One man’s loss is another man’s gain, the saying goes, and that goes for competitive retail as well. Take a retailer’s target market as an example. If Target lacked nimbleness and Walmart suddenly branded itself as the Chanel of the urban Gen X population, Target could lose its customer base and be left with budget-conscious Baby Boomers squinting at coupons on their small iPhone screens.
Still, those competing retailers would each retain some segment of the market. Now, what if the top-selling product of those competitors suddenly dropped from its pedestal? An independent variable that is no reflection of a retailer’s performance can devastate a whole market sector because all of its members lose an important revenue source.
The Ripple Effect
Such is the situation unfolding around Apple. Apple products are not selling like they used to. Whether smartphones are expensive, carriers no longer offer subsidies or people are holding onto iPhones for longer sales — unless something KILLER comes out, why lay out another $600 for a minimal upgrade? — the effect is significant for the electronics retail sector.
It’s inevitable that a popular product will reach the top of the maturity curve. A drop in sales is expected, particularly if a new model is about to replace it. So, the drop in iPhone sales should be predictable and relatively innocuous.
Apple’s iPhone sales declined by almost 8 percent in Q2 2016, and Apple’s sales slipped in both the U.S. and Europe. In Asia-Pacific and China, sales dropped 26 percent, according to Gartner, and a comment by a Gartner analyst implied that Apple was wrong-footed partly by China’s economic downturn. “China is particularly worrisome for Apple because it has risen quite quickly to become Apple’s second-most important region … that makes us wonder what the issue is, whether it’s a temporary issue or whether it’s going to be something longer-term,” said Brian Blau.
Directly affected by these declining sales are retailers who depend on Apple to provide a percentage of overall revenues. Brian Cornell, Target’s CEO, said diminishing Apple product turnover had a “significant” impact on electronics earnings, with a 20 percent decline in Apple sales being responsible for one-third of the slowdown in Target’s electronics division. The company’s revenue was down by 7.2 percent in Q2, and guidance was adjusted downward for the rest of the year.
But it is unfair of Cornell to blame Target’s woes completely on Apple’s falling sales. Target has many other problems, including a drop in foot traffic and competition from eCommerce and the Amazons of the world, not to mention a half-hearted grocery segment.
Let’s take a look at Walmart and see what’s going on there.
The Knock-On For Walmart
It is difficult to discern the exact effect declining iPhone sales had on Walmart because the company lumps all electronics sales under “entertainment.” However, Walmart also had weak sales in Q2 for its electronics products, although overall earnings were out of the ballpark. Perhaps encouraged by its stellar performance, Walmart avoided direct criticism of Apple and cited a “weakness of new item launches and the planned exit of movies/music categories, as well as continued industry headwinds in wireless [products] pressured sales” as the reason for its disappointing revenues in the electronics space.
And How About Best Buy?
Best Buy seems to be singing a sad song going into Q3 and Q4. According to Best Buy’s executive team, this holiday season may not be that holly and jolly. Government retail data for Q2 shows a deteriorating trend for the industry, and Best Buy must compete for sales with Target and Walmart, who are both expanding their TV model range. So confident is the Best Buy team of a disappointing Q3 and Q4 that it has been lowering analysts’ expectations for the last two quarters.
“We are not surrendering in advance, but as investors — you guys have been around — you know that this is the kind of thing that happens. So, when it happens, don’t be surprised,” said a spokesperson back in May.
A Broader Outlook
Could the decline in iPhone sales have a broader ripple effect? Let’s think about a sector other than retail for a minute: app developers. If Apple’s iPhone sales are dropping, that implies that demand is dropping for apps, too, which might mean fewer jobs for app developers and, therefore, fewer apps. This reduces the attractiveness of everything mobile and the Internet of Things. And what about component suppliers? Decreased demand for iPhones means layoffs for workers and suppliers who make more than just iPhones.
So, let’s see. The fallout from Apple is influencing the retail sector, the technology R&D sector, HR and recruitment, transportation, marketing, finance, and it could be stretched as far as housing and health if enough people in the labor market are affected.
In fact, it might be better to start with the sectors not affected by Apple’s drop in sales — but you get the point. Beware the ripple effects of a seemingly innocuous, even predictable, occurrence. The repercussions of the iPhone’s decline could be greater than those of its ascent.