No matter how bad the economy is, consumers still crave electronics. This holiday season the gifts may be few but they won’t be simple. People are willing to sacrifice and give up their daily coffee from Starbucks to purchase a new G1 phone from Google (News - Alert) and T-Mobile.

 

When consumers do choose to spend their hard-earned cash on gifts, they have a soft spot for electronics that they will give up items like sporting goods and trips to pay for gadgets, said Tim Herbert, senior director of market research for the CEA, which represents the $160 billion industry.

 

"These are no longer just luxury items or products that are fun to own. They really are used in a variety of ways to enhance communications, increase productivity, or for education," Herbert said. "Also, from a gift-giving standpoint, there is still a tremendous 'wow' factor with electronics."

 

According to the CEA consumers are expected to cut overall spending by 14 percent but electronic spending is expected to increase. This should keep the hype up for Apple’s iPhone and iPod, the “Google phone,” or Dell’s (News - Alert) two-pound mini computer. Advanced video game consoles, 40-inch flat-panel televisions, and smartphones are also expected to fly off retail shelves.

 

However, major electronic retail stores like Best Buy or Circuit City will have added pressure in bringing holiday-discounted electronics while still making a profit. This will cause other retail chains, like Wal-Mart, to take advantage of the situation and price electronics accordingly; consumers already expect low prices from the chain.

 

"The product cycle is commoditizing, so as price points become cheaper you get into the sweet spot of the Wal-Mart customer," said JP Morgan (News - Alert) analyst Christopher Horvers.

 

"Circuit City right now is in a capital-constrained situation and really fighting for their life," Horvers said. "You're likely to see them be more aggressive this year to try to drive traffic."

 

Although, there aren’t any “must-have” items this season, Mukul Krishna, global director of digital media for Frost & Sullivan (News - Alert), is betting that advanced high-definition TVs, video game software and smartphones will be consumers' top picks in electronics.

 

He agreed that consumers who have tightened their wallets "are going to be looking for some aggressive discounting and couponing by the major electronics leaders," potentially pressuring profit margins of major manufacturers.

 

"You will see more bargain hunting and lower pricing, and more advertising for Black Friday (News - Alert). However ... pricing probably won't be what drives people into the stores," said analyst Stephen Baker of research firm NPD.

 

"If people still feel the way that they do now, (stores are) going to have to keep reminding them that these things have never been more affordable," he added.

 

A major push for better televisions may be the only sure sale because of the switch to digital in the beginning of 2009. However this doesn’t mean that consumers are going to buy high-priced LCDs or Plasmas. Lower-priced TV brands such as the Vizio sold at Wal-Mart Stores may have an advantage as consumers look for values. "Consumers might be going for some of the cheaper alternatives out there," Frost & Sullivan's Krishna said.

 

Either way, people are going to go out shopping, even if they can’t afford much. CEA's Herbert said emotions may drive shoppers to the store as the holidays draw closer.

 

"Historically, for a lot of Americans, shopping is therapy. People want to give gifts to their loved ones," he said. "If these products can enhance family time or serve as a substitute for that trip to Disney World for a vacation ... consumers view that as a way to keep their spirits up."

 

"I don't think anyone wants to outright cancel Christmas," Herbert added.