A recent conversation with a camera dealer friend reminded me that the conflict between camera maker, camera retailer, and camera consumer is still being quietly but viciously fought. There will be losers.
To understand what's happening, you have to understand dealer pricing. A rule of thumb has been that dealer margins on equipment have tended to be a maximum of about 15%. By paying cash and committing to volume and taking advantage of every last little incentive you might goose that by a couple of percent. 15% is a good starting point for determining what your dealer paid for what you bought from them, but remember, some dealers and some products will be closer to 10%, though. (Accessories often have better margins, but they're also lower priced.)
The recession has caused a few wrinkles. More and more compact cameras now have 10% margins, and many companies, Nikon included, have been using customer incentive programs that temporarily "break the register" for dealers (put another way, the dealer paid more for the item than you paid the dealer, and only by filling out the proper paperwork will get any profit back, and sometimes less than the 15% or so they normally expect).
The incentive to the dealers to be part of these programs is cooperative advertising: they get local advertising support from the camera companies, but that's not a free lunch. And the Best Buy down the street gets that same support (or better).
The thing that got me thinking was this: what would camera makers want to sell most, what would dealers want to sell most, and what cameras should customers want to buy most? When my dealer friend and I compared dealer and customer lists, there were some clear differences. For instance, one camera I put on "customers should want" list my dealer friend pays more for than other retailers he competes with who are selling for (a big dealer like a Best Buy may be factoring in quantity discounts a local dealer can't match). Two others on my customer list my dealer friend won't carry because there are no support programs from the camera maker. Two that weren't on my customer list made it onto the dealer's list because of maker support (spiffs, advertising, tech support, etc.).
Let's look at this from Nikon's viewpoint. Which models would they really want to be their best sellers? The D90, D300, and D700, probably. Those three models have the most margin in them, and can be substantially profitable if sold in any meaningful volume. The D40, D60, and D5000 are must-have-lots-of-volume cameras: they are indeed very profitable for Nikon, but only if they move substantial units (measured in the millions a year). Ditto with the entire Coolpix line. The D3 and D3x are prestige cameras and targeted towards pros, and when they get long in the tooth, most of their margin disappears, too, as dealers try to unload overstocked inventory. But, in essence, my point is that everything except the pro gear has turned into commodity products: products that are not highly differentiated and must sell in large volume to be profitable.
Note where Nikon puts its advertising coop dollars and forces Instant Rebates on the dealer: mostly Coolpix and D40 through D5000 (the D700 is an exception because of the 5DII--if Nikon weren't aggressive here, they'd lose some volume right in the heart of where they want to sell). But these models are exactly where the dealer ends up not making any real money. So let's think about that for a moment. If the usual retail price is US$799 for something and Nikon throws a US$100 instant rebate at it, the dealer nets exactly US$20 on the initial sale, plus then a month later gets a credit for US$85 (the dealer's portion of the Instant Rebate, the way Nikon's program works). Put another way, where normally the dealer would get US$120 profit for the sale, instead he gets one-sixth of that plus he extends at least a one-month without interest loan to Nikon of US$85. Pretty sweet deal for Nikon. Not so much for the dealer (yes, I know there's some coop advertising thrown in, but as my dealer friend pointed out, you can easily get upside down when you add up your advertising costs and foregone discounts compared to your increased sales and coop ad dollars).
- Customers in the recession want lower prices.
- Camera makers in the recession want more unit sales.
- Dealers in the recession don't want to lose the lease.
See any problem with those conflicting demands? The party with the most flexibility is actually the camera maker. Many DSLR products have 25% and higher gross profit margins for the corporate parent. The party with the least flexibility is the dealer: they have little or no say in the programs that are thrown at them: it's take it or leave it, and both choices mean fewer dollars, so it's a choice of the least evil. Customers have the flexibility in delaying decisions.
Here's the thing: you know all those stats that say auto sales are down 30% or more? As I've been predicting for some time now, DSLR sales are now down year-to-year. For example, in the January to May period of this year versus last, unit volume is 84% of what it was, and dollar value is only 63% of what it was for DSLRs. On a value basis, the camera companies are hurting as much as the auto industry. Olympus, Pentax, Panasonic, Samsung, et.al., can't really live long in the DSLR market without growth, so they have to steal share from somebody. Canon, Nikon, and Sony don't want that to be them. Even modest successes like the Panasonic G1 and Olympus E-P1 send shivers down the back of the big players, and it'll show up in price competition in the lower end lineups. You, the consumer won't notice it at first, because the first place the prices get squeezed is in the subsidiary costs and in dealer margins (one of the big three just reduced all P&S margins to 10%, by the way).
Long story short: something's gotta give. Best bet right now is that many of your local camera dealer will amongst the casualties. After all, most of the cameras on both my customer list and my dealer friend's retailer list are available at Best Buy already. The commoditization of cameras has happened. 100%. Just as mass HiFi and then TV dealers were driven out of business by commoditization and price reductions, so to will be the camera dealers. Their only sane alternatives are to go upscale or close the doors. It's hard to see how they'll go upscale in this economy.
But the next wave of casualties will be even more eye-opening. First, you're going to stop upgrading so often (if you haven't already). If cameras are really commodities-- even DSLR cameras--you don't need a new one every 18 months. This just drives nails in the coffin lid for more folk up the chain, I think.
Here's the scary thing: the single company that is still primarily a camera company and has little else to fall back on is...Nikon. We're nearing the point where three-quarters of Nikon's sales are camera-dependent. No, I'm not predicting a Nikon bankruptcy or worse. But the pressure is really on Nikon now. As long as the semiconductor equipment business continues to languish, Nikon is dependent upon the Imaging Division to keep the company healthy. I think that means that we're going to see a more unpredictable and more aggressive Nikon.
But my message to the Nikon board is different: Nikon needs to find ways to rise above the commodity camera. It's okay to keep producing more Coolpix looks-like-the-competition siblings, but in high-end compacts and in DSLRs, that's not going to win the day against commoditization. The words Photographer Inspired (or maybe Photography Inspired) come to mind. Stop the me-too feature creep and hanging more exotic post production junk on the menu system. Get real photographers involved in the decisionmaking. Build that modular, never-obsolete camera. Commodity cameras? That's a tough place to be when you're fighting the world's largest and most efficient consumer electronics firms. Dare to be different. Think different. Design different. And, oh, by the way, don't kill the folk that helped make you successful (dealers).