The residential market in the next few fiscal quarters may look like a stale wad of chewing gum stuck to the bottom of a theater seat.
Many local markets have bloated inventories of unsold homes. Many families that had planned to upgrade to a new home are now sitting tight, waiting for the credit market to ease and for the value of their existing homes to recover some lost ground. Residential electrical contractors are fighting for a share of a shrinking pool of construction work. Builders are fighting for survival. Disappointing as all this may be, the shift in market conditions does bring some opportunities.
No one's going to mistake the bursting of the bubble for the sound of a champagne cork, but for distributors willing and able to tap into a new market, this can be a valuable opportunity to expand their sales into each of those homes that are being built, while picking up sales to the retrofit and remodeling market at the same time.
“During every economic downturn I have witnessed, we have seen growing demand for home theater installations,” says Michael Fromm, president of Fromm Electric Supply of Reading, Reading, Pa. “People are pumping more money into existing homes because, while they know they can't get the sale price they want, they can at least derive ‘entertainment value’ from the money they put into home improvements.”
Not only are home owners putting more money into remodeling projects to make their existing homes more comfortable and enjoyable, but developers are looking to home theaters and entertainment systems for a way to upgrade and differentiate their homes and attract attention in a buyer's market.
So break out the popcorn and the Milk Duds, it's time to open the curtain on one of the most promising (i.e., growing when the rest of the market isn't) and entertaining segments of the residential market. Take a look at home theaters and home entertainment systems and you may see your own future.
Leviton Manufacturing Co., Little Neck, N.Y., is one of the manufacturers looking to home entertainment for a dose of strong growth in a sluggish residential market. Through partnerships with recognized brands such as JBL and Harmon/Kardon, the company has developed a line of entertainment-system components ranging from speakers to audio-video receivers, amplified volume controls, iPod bridges and six-channel keypads for controlling whole-house media distribution.
“Except for DVDs and the iPod itself, everything else is a complete one-stop solution,” says Mark Cerasuolo, director of entertainment products. “That's important, because we want a contractor to come from a builder with complete bill of materials and to make it easy for them to buy everything from our distributors. They don't want to go other places.”
Leviton is focusing its home entertainment lines on providing builders and remodelers with specification-grade sound at the most price-driven end of the market. The market for home entertainment upgrades is approaching $12 billion when you add in installation, distributor and contractor markups and all the rest of it, Cerasuolo estimates, with audio accounting for about $1 billion of that total.
“It's like a billion-dollar business that nobody saw coming,” says Cerasuolo.
The growth trends are strong, driven by the maturation of the baby-boom and subsequent generations that came of age at a time when the stereo system one owned was an important status symbol. Even before the collapse of the housing market, these buyers have shown a willingness to put more effort and resources into making their homes more comfortable — feathering their nests — than earlier generations. This “stereo generation” has a greater enthusiasm for built-in versions of their favorite entertainment brands.
The market penetration for multi-room audio systems grew from 23 percent to 33 percent from 2006 to 2007, according to a study by Parks Associates cited in Hanley-Woods Digital Home. Home theaters have grown from 12 percent to 21 percent over the same time.
“I compare it to the OEM automotive market,” says Cerasuolo, whose background includes positions at Bose and JBL. “It used to be that auto sound systems were a custom affair. As soon as you bought your car, you went down to the custom sound shop and had them rip out the factory stereo and put in a better system. Now the factory systems are great — JBL, Bose, Mark Levinson. In the same way, increasingly, the home will come with a branded entertainment system.”
The question of whether the traditional powerline-oriented residential electrical contractor channel could be a significant player in the high-tech, consumer-branded entertainment systems market turns out to be less problematic than one might think. In fact, 56 percent of builders already turn to their electrical contractors to install some home entertainment wiring, according to the Parks Associates study, while 52 percent use an audio-video specialist installer (many use both).
Audio-video systems have typically been sold direct by factory-appointed networks of dealers and installers, and for years, these dealers and installers have been trying hard to build relationships with builders, says Cerasuolo. “They talk about how, ‘Builders ought to listen to us.’ The builder's going to be interested and will talk to (the dealers) about all the latest technology, but then they'll turn around and talk to their electrician about playing golf. They're very comfortable with their incumbent electrical contractors, and they want fewer people on the job site instead of more.”
The complexity of the systems can seem daunting at first, but electrical contractors deal with complex systems all the time. “Audio specialists have made it seem hard,” Cerasuolo says. But he compares a typical datacom structured-wiring system, which requires eight connections, with a speaker, which has only two. “Even if you don't know what you're doing, you have a 50 percent chance of getting it right. At worst it will be out of phase. It's hard to get killed working on a low-voltage system.”
But the home entertainment segment goes far beyond audio. It may begin with whole-house speaker systems and surround sound in the home theater, but advances in high-definition (HD) video and centralized media distribution systems — both wired and wireless — continues to raise the technological bar.
Distributors entering this field have a lot to catch up on so they can help their contractors stay on top of the market. They'll need to be conversant in technologies ranging from the obvious to the esoteric: HD television connections and various satellite and cable sources; stereo receivers, amplifiers, media players and speakers; emerging media distribution standards such as universal powerline bus (UPB) and wireless Z-wave and the components that use them; and high-definition multimedia interface (HDMI) compatibility. Suppliers who are pursuing this market stand ready to help.
“What a distributor wants to have is one or two people at each branch — an in-house expert on this stuff — who can help the contractor work up the bill of materials and answer his questions,” Cerasuolo says. “It's not difficult. In fact, it's hard to go into a distributor and not find someone who's just nuts about audio gear. People like this stuff. It's not hard to get used to.”
For distributors who dive in big, having a showroom demonstrating a range of high-end home entertainment products where they can also showcase the latest in lighting controls and a flair for lighting design brings great visibility.
“Smart residential contractors are targeting the remodeling market,” says Fromm. “This presents a very exciting opportunity for distributors to shift their attention from commodity sales to more profitable products like dimming systems, high-end lighting and home automation. We have recently opened two design centers with vignettes featuring products that have to be seen — or experienced — to be fully appreciated. This includes kitchen and bath displays as well as home theater and entertainment rooms.”