The Consumer Electronics Bust And Best Buy’s Coming Fizzle?

Yikes. Talk about a Fizzle. What’s up with the Team USA swimming shenanigans in Rio? What had the world aghast last week – the idea that three American swimmers were robbed at gunpoint by a police imposter – still has the world aghast a few days later, but for different reasons. The story now appears to have some serious flaws in it and is now being reported as entirely fabricated.

It’s a most unfortunate fizzle to an otherwise sizzling performance of that team in Rio.

And, speaking of fizzles …

Retail Sales

With one exception so far – Walmart – retailer earnings are pretty bleak. You name the retailer – sales are off, foot traffic is down, stock prices down, too. The only thing that’s up are store closures – not necessarily the upward trend they were hoping for. Big doses of retail reinvention are needed to turn fizzles into, well less of a fizzle.

Apple’s Ripple Effect

One of the things that Target said tanked their earnings was the deep decline in Apple sales. The visions of Apple products appeared not to be dancing around in consumers’ heads when they visited Target last quarter – and as a result sales were off 20 percent. It was enough to cause Target’s CEO to adjust guidance downward for the rest of the year. And that sorta suggests that holiday sales won’t be enough to make up the difference – or even Apple iPhone 7 sales. Exhibit A for what happens when Fizzles become contagious.

Sizzle

Commerce-Enabled Search

Google made news this week when it announced that its partnership with ChowNow means that users can quite literally chow now by ordering directly from a restaurant’s business page from Google search. The software integration eliminates more than a few steps for the consumer who can search for and find the “best pizza in LA” and then, when found, order one with the works from a page that ChowNow hosts for the restaurant. It could be that the best way to searchers’ hearts is through their stomachs.

Carrier Billing

In a little-covered piece of unofficial news this week, it has been reported that Apple’s carrier billing initiative will soon roll out in Japan. This means that iPhone users will be able to buy digital goods in the App Store with their mobile account instead of a card or bank account. Japan is Apple’s fifth carrier billing market but would be its largest – and arguably one of its most important. Carrier billing is used for seventy percent of digital goods purchased in Japan.

This is a pretty interesting move on the part of Apple to expand its payment in the App Store beyond the registered iTunes account in geographies where people don’t have cards. Google Play has been quite aggressive in pursuing this option and has now made it available in 45 countries.

Sizzle for lots of players – carriers, app developers, and Apple.

Fizzle

Coming Woes For Best Buy

As earnings season is winding down and all the numbers have been counted, the results for physical retail have been less than entirely inspiring.

Lots of falling foot traffic, lots of diminished same store sales and earnings below what they were a year ago.

Some, like Target and Macy’s, managed to “beat the street” by doing less terribly than Wall Street analysts were expecting given last quarter’s results; Walmart even managed to pull its second quarter in a row of analyst-surprising growth across the relevant categories, despite the prevailing headwinds that seems to have flattened most everyone else.

But Walmart has been the exception for physical retail in Q2 instead of the rule – and with Best Buy coming up to the plate next week, some investors are wondering if there’s reason to worry. And not just because Best Buy is a big box store in a world that has recently become rather fickle toward big box stores that don’t start with Wal and end with Mart.

Because Best Buy isn’t just a physical retailer – it’s a physical retailer in the consumer electronics game. And a close look at recent reports coming out of Best Buy’s competitors strongly indicate that it might not be the best time in the world to be selling consumer electronics. Demand for hot – and expensive – items like smartphones is down, other high demand items just aren’t as expensive as they used to be and the shelf space is getting more competitive – with increasing downward pricing pressure.

All trends that could point to deep fizzle territory for Best Buy when they report in a week.

Target’s Apple Problem

There were a variety of reasons given for Target’s fall-off in foot traffic and sales – sluggish grocery performance was a favorite, but one of the more interesting ones called out by Target’s CEO Brian Cornell was Apple.

Specifically falling demand for Apple products.

Electronics as a whole was hurting, according to Cornell – with customer visits down by double-digit percentages. And in the unusual role of anchor to numbers, around a third of the decrease in electronics sales stemmed from reduced demand for Apple products. On the whole, demand for Apple goods is down 20 percent – and that is having a strong gravitational pull.

A pull Cornell hopes will be temporary and alleviated once the new phone comes in later in 2016.

Cornell noted Chief Merchandising Officer Mark Tritton is spending time with Apple to make sure “we’re putting the right plans together for the back half of the year, that we’re ready to capitalize on their new innovation that they will be bringing to the market.”

We’re sure they are – and Target better hope the iPhone 7 is a hit.

General Electronics Weakness

Target was the only big retailer to call out Apple in specific, but they weren’t the only ones complaining of big weakness in electronics sales – Walmart, it seemed, was tacitly joining them.

Walmart does not break out its electronics sales figures specifically – it contains them under the general heading of “entertainment” (the category for electronics, cameras, cell phones and movies) and noted that sales had been softer than expected during Q2.

“(We saw) softer than expected results in the TV category due to weakness of new item launches and the planned exit of movies/music categories as well as continued industry headwinds in wireless [products] pressured sales,” the company noted in a press release.

Those weaker than expected sales – combined with the fact that 4k television technology has declined in price by about 30 percent over the last year – has left Walmart with a larger than normal supply of televisions going into to Q3. Target also has similarly visible surplus: currently Target offers 44 televisions (by SKU) either in store or online, Walmart has 59. That still trails the 160 4k TV SKUs Best Buy offers – but is more than double than what they had a year ago. This means Best Buy’s expanded selection advantage is much less acute going into Q3.

So, fizzle ahead? Of course, it is hard to know ahead of time – but it isn’t looking good unless somehow Best Buy was capturing all the consumer electronics spend that Target and Walmart were losing last quarter – a situation analysts like Jefferies’ Dan Binder finds unlikely.

More likely – Best Buy can start predicting a Blue Christmas right now.

“Retail fiscal second-quarter government data shows a deterioration in industry trends, which remain below recent years. The commoditization of this technology could put second-half same-store sales at risk for Best Buy — Best Buy has very strong market share in 4K TVs and thus far has not faced stiff holiday competition from large general merchandise retailers, due to limited assortment, (but) this holiday will be different.”

Best Buy’s executive team has been trying to ramp down expectations for TVs for at least two quarters – noting that their status as mass-market goods is eminent.

“At some point, the growth in TVs will slow down and at some point, we would expect [we] could not be able to hold the kind of great (market) share we’ve had,” Best Buy’s Joly told analysts on a May 24 call. “We are not surrendering in advance, but as investors, you guys are been around, you know that this is the kind of thing that happens — so when it happens, don’t be surprised.”

But high definition and 4K TVs are a lot of Best Buy’s bottom line, which leaves the question – if those are fizzling, what’s going to sizzle enough to get Best Buy sizzling with it?

Hmmm, looks like they need the iPhone 7 to be a pretty big hit too.

Uh-Oh.