Our Q1 forecast for North America was too low by 40%. The story we told you to expect was a deep decline in demand, but the real story was one of surging demand.
What we expected
In the first quarter, the coronavirus was wreaking havoc across Asia and Southern Europe, and very early indicators showed a slight bump in TV demand as consumers prepared for lockdowns, followed by decimated demand once lockdowns began. We expected NA to follow this pattern.
It did not.
Given forecasts of serious economic repercussions from COVID-19, we expected NA consumers to start saving aggressively for potential medical expenses and uncertain employment and to spend mainly on necessities, such as food.
They did not.
Instead, NA TV shipments were only down 8.6% from 1Q19, which might seem like a significant decline without context. 1Q19 was an exceptionally strong quarter, up 30% year-over-year, because brands and retailers pulled forward shipments to avoid proposed tariffs on Chinese goods. 1Q18 was a more-or-less normal quarter, and 1Q20 was up 18.6% over 1Q18. That is not a slight bump in demand. That is extraordinary demand.
In hindsight, 1Q20 TV shipments likely surged in several waves:
- In February, brands and retailers increased shipments to offset an expected supply disruption as China reeled under coronavirus lockdown. In addition, it is apparent that brands like Samsung may have surged product in to take advantage of the supply disruption from China that disproportionately affected Chinese brands like TCL.
- In the first half of March, they upped shipments again due to an overall increase in demand for CE products for the home and may have anticipated TV demand as well. At the time, the prospect of a longer shutdown was sinking in for most Americans as school districts across the country closed and many companies ordered employees to work from home.
- In the second half of March, retailers again increased orders as they prepared for extra sales due to a stimulus bill that the U.S. government was considering. U.S. retailers know to prepare for a spending boost due to tax returns and likely anticipated a similar impact from the stimulus. The bill passed on March 27, promising $1,200 per individual and $500 per child, with a sliding reduction for higher income households.
In last quarter’s update, we forecast Q2 would be impacted most heavily as lockdowns and recessionary news settled on consumer spending, lowering shipments 45% against 2Q19, which was also a strong quarter. We expected gradual improvement in Q3 and Q4 as the economy slowly reopened.
We now expect shipments in Q2 to be above the previous forecast, but still down significantly year-over-year, and for the forecast to be reduced in Q3 and Q4 for three reasons:
- In Q2, some Americans will feel richer than normal due to the stimulus, but that effect will fade in 2H20.
Most stimulus payments will hit bank accounts in Q2, either by way of direct deposit on April 15, or by check throughout late May and June. In addition, the U.S. stimulus plan approved an extra $600 in unemployment payments per week, which means that some workers will take home more on unemployment than they did when employed. This unemployment benefit expires on July 31.
- Inventory may be sufficient for Q2, but stock-outs are likely on the horizon.
While China TV manufacturing resumed in March, other factories around the world started suffering production shortages. Mexico TV factories (which account for about 60% of imports into NA) experienced shut-downs in April, and slow-downs are persisting into May. With strong demand at retail in April, inventories are certainly being pinched.
- Some replacement demand was pulled forward to 1H20, which will affect shipments in 2H20.
The shipment size mix in 1H20 favors smaller screen sizes, such as 32” and 42”. These sets seem to represent additive, situational demand used, for example, to manage children – a 32” TV is very cheap childcare – or by homeworkers as an extra monitor. But some accelerated replacement demand is also mixed in, and these sales will impact future replacement demand, hence the pressure on Q3 and Q4.
What we got wrong
We underestimated the importance of entertainment to NA consumers and the pivotal role of TVs in home-based entertainment.
We should have looked to history. During the Great Recession of 2008-2010, NA TV purchases increased by 8% in 2008 and 12% in 2009 as consumers cocooned at home and diverted discretionary spending away from vacations and other luxuries. At the time, the decision to replace a CRT TV with a flat-panel TV was also made easier by falling TV prices due to an oversupply in the LCD industry. The average selling price of an LCD TV in North America plummeted from $845 in 2008 to $623 in 2009.
A lockdown forcibly diverts even more spending – no vacations, but also no driving, no childcare fees, no coffeeshops – while increasing the need for home-based entertainment – no school, no movie theaters, no bars.
Add in that the U.S. government moved swiftly to pass a stimulus, putting even more money into consumer’s pockets. Other countries have been far slower with stimulus spending, if any has been approved at all.
And add in that LCD TV prices have continued to plummet since the Great Recession, especially for the extra-large sizes. The average selling price of an LCD TV in North America now is $420, 35% of the promised stimulus payment of $1,200.
Total it all up and the extraordinary demand now seems obvious. It seems obvious in hindsight, that is.