Too Big To Fail: AV Manufacturers Look To Big Distributor AVAD For Their Future

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Anybody who listens to the news in the last year or so has heard the term "too big to fail" when it comes to America's banks. Just in 2009 alone 209 banks have failed while taxpayers have "bailed out" larger banks that to many just couldn't fail. The debate on whether these banks (or car companies) should be left to fend for themselves is a lively one with ramifications in terms of mortgage lending and consumer credit that directly affects the consumer electronics business.

What if I told you that that AV business has its own entity that is too big to fail? No, its not Circuit City - they already went Chapter 7 as a traditional brick and mortar retailer. Same with The Good Guys and Tweeter. This is a distribution company called AVAD. While the AV business was consolidating thanks to the fast and easy money from the mid-2000's - AVAD smartly bought up many of the very best local AV distribution companies in many of the best, most lucrative markets. While housing prices were going up 20 percent plus year after year, AVAD was adding product lines and becoming a more efficient company that sold to nearly anyone who had a credit card, a tax ID number and a business card that suggested that they were a custom AV installer. These dealers could buy anything from Polk to Atlantic Technologies to Denon to JBL to Draper to Samsung to JVC to Panasonic and much more.

Many traditional specialty AV dealers used AVAD for what they needed, but quietly resented the company because as one nationally prominent retailer put it, "AVAD offers every trunk-slammer the chance to sell Rolex quality brands right from their homes without doing a demo and selling only on price." This dealer isn't the only one who feels this way, but the money was too good for the AV manufacturers to deny. They had a fresh crop of new customers that kept ringing the register day in and day out in ways that traditional brick and mortar stores couldn't keep up with.

The first signs of real trouble came when Circuit City, The Good Guys and Tweeter dramatically failed. These accounts were one-chain solutions that many AV manufacturers saw as a fast track to easy street. For example: a top specialty AV manufacturer opens Tweeter and the first order could mean millions of dollars of brand new sales. The sell-through on the account could be even better, resulting in increases to a company's top line earnings that simply couldn't be had this easily with traditional specialty AV dealers.

The next warning sign came when the housing market threw a U-turn in terms of property values after four to five years of unprecedented, deep double-digit growth. "Trunk-slammers," as they are called, who might have sold alarm systems or have an electrical contractors license now found themselves without a month-in month-out parade of new home theater and HDTV customers thanks to new construction or rehab projects. When that party ended - it ended more abruptly and faster than these new dealers came to market, then left the market. The easy money was gone.

AVAD, to their credit, has made significant changes to their business to compete in the new economy. They have closed major locations like their Las Vegas distribution center. They have closed other satellite centers as well, thus consolidating their operation and lowering their overhead - but dealers are not completely happy with the moves. They complain about shipping times and support. Then again, AV dealers complain about nearly everything. You have to know the dealers to love them. It's all part of the relationship.

Who is starting to worry are the AV manufacturers who are becoming increasing concerned that AVAD, much like Goldman Sachs, Bank of America or General Motors, is too big to fail? With many of the chain retailers long gone, AV companies need AVAD, but with the housing market in a major funk - AVID simply doesn't have the new, repeat customers they did during the booming housing market and through the advent of the flat HDTV. It's a messy situation and respectfully bigger than anything an AV distribution company or AV manufacturer can control.

While I don't think AVAD will be going away by any stretch of the imagination, it's easy to understand why companies worry about this kind of doomsday scenario. Unlike banks and car companies - I don't think Uncle Sam would come walking in to save an AV company. Perhaps, AVAD's safety net is its own vendors who need them to do what they can't do for themselves, which is to reach out to new "trunk slammers" and smaller dealers without angering the core specialty dealers, because this generation of new business is powerful and positive new business for the AV industry as a whole.

One top custom AV installer suggested "Trunk slammers have their place and often sell on price but today it's more and more important to support dealers who have project managers, CAD designers, support centers and other overhead that insure that your system will be properly installed, calibrated and maintained for years to come. If all you are trying to do is buy on price - that's what the Internet was invented for. If you want to get the full experience in a system that works flawlessly - that's what you pay a top dealer or installer for."


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