tough economic times.

Andy Flagg, Olympus: The biggest challenge we have is to openly welcome consumers back into our retail environment and purchase. When you walk into an environment today you may see a reduced SKU count due to what happened coming out of last Christmas. It looks like the fall will be more robust from an assortment standpoint as a lot of our major accounts are increasing their presence so that they can be prepared for a successful holiday season.

Our challenge is to really break through — especially on the point-and-shoot compact side — the commoditization that has happened to the category and to make it worthwhile for that customer to stick their hand in their pocket and spend money.

We think that our assortment for the fall is uniquely suited for that not only from an entry standpoint but all the way through our Tough-series products and ultra-zooms. We just hope that our retailing partners ultimately at the end convey more than just [specs]. We see this as a partnership between the merchant and the manufacturer to make sure that we haven't taken all of the excitement out of the product, because if we do, then everybody has very similar product.

TWICE: How are Q4 inventory levels shaping up for this environment?

Rubin: There will be some shortages in the market place. I think that's inevitable. Retailers have been as aggressive as they can be, but certainly no one wants to have too much inventory at any given time. If we are not seeing clear signals from the retailers both from sell-through and from promotional opportunities, then everybody becomes hesitant in their forecasting and commitments.

Weir: When new technologies are introduced which cause great demand, gauging that demand and having that reflected in the supply chain becomes one of the challenges, and I think all manufacturers are looking to deliver the kind of innovation that will stem the tide of ASP erosion.

Zani: Without clarity of the sell-through, without clarity of channel inventory, yes, there could be some shortages in key models.

Manufacturers Strive To Balance Retail Playing Field

TWICE: What trends in retail distribution are emerging from these market conditions?

Rubin: We certainly saw some re-distribution with the demise of Circuit, which was responsible for about 5 percent of the category. That's our consumer data that includes Walmart and other retailers. A lot of that volume, not surprisingly, has gone to Best Buy as well as Walmart and Costco. E-commerce continues to become a larger part of the pie.

TWICE: Which channels are becoming more important to all of you as this climate continues?

Pellegrino: All retail channels are important to us and play a vital role in our success. Our channel partners have developed confidence in our ability to deliver products and programs that support their sales goals. We will continue working to foster this confidence and to help each channel meet their goals and objectives. We will continue to provide marketing programs, incentives and product offerings that support differentiation between channels. Our understanding of what types of products our consumers are looking for and where they prefer to shop, combined with our understanding of channel needs, ensures we have the right products in the right channels.

Troy: I think virtually every retail channel is important. As we are seeing the category mature, start to flatten out a little bit, growth slowing, I don't think any manufacturer wants to overlook any opportunity for distribution to reach potentially a different consumer or a new consumer. The C channels, despite the changes they have gone though in the past year, continue to drive the digital photography category. I think our mass retailers certainly are picking up a big chunk of the changes in the C world. Our channel partners, photo specialty dealers, certainly, we have seen a number of changes over the past few years. As big boxes increase, I think the pressure is on supporting our customers. Fujifilm is looking beyond the traditional channels for cameras. We are looking more and more at food and drug, other non-traditional retailers, as ways to grow the business. I would imagine we all face the same challenges with how the Internet fits into that world because it is certainly becoming a bigger and bigger piece of the pie. Brick-and-mortar has their dot-com brethren as well as e-tail-only sites. It certainly poses a number of challenges to how we maintain a level playing field in the market place. But, certainly, Fujifilm looks at every retail outlet as important.

TWICE: Are any of you seeing any advantages for the smaller specialty accounts now?

Weir: I think that one of the things we can all see is that in tough economic times customers have a great priority for value. It may not be price; indeed, if you look at NPD's numbers, the decline in ASPs certainly didn't stem the tide of the decline in units. I don't really know that customers are looking to buy a cheaper camera, but I think that they are looking to get more value when they buy a camera, and that not only extends to the product but it also extends to the channel. Customers are more discriminating in the way they buy … The ones that are going to win the day are going to have the advantage of a loyal customer base. All channels are important to all manufacturers, but supporting the manufacturer to deliver more value to the customer is really a key function.

TWICE: Is it necessary to protect some of them from what is going on on the Internet?

Weir: Well, I don't think that protection is really a functional strategy. No. 1, I think that many manufacturers have experimented with all kinds of approaches, and I don't necessarily know if the customer is necessarily looking for price but for something larger which is value, giving the retailer the ability to deliver that greater value, that greater service to the customer. Those things which deliver the loyalty from the customer is ultimately the solution. Protecting retailers from one another, I don't think anyone can think of a functional strategy for that.

TWICE: But you are offering certain products to certain retailers to avoid channel conflicts?

Weir: The idea of differentiating product for creating derivative products, no, we are not creating derivative products. We believe that individual retailers will bundle products, and certainly individual manufacturers will bundle products, but the notion of driving one particular product into one channel and another particular product into another channel is not what we are doing.

Pepple: Yes, Casio is diversifying cameras by different kit structures and trying somewhat to segment channels and distribution strategies. I think you have kind of heard it here today in three words. This is really a diversified distribution strategy. Every company really needs to do that. It echoes pretty loud when we have seen the void that Circuit City created. A lot of what is happening with Ritz, without diversifying, manufacturers can find themselves in a very difficult situation, so what Casio has been doing recently really is strengthening its photo channel distribution strategy. More importantly, what we are doing is we are establishing relationships with dealers that cater to growing ethnic groups.