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The growth surprise in Apple retail

In Apple: For What It’s Worth Jeff Matthews asks a question “about the most disturbing pattern coming out of Apple’s earning release: the measly 1% year/year revenue increase at Apple’s retail stores”.

He notes that prior to the drop, Apple stores were growing at 36%. Such a huge drop quarter on quarter seems suspicious and he thinks something is happening.

Something is happening.

To find out what, let’s start with the revenue from Retail that Apple reports[1]

 

 

The concern is with that low growth between calendar Q3 last year and this year. That is being contrasted with the growth in the previous quarter (Q2) of 36%.

When seen as a chart, the explanation for a big change in growth is perhaps easier. The third quarter of last year was a boom for retail and the quarters that followed were more-or-less similar in sales level.

With this perspective, it’s clear that there was a surge in sales during the last year which did not repeat this year.

But what’s the cause for this pattern? If we know the cause can we predict if retail sales growth will increase or decrease?

Consider the following compound chart:

The chart shows three different quantities.

  1. The original retail sales values in “hollow” bars
  2. The growth in those values year-on-year (in a line chart)
  3. A “proxy” candidate for retail growth explanation: the sum of US phone activations and in-store CPU units sold as a stacked bar chart.

The choice of proxy includes the blue bars which Apple reports as in-store “CPU units” and the US phone activations[2] coming from AT&T and Verizon[3].

We can see now that there is a strong relationship between iPhone sales growth and store sales growth. The Mac business is growing but not in the bursty way that iPhones are growing. The growth of US iPhones matches the growth in (US mostly) Apple retail. This should not be a surprise.

The bursty nature of iPhone means that store growth varies just as dramatically. I highlighted that during the period of Q4 2008 to Q1 2010, Apple store revenue grew at an average of 7.3% but following the “big bang” of the iPhone 4 launch they grew at 79% over the subsequent five quarters (because the comps were easy).

In the latest quarter the growth dropped as there was no launch of a new iPhone to top the big bang of a year earlier. Even so, store revenues actually increased by a slight amount.

Knowing that the comp with the year before was so tough the surprise isn’t that the growth slowed, it’s that there was any growth at all.

If iPhone as a cause for growth in retail is to be believed, then how hard can it be to forecast retail growth in the future?

Notes:

  1. Apple does not submit this information to the SEC but reports it (exclusively I believe) during the earnings conference call. Transcripts are available on seekingalpha.com but fortunately they are recorded as well by Gary Allen at ifoapplestore.com.
  2. I used US data for the iPhone as most of Apple stores are in the US. The global pattern is similar.
  3. I had to estimate Verizon units used during the last quarter as they have not been reported yet. I used a similar ratio between AT&T and Verizon as for the last quarter.
  • vhs

    I think iPads were selling pretty well, too, in that time frame. And since they were only available at the stores and online (as opposed to the iPhone which is also sold through carriers) the iPad may have had a significant impact.

    • http://nmuppala.wordpress.com Nalini Kumar Muppala

      the iPads are available at other retailers as well.

  • Anonymous

    The chart could do with a scale for the blue/green bars – I’m assuming that they are being reported as unit sales not as $ value?

    • http://www.asymco.com Horace Dediu

      I did not want to crowd it with three separate scales but there is a value for the upper bound grid line (7000) shown in the upper left.

      • Anonymous

        Ahh I didn’t notice that!. It would be interesting to see a graph which subtracted off the CPU sales, given that we have a pretty solid estimate for the mac ASP.

        We should be able to get an estimate for what percentage of iOS sales are through their own retail – and particularly whether it’s increasing or decreasing.

      • http://nmuppala.wordpress.com Nalini Kumar Muppala

        An option in Numbers to display value labels on the right side would help.

  • Anonymous

    If I where Apple, I’d hurry to put together an iOS based desktop. If the iPad3 goes up to 2560×1536 with the GPU prowess to move all those pixels, Apple will actually have a hard time finding a desktop monitor to carry that many pixels, and will need to build in support for an intermediary resolution. Add a BT keyboard and mouse, and support for Hard Disk and LAN, and you’ve got a Mac pico that they could sell for $300 and still do 50+% margin with.
    It would do what most people need, and shield customers from ever having to go outside the walled playpen.

    • Eric D.

      Jobs addressed that, saying that raising your finger to the screen is ergonomically tiresome. Your shoulder is doing all the heavy lifting. On the iPad and iPhone, it’s just your forearm or your wrist.

      Otherwise, I do think they’re trying to merge the feel of the UIs as much as they can.

      What I would love to see, though, is a 17″ iPad. One day…

      • Anonymous

        I’m not talking about making the Mac pico touch-based ? And not of converging MacOS and iOS UIs either, but of expanding the iOS ecosystem to the desktop.

      • Anonymous

        iOS is touch based, so iOS on the desktop would require you to control it via touching the desktop display – introducing the ergonomic issues mentioned. There’s no way around it.

        You can’t control an iOS device with a mouse, because iOS doesn’t have a pointer and because a mouse can’t do multi-touch gestures. This is fundamental.

      • Anonymous

        2 things:
        1- note the “Add a BT keyboard and mouse”, ok , sorry, make that support for…
        2- http://www.apple.com/magictrackpad/

        So multitouch is not an issue. Pointer may be, though I’m sure the UI gurus at Apple can whip up a way to make it work nicely.

      • Anonymous

        No – there is no way to make a touch based interface work well with a mouse, any more than there is a way to make a mouse based UI work well with touch.

        A track pad is still not a substitute for a touchscreen, a track pad is a substitute for a mouse. Like a mouse it still depends on a pointer. You can gesture on a track-pad, but the gestures need to be global, or to relate to the position of the pointer. Gestures on a touch-screen relate to the position of the gesture.

      • Anonymous

        i don’t see that as blocking. make all gestures relative to pointer, and 2-finger movement move the pointer. That way all other gestures work the same, and 2-finger movement (which I’ve never seen used on a touchscreen, though I’m no expert in Apple thingies) takes care of the pointer.

      • Anonymous

        Then the gestures in iOS would be the exact opposite of the gestures in OS-X, where two fingers mean window pan. And how is that going to work when you try to play infinity blade on your new pico mac? Will the attack be single finger? Two finger? What if Epic use two fingers for something else?

        Apple clearly thought long and hard about this when they created iOS in the first place. They could have simply created a touchified version of OS-X with gestural analogues for every mouse movement, and they specifically chose not to.

        Why do you think they’re going to reverse that now, and create a hideous franken-interface just to support a tiny desktop market?

        Microsoft may go such a route with Windows-8, but Apple will not.

      • Anonymous

        because the desktop market is not tiny, and Apple has no offering on the cheap end of it, which is the biggest. They could go there that way *and* maintain high margins.

      • Anonymous

        Apple isn’t in the business of creating such kludges.

        If they wanted to create a cheap tiny desktop they could simply create an ARM version of OS-X – but nobody wants desktops with iPad sized screens, so they won’t.

      • http://www.asymco.com Horace Dediu

        Desktops make up about 25% of OS X devices and a tiny fraction of Apple’s total devices sold. This is a tiny and shrinking business.

      • Anonymous

        Not just for Apple either, desktops are losing share in the consumer space across the entire PC market.

        Even some enterprises are now switching to laptops.

      • Anonymous

        Tiltable screen. Problem solved.

      • GeorgeS

        No. It’s not the angle of the screen but the fact that it’s above the level of your elbows and well out in front of you. Try holding your arm up to the screen for 15 minutes.

        FWIW, my Mac HAS a “tiltable scren,” as it’s an iMac G4. The fact that it tilts is irrelevant to the ergonomics. Tilting the screen too much also makes it harder to read, as it’s no longer perpendicular to the line of sight.

      • Anonymous

        when I say tiltable screen – I mean one that goes from normal vertical position to one that pulls down onto the desktop and basically is almost flat – maybe a 5 or 10 degree slope, so you can use it while resting your elbows on the desk (like using a keyboard almost).

    • Anonymous

      iPad already does what most people need.

    • Hossein

      The next iPad (or iPad generations) CANNOT have a different pixel aspect ratio. So whoever said the next iPad resolution will be 2560×1536 (ratio = 1.66) is wrong.

  • Luis Alejandro Masanti

    I should also consider the “opening” of China’s stores last year (if I’m not wrong with the dates).
    Then relate the graphs to “sales in China” that, according to Cook, were explosive.
    In this case, maybe it is not the “number of stores” if not “where it is placed.”

    • kevin

      Agree. The China stores, along with Mac growth, counters the US iPhone drop, and accounts for the 1% yoy growth the retail stores had last quarter.

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  • kevin

    This issue can be looked at 2 ways: outsized growth in Retail in Apple’s 4Q10 or undersized growth in 4Q11. I think both happened.

    In the former case, iPhone 4 launched in June/July 2010 in US, UK, Japan, France, Germany, then Australia, Canada, Italy (and a bunch of smaller European countries & Hong Kong). Almost all of Apple’s Retail Stores are located in those countries; with China being the major exception (China launched iPhone 4 on 9/25/2010 which I think was the first day of Apple’s 1Q11.)

    • kevin

      The undersized growth in 4Q11 is due to the iPhone transition, which disproportionately affects those countries that would be the launch countries in Oct 2011; those countries also being where almost all of the Apple Stores are located.

  • Canucker

    Any data on the Microsoft store numbers? ;)

  • http://nmuppala.wordpress.com Nalini Kumar Muppala

    “If iPhone as a cause for growth in retail is to be believed, then how hard can it be to forecast retail growth in the future?”

    might these factors effect the correlation?
    - iPhone sales via carriers
    - iPhone sales in areas where retail presence is absent or weak
    - sales via website

    the correlation will improve as the retail coverage expands and a higher percentage of sales comes from own stores.

  • Anonymous

    I’ve always felt and continue to feel that the value of Apple’s retail stores lies apart from in-store sales.

    Retail stores serve multiple purposes… they showcase Apple, its products, and provide face-to-face service. These aspects drive sales… even if some of those resulting sales occur online, at Target, or ATT.

  • http://newcanuckworkshop.tumblr.com Junesoo Andrew Yang

    Am I misunderstanding footnote [1]? Aren’t retail sales broken out as a line item on the last page of the quarterly 8-K filing?
    http://files.shareholder.com/downloads/AAPL/1454533397x0xS1193125-11-273826/320193/filing.pdf

    • http://www.asymco.com Horace Dediu

      Retail revenues are in the 8k, but in the conference call there is additional detail such as: Retail Margin, Store visitors, Average store revenues, Stores opened in quarter, Average stores open, in-store CPU units sold, lease commitments, capital asset purchases retail, total retail personnel, high profile store marketing.

      • Anonymous

        He’s right though that the CPUs sold are in the 8-K.

      • http://www.asymco.com Horace Dediu

        True.

  • Alan

    Next quarter’s results ought to clear all this up ;)

  • Katjes

    All these “disappointments” and “weak numbers” have their cause in the iPhone 4S introduction falling into calendar Q4 instead of the “usual” Q3. It would be an interesting exercise to add those 4 millions iPhone 4Ss sold on the first weekend to the Q3 numbers (and subtract them from Apple’s expectations for Q4). This would probably bring the numbers back to what was expected.

    Another interesting exercise might be to look at moving quarter averages to smooth out those jumps.

    • Relayman5C

      I bought my 4S through Verizon, not through an Apple store. I buy a lot of Apple products rarely at an Apple store.

  • r.d

    CPU Unit change was 43% sequentially and 24% yearly.
    That means that lower margin items were selling reducing the revenues.

    • r.d

      Could be because people are abusing the AppleCare.
      This year there was no free ipod touch instead you had 100 iTunes card
      for back to school.
      so that 100 card went with ipad instead of a macbook + ipod touch last year.

    • Anonymous

      Huh? No, it just means that September quarter generally significantly outperforms the June quarter.

      • r.d

        Did you actually read the article before replying.
        The issue at hand is 1% growth on revenue for Retail.
        How do you explain the outperformance. If the ASP is all the same
        from last year to this year yet growth rate is 1%.

      • Anonymous

        Because CPUs are only one relatively small component of the sales. Unit sales of CPUs are up, ASP of CPUs is slightly down due to the launch of the Air, but margin is uncertain, probably unchanged. Apple don’t give us any way of judging margin by product line directly.

        Revenues are flat because sales of iPhones in the US are down YoY. That’s pretty much the point of the article!

  • Anonymous

    much ado about nothing…

  • Moctavio

    To me the more important question is why the number of people visiting the stores is not growing the way it used to. My personal observation is exactly the opposite, with the store having more geniuses and the like and being crowded at odd hours. With 40 more stores, the number of vistors to the stores barely grew as per Mathews article at the end.

    • http://www.asymco.com Horace Dediu

      The correct measure of store “popularity” is store visitors in the quarter divided by average number of stores open during the quarter yielding average visitors per store.

      That figure is growing nicely (with seasonal peaks). It’s 230 thousand per quarter. See growth in attached chart.

    • Relayman5C

      I don’t know if Horace’s numbers reflect this but usually retail sales are reported for “stores open a year or more.” The idea is that you don’t want your sales trends inflated by new stores which obviously would have zero sales during the previous year. (During the second year, any growth for a new store would be compared to the first year.) Any new stores opened by Apple may not show in the retail sales for the first year that they are open.

      On the other hand, this chart may show total retail sales regardless of the age of the store. Then you need to factor in store openings to get a true picture. My guess is that the U.S. store openings for Q3-2010 to Q3-2011 are minimal. If the 36% jump is due to opening new stores, then there’s part of the explanation of the drop there.

      • Anonymous

        Apple are just reporting total retail sales, and so that’s what Horace has in the chart.

  • Jeano

    The political gamesmanship at the end of July put a real kabosh on my spending. Bet it did with others too.

  • Davel

    This is nice.

    It helps to understand what happened.

    If your analysis is correct then store sales should be up this qtr

  • Anonymous

    Speaking of other retailers for Apple products, can Horace or anyone else explain why Amazon sells Macs and iPods but not iPads? At a minimum WiFi only iPads?

    • Anonymous

      Amazon presumably, since they have any number of amazon marketplace vendors selling them.

    • http://twitter.com/nursegirlt Thea

      The iPad is the only product that Apple sells that directly competes with an Amazon product. I wonder whether Amazon has decided to make it easier to buy a Fire and harder to buy an iPad.

      • Anonymous

        They do sell the Samsung 10.1 though, and it is also a competitor. I think it may be more prosaic, the margins may just be too small given the competition from Apple’s own online store.

  • Anonymous

    Horace, while we’re on the subject of retail, do you have any thoughts on the enormous increase in staffing that we’ve seen over the last year or so? Personnel per Store has been growing steadily from 65 in 2010Q2, to 94 in 2011Q3.

    All that I can think is that perhaps phone sales require more staff because each transaction takes longer due to the need to contact the carrier, determine subsidy etc?

    • http://www.asymco.com Horace Dediu

      I checked it relative to average number of visitors per store and they correlate very well. They are staffing in function of visitors.

  • Stringbender

    Thank you for your thoughtful blog and analysis. It is tremendously helpful to me.

  • capablanca

    One way to insulate from the comparison with the iPhone4 launch quarter is to go back two years to Q4’09. This years Q4 store revenue was approximately double that in ’09 and the compound growth rate was 41%. Not bad for a quarter with both drawdown and demand shift.

  • Cranium

    The item that suddenly jacked the Apple stores visit was iPad. This was a brand new product that everyone wanted to actually touch and try out. To try an iPad really did require a trip to the Apple store as nobody knew enough friends with iPad until recently. New iPhones are a definite factor, but the sensation caused by iPad and the fact that most people have now played with is leaving year over year numbers less impressive. I wonder if the introduction of SIRI might cause a jump in visits as this again introduces something that people really need to experience to see (and hear) what it is all about.

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