Portable navigation devices are poised to take off this holiday shopping season as market leaders Garmin and TomTom race each other to make deeper inroads into the mass market by pushing out cheaper models.
The trend for entry-level gadgets will mean lower profit margins for Garmin Ltd and TomTom, but the companies are willing to make that sacrifice to lure consumers and go one up in their intense battle for market share, analysts said.
Portable navigation devices are becoming a 'must have' device for a growing percentage of the population, JMP Securities analyst Ingrid Ebeling said.
Prices in the portable navigation devices market, worth about 8.5 billion euros ($11.79 billion) this year, have been sliding as Garmin and TomTom make more of their products for ordinary consumers.
The sleek gadgets show users where they are through preloaded maps on touch screens and also offer related information and features like a MP3 player and Bluetooth capability depending on the model.
Garmin's global average selling price has fallen to 320 euros ($443.9) in the year to date, from 458 euros ($635.4) in 2005, according to Canalys analyst Caroline Chow. TomTom's average selling price fell to 270 euros ($374.6) from 452 euros ($627.1) over the same period, Chow said.
Nasdaq-listed Garmin overtook its Dutch rival by a whisker in the second quarter to become the world's largest maker of navigation devices. In the quarter, Garmin had a 24.9 percent share of the burgeoning market and TomTom 24.3 percent, according to a report by market research firm Canalys.
But TomTom's planned acquisition of its main map supplier, Tele Atlas, could turn up the heat on Garmin, analysts said. Once closed, the deal could give the only other major map supplier, Navteq Corp, significant pricing power over Garmin.
EMBRACE THE MASSES
Both TomTom and Garmin are launching an array of products that will sit on shelves of retailers ranging from Best Buy Co Inc to Halfords Group Plc for the end-year holiday shopping spree.
Some analysts say portable navigation devices could tip into the mainstream market this holiday season.
CIBC World Markets analyst Yair Reiner said the longer-term challenge for device makers is to protect their profitability.
The question is, when do we get to some steady state for this market? Two or three years from now, will gross margins level out at 10-15 percent range or will they be close to 30 percent? he said.
For the first half of 2007, Garmin's gross margin was 49.4 percent and TomTom's was 42.5 percent.
Judging from our sales and revenue, it's obvious that navigation has transitioned from a niche product to one with mass market appeal, Garmin spokesman Ted Gartner said.
The company will sell a pink nuvi-branded device aimed at women in Europe during the fourth quarter and Gartner said its nuvi 200 series -- another entry-level product -- is being marketed as a contemporary and fun-to-use device for young consumers.
Garmin's C300 series, used in cars for navigation, has been its best-selling line this year, said Dougherty & Co analyst Jeff Evanson.
You're starting to get below the price of an iPod and this provides a lot of value, Evanson said. He expects an upgrade of Garmin's C300 series later this month.
Garmin, which snagged an ad spot during the popular Super Bowl event earlier this year, sells devices priced from $300 to $1000.
TomTom launched the third edition of its entry-level TomTom One device in late August with a lower price point than its previous version.
TomTom investor relations officer Richard Piekaar said TomTom One is its best-selling device globally. He said the company develops every device on a 40 percent gross margin basis.
A strong U.S. market for portable navigation devices has paved the route for Garmin shares to surge more than 92 percent since the start of the year. TomTom shares have leaped nearly 60 percent in the same period.
Investor sentiment is so positive because Garmin is one of the best growth stories out there, JMP's Ebeling said.
JMP has forecast 30 percent year-over-year growth for Garmin in 2008, an incredible level for a company with about $3 billion in sales, she said.
Canalys' Chow said she expects the U.S. portable navigation market to reach about 20 million units by 2010, from only about 2.9 million units in 2006.