05.22.2007 — Who woulda thunk it? For years, the consumer electronics retailers have been trying to figure out how to compete against the Internet and the big-box retailers. Well, they may have found the answer … installation.

Declining product margins and stiff competition have taken a toll on the profits of specialty retailers the past few years, but a quick look at this year’s list of the CE Pro Retailing Top 40 Hybrids reveals that concentrating on installation services may be the right formula for success.

Indeed, data from the fourth annual CE Pro Retailing Top 40 Hybrids indicates that nearly 80 percent of the group’s overall business is in some way linked to installation services, way up from last year’s 43 percent figure.

(Editor’s Note: This year, CE Pro included revenue from any equipment sold over the counter that is eventually installed in addition to actual labor charges for installation services, such as technicians, sales commissions and programming. That accounts for the dramatic increase.)

Even more enlightening, every single company on the list reports that they have a portion of their showroom dedicated to plying their installation services. Finally, hybrids are expecting 14 percent growth in their installation operations this year, compared to 10 percent growth in retail sales.

This year’s list of the CE Pro Retailing Top 40 Hybrids continues to show diversity. Several of the companies are traditional custom installation operations that have either migrated their appointment-only showrooms into storefronts or have offered retail hours for their showrooms from the outset. But most companies on the list are specialty retailers that have instituted custom installation operations.

Participation on the list is purely voluntary by the companies themselves. CE Pro does not try to estimate revenues for any company. (See methodology box on page ??.)

The data itself provides some key benchmarks by which other custom retailers can measure against. For example:

• Average revenue per installation is $5,507, a 12 percent increase over last year.
• Average custom revenue per store is $2,602,279, a 30 percent increase over last year. This is a sign that many hybrids consolidated the number of stores or just honed their efficiency.
• Average custom revenue per square foot is $1,178. This figure is based on the entire square footage in a showroom, not just the square footage devoted exclusively to custom installation.
• Average showroom size is 7,145 square feet.

One trend coming to light among hybrids relates to the amount of business derived from new construction vs. retrofit jobs. In the past, retailers have tended to concentrate on off-the-street sales to consumers who may be upgrading their home electronics systems.

The CE Pro Retailing Top 40 Hybrids report that nearly half (44 percent) of their business is from new construction, a slight drop from last year. That drop is to be expected with the slowdown in housing in 2006. Builders are more often turning to retailers for their installation needs.

A recent study from the Consumer Electronics Association and the National Association of Home Builders Research Center revealed that 17 percent of builders are now using retailers, up from just 7 percent the year prior and 1 percent in 2004.

Personnel, Margins Are Biggest Concerns

Not surprisingly, the four biggest challenges facing hybrids today relate to product margins, the housing market slowdown, competition and personnel.

“2007 will be a year where we will need to be more focused in terms of selling additional services, such as extended warranties and programming,” says Eric Smith of Intech in Hicksville, N.Y. “Reduced video margins have increased sales opportunities, but greatly reduced profits. It will be important to ‘sell up,’ whether that means moving clients to a step-up model or a full surround sound system where audio products and speakers offer better margin opportunities.”

Anthony Loizos of HiDEF of Freehold in Freehold, N.J., sees technology as a challenge in 2007. “As I noted last year, I think the biggest challenge in 2007 will continue to be the convergence and integration of computers into the audio, video, and home automation/multi-room world. More and more computer-based products are coming to market and the audio/video integrators must adapt to the networking and integration/control of these products.”

Donald SooHoo of Paradyme Sound & Vision in Sacramento, Calif., says the slow housing market in previously booming Northern California is an issue. “Our biggest challenge is dealing with the effects of the slow down in our local housing market. In 2007, we are committed to provide training and education to our people, thereby enhancing the ability to provide ‘cutting-edge’ technologies with great customer service to our customer.”

David Wexler of The Little Guys in Glenwood, Ill., says bluntly that his biggest challenge is “being profitable and overcoming the intrusion of big-box predators who want to be like us.”

Top 40 Hybrids Snapshot

Average Years in Custom Business: 20 years, 2 months
Average Number of Installations: 1,299
Average Number of Stores: 3
Average Square Footage of Retail Store: 7,145
Percent of Top 40 Hybrids with a Custom In-Store Section: 100%
Average Total Revenue Per Installation: $5,507
Average Revenue Per Storefront: $2.6 million
Average Revenue Per Square Foot of Retail Space: $1,178

Fastest Growth Areas for 2007

1. Home Theater
2. Multiroom Audio/Video
3. (tie) Home Automation
3. (tie) Lighting Control
5. Media Servers
6. Home Networking
7. Structured Wiring

Just as for traditional integrators, structured wiring has fallen to the slowest growth category among hybrids. This falls in line with recent news from Best Buy that it is dropping its structured wiring installation program.

Survey Methodology for the Top 40

The CE Pro Retailing Top 40 Hybrids is just in its fourth year. To help confirm the data provided, CE Pro Retailing asks for independent verifying documentation from companies submitting information for the listing. The verification is optional, but the number of verified financials has steadily increased. This year, 21 of the 40 companies testified to the veracity of their information.

This listing of hybrids installing multi-subsystem jobs does not necessarily denote the “best” integrators, merely the most successful from a revenue standpoint. And as every integrator and hybrid knows, the highest revenues does not equate to profitability.
CE Pro Retailing has selected gross revenue in multisystem residential installations as the determining factor for the ranking.

The list is obtained in several ways:

• A qualification form appeared in the February and June 2007 issues of CE Pro Retailing.
• An online form was posted on http://www.cepro.com for three months, inviting entries.
• A blast e-mail was sent out to the installing companies that subscribe to CE Pro.
• Special e-mails and phone calls were made to a handful of firms that appeared in previous CE Pro Retailing listing.

The list is ranked by the volume of billed, not booked, business from residential systems, including:

• Audio (sources, speakers, processors or multiroom distribution components)
• HVAC control/energy management systems
• Lighting controls
• Security systems (alarms, integrated fire, access control or CCTV)
• Structured wiring systems
• Telecommunications systems
• Video (sources, monitors, projectors, screens DBS or multiroom distribution components)
• Whole-house automation/integration
• PC networks/broadband installation
• Window covering controls
• Other (central vacuum, surge protection, irrigation control, spa controls, etc.)

The red “v” next to several of the entries denotes that the revenues listed were verified by the submission of tax records, P&L statements or written confirmations from the company’s certified public accountant. Companies were required to sign a statement (for faxed or mailed entries) that says, “the information provided is accurate and truthful.” That statement also appears at the bottom of electronic submissions.

Is your company missing from the list? If so, e-mail CE Pro Retailing at , or please e-mail any other comments about the CE Pro Retailing Top 40 Hybrids.

Download the Top 40 Hybrids list.