A Complex Engine Seizes Up By MATT RICHTEL and STEPHANIE ROSENBLOOM Published: October 14, 2008 http://www.nytimes.com/2008/10/15/business/15retail.html With his retirement account devastated by the plunging stock market, Henry Vicenteno is feeling poor â poor enough to play the Grinch this holiday season. Mr. Vicenteno, 31, an aircraft mechanic in Cleveland, said his 9-year-old son had asked for a copy of Skate, a skateboarding video game by Electronic Arts. âI told him Iâd buy it for him, but really Iâm just going to Blockbuster to rent it,â Mr. Vicenteno said. âBefore, I would have bought it, no problem. But itâs like $50, and we canât be spending that kind of money.â With consumers increasingly worried about a severe economic recession, Mr. Vicenteno is hardly the only person keeping his wallet shut. A growing body of statistical and anecdotal evidence suggests that demand for televisions, computers, cameras and other electronics is falling sharply â portending extra discounts for customers in coming months but a very unhappy holiday season for retailers, electronics makers and component suppliers. MasterCard reported last week that spending on consumer electronics and home appliances dropped 13.8 percent in September compared with a year ago. That number is by far the largest recorded since MasterCard began tracking the category in 2003, and twice the largest previous monthly drop in such spending. âSeptember was a dramatic pullback in terms of spending on consumer electronics,â said Kamalesh Roa, director of economic research for MasterCard SpendingPulse. In particular, âpeople are pulling back from buying big-ticket items.â Wal-Mart Stores, the nationâs largest retailer, was one of the few companies to report positive September sales figures last week, but the companyâs sales of discretionary items were soft. At the companyâs Samâs Club division, electronics and videogames were among the weakest categories. BJâs Wholesale Club, which had strong September sales over all, said sales of electronics, TVs and prerecorded videos declined from the previous year, although computer sales were up. The sudden and steep drop in the economy and consumer confidence has caught retail chains by surprise and left them scrambling to adapt their sales strategies. The holidays are a critical time for sales of electronics and in-home entertainment products. The video game industry traditionally does 50 percent of its business in the holiday quarter. If the early sales trends continue or get worse, they are likely to push some troubled retailers into bankruptcy. Industry analysts view Circuit City Stores, whose stock closed Tuesday at 40 cents a share, as the electronics retailer that is most vulnerable. Circuit City fired its chief executive last month and said that sales at stores open at least a year, a measure of retail health, fell 13.3 percent for three months ending in August. The company said sales dropped in virtually every category of electronics, from personal computers to GPS navigation units. The only exception was flat-panel TVs. Under the terms it has reached with creditors, Circuit City can borrow up to $1.3 billion against the value of existing inventory to buy more inventory, according to Anthony Chukumba, an industry analyst with FTN Midwest Securities. But Mr. Chukumba said that manufacturers have grown cautious about how much merchandise to ship to Circuit City, fearing the company is financially unstable. As inventory goes down, credit available to Circuit City to buy additional inventory falls, he said. âIt becomes a death spiral,â Mr. Chukumba said. âI call this Christmas âCircuit Cityâs last stand.â â Circuit City and its chief rival, Best Buy, declined to comment. But they have to be worried about customers like Wayne Giacomo, 66, a retired telecommunications supervisor who was shopping Friday at a Best Buy in Arlington Heights, Ill., near Chicago. Mr. Giacomo recently bought a 52-inch flat-screen TV, and he had been hoping to add a $2,000 surround-sound unit to complete his home theater. But after watching his stocks nosedive last week, he is curbing unnecessary spending. âThe surround sound is going to have to wait, at least until next spring,â he said. His consolation purchase instead: a $39 DVD boxed set of the 1970s television show âMission Impossible.â The slowdown at retailers is already beginning to be felt among their suppliers. Micron Technology, a supplier of flash memory for electronics like music players and digital cameras, said Thursday that it was stopping flash production at one factory and laying off nearly 3,000 workers because of weakening demand. Analysts said that companies in Taiwan and Korea that manufacture electronics and the parts used to build them are being told to prepare for slowing demand. Doug Bell, an analyst with the research firm IDC, said his company is cutting its projections of a 10.2 percent increase in personal computer sales in the fourth quarter after conversations with both manufacturers and consumers. âWeâre seeing the lowest consumer confidence levels in a long time, and major vendors are cutting shipments,â he said. Sales of high-end cellphones could also take a hit. This Christmas was supposed to be the season of the smartphone, when all of the major mobile phone makers came out with new devices to challenge Appleâs iPhone. In the past few weeks, new touch-screen competitors have been introduced, including the G1 powered by Googleâs Android platform, Nokiaâs 5800 Xpress Music and the BlackBerry Storm from Research in Motion. But with consumers worried more about the financial crisis and its impact on their pocketbooks, the new must-have phone could become a not-have. Smartphones are among the most expensive mobile devices, some costing hundreds of dollars. âItâs the impulse purchase and the self-purchase thatâs going to suffer this holiday,â said Marshal Cohen, chief industry analyst at NPD Group. And retailers, worried about grabbing the few dollars consumers are willing to part with, will be offering the kind of discounts usually only seen in the days leading up to Christmas. âI think electronics are going to go through an early promotional period,â Mr. Cohen said. âWeâll be lucky to get through October without aggressive promotions.â Still, for all the gloom, the outlook for electronics is better than for retail sales as a whole, according to analysts. Jason Oxman, vice president for industry affairs for the Consumer Electronics Association, said the trade group was projecting that sales of televisions and audio equipment would be 4.7 percent higher this holiday than a year ago, while video game hardware sales will be up 3.5 percent. Meanwhile, many analysts are predicting that overall retail sales will be flat or decline over the holidays, dragged down by categories like apparel and luxury goods. âWith consumers already saying they plan to spend less, stores with lean inventories, those inventories on sale as soon as they hit the floor, and tightening credit both for businesses and consumers, where can growth come from?â Mr. Cohen wrote in a report on Tuesday. Mr. Chukumba said some consumers would respond to the economic downturn by buying electronics instead of going out to dinner or a sporting event. âThereâs a nesting phenomenon going on,â he said. But the concern for retailers is that customers will nest with the products they already have. Damion Isaac, 31, a warehouse manager from South Euclid, Ohio, near Cleveland, said he has a six-year-old 31-inch TV that he is itching to replace. But he cannot afford to buy a new one, so he will not even go window-shopping at Best Buy. âI donât even torture myself like that,â he said.