Q&A: Richard Gilkes, Executive Director, HTSA

To meet demand over the past few years, many manufacturers have broadened their sales channels wider than ever before.

One key outlet for many has been buying groups, like the Home Theater Specialists of America (HTSA). With 62 members and 43 associate vendor members, the group has a combined buying power of more than $500 million.

It offers members advice on sales, installation techniques and marketing tactics. Richard Gilkes, executive director, spoke with CE Pro Retailing about buying groups, HTSA and the future of the market.

How did HTSA get started?

It started 11 years ago, when 11 members found themselves going to AVB [an appliance buying group] meetings just so they could earn a 1 percent rebate with a particular video manufacturer.

The AVB dues were $2,500, so they had to do $250,000 with this vendor to make it worth it. They realized that there needed to be a buying group for mid-sized retailers.

What is required to be an HTSA member?

You must be in business for five years. You cannot sell appliances. You must sell $5 million a year or be the largest home theater company in your market.

You must do 60 percent of your video business with HTSA associate member video manufacturers. Every HTSA member has to establish individual credit with the vendors.

What are the benefits of joining HTSA?

The number one benefit from HTSA is idea and information sharing. No one individual or company has all the answers.

HTSA is a group of problem solvers that can seek counsel from each other. That is a tremendous value.

Another primary benefit is dealing with the changing vendor landscape. You have to be careful with whom you partner, and you have to stay true to them. HTSA has been consistent in its vendor relationships.

It's like a marriage -- you have good and bad days. Other buying groups have deals with every vendor, and others hop around from vendor to vendor. We don't do either. We are loyal to our vendors.

Lastly, buying groups return money to the bottom line that is necessary to survive. Margins have never been worse and there has never been more competition.

At the retail level, specialty retailers are competing with warehouse clubs now. Two years ago, those clubs were selling CRTs while our members were selling flat panels.

Today, warehouse stores have a market share of more than 20 percent. At the installation level, there is a lot of competition from small integration companies. These companies are buying from distribution.

What is the outlook for the industry?

The short-term outlook is tough, but the long-term outlook is great. In the short-term, the market is due for a shakeout of retailers, custom installers and manufacturers.

I think we are going to see a lot of combinations, like the JVC-Kenwood one that was [recently] announced. Manufacturers will need to do this to survive.

Vendors need more outlets for their products than ever, including distributors, military, warehouse clubs and more. It's prostitution. They are selling wherever they can.

Limited distribution used to be the hallmark of the electronics industry. It is very difficult for manufacturers to keep their factories running if they limit their distribution.

Manufacturers' outlets have gotten wider and wider. That's a problem!

One thing that could be very good for the industry might be the recent Supreme Court judgment that allows manufacturers to set a minimum advertised price (MAP). This will allow manufacturers to segment their product lines and set MAPs for particular segments.

At the end of the day, everyone needs to make money. These club warehouses can survive on 15 percent gross margin. Best Buy and Circuit City can survive on 22 percent to 27 percent gross margin.

A specialty retailer needs to earn about 40 percent gross. Even Tweeter couldn't make a profit with a 41 percent gross.

The point is that different channels have different margin needs. With everyone foreboding a weak holiday sales season coming up, manufacturers might realize that setting MAPs for particular products targeted for specific channels is the way to go.

There is too much short-term thinking among vendors, concentrating on end-of-month or quarterly numbers. I believe it's a long-term game. I am disappointed when I see some of the tactics vendors go through to move merchandise.

I would rather see them stay true to their brands. Doubling their factory size will catch up with them eventually.

Overall, the market needs to say nimble and adept. Some mass-merchandiser or warehouse club is going to be selling a 42-inch plasma for $599 this season, hoping that they can sell a bracket, installation and service agreement to earn 10 points. That's crazy.

HTSA members are in a good place right now. The wealthy still seem to be buying.

Our members have moved away from competing in the low-cost flat-panel market. The biggest problem facing custom installation companies is their efficiency.

Many companies operate with six-week backlogs due to finite labor. Most consumers don't want to wait that long.

In what areas can members expect growth?

I have identified six categories for improvement for HTSA members:

• Networking: Every house needs a home network.


• Lighting Control: Selling lighting control helps sell audio systems.


• Furniture: Mass merchandisers do a lousy job selling furniture.


• Control: Our members are already selling control systems, but they need to sell more.


• Audio: We've been distracted by video. We need to use the iPod to reinvigorate audio sales.


• Dedicated Home Theaters: I am not talking about multipurpose rooms, but big-ticket dedicated spaces.

Some HTSA members want the group to grow larger. You currently have 62 members and 43 vendor partners. Why have you resisted changing the bylaws to allow for more membership growth?

We could have 400 to 500 members if we reduced the requirement to $2 million or allowed appliance resellers in. Four years ago, we changed the bylaws to allow non-retail, custom-only companies into the group.

We did that because many of our members were migrating to custom.

We have 62 members now, but I don't think we will ever even get to 75 members. I don't want to be 100 members.We have two annual events that would lose their personal touch if we grew that large.

We like to have lots of fun at our spring and fall events, and that size of an organization would change the fun.