Editor's note: This is part of a series of stories about the recession's effect on the tech industry.
MODESTO, Calif.--As a driver for United Parcel Service and an Apple fan, Jeff Maciel is in an interesting position to observe how Central California's San Joaquin Valley is coping with a deepening recession just as Apple moves into the neighborhood.
Jeff Maciel is reducing his holiday spending this year, but is excited to have a nearby Apple retail store.
(Credit: Tom Krazit/CNET News)As he beat a path to the crowded parking lot outside the new Apple retail store at the Vintage Faire Mall in Modesto, Maciel grudgingly admitted that he and his family are spending less this holiday season as he watches the pile of boxes assigned to his UPS route dwindle.
"I'm making the same number of stops, but the shipments are way down," the soft-spoken shopper said as his son and daughter fidgeted, likely more interested in the large bag of See's Candies they were carrying rather than discussing economics with a stranger.
To purchase a new case for his iPhone 3G, Maciel drove half an hour across an area among the hardest hit by the credit crunch and resulting home foreclosures that have helped plunge the world into recession. Modesto, where Apple decided to open its 250th retail store in November, had the ninth-highest rate of foreclosure activity in the U.S. during October, according to statistics published by RealtyTrac. That number has probably been fueled by rising unemployment, which at 11.8 percent is nearing a 10-year high.
Just 8 miles away from the Vintage Faire Mall, one of Modesto's hardest-hit neighborhoods was very quiet on a sunny but brisk Saturday morning. Debris lined the streets near the Modesto airport, dotted with boarded-up houses bearing the telling "BANK OWNED" real estate signs out front.
But on the second-to-last shopping weekend before the holidays, shoppers were bustling at the Apple store, which was "dead" on Friday according to one Apple employee. A steady stream of people ventured into the store to check out the MacBooks and iPod Touches prominently on display on Apple's usual low wooden tables.
Apple's 250th retail store opened in foreclosure-plagued Modesto, California.
(Credit: Tom Krazit/CNET News)Amber Hill of Modesto came to the store because her two sons, Jacob and Josh, both want the new iPod Touches for Christmas. Hill thinks Apple's products are "overpriced" but the boys were clearly excited about the prospect of the iPods making their way from their wish lists to under the tree.
So how did Apple's milestone 250th retail store wind up in Modesto? Two years ago, when Modesto's agriculture-centered economy was in much better shape, the city wanted to find a way to keep its residents in town rather than having them drive to places like Sacramento or Pleasanton for high-end retail shops, said Brent Sinclair, community and economic development director for Modesto.
The city and Vintage Faire Mall management company Macerich decided the answer was a so-called "lifestyle center," a fancy outdoor mall supplement to the traditional indoor mall design with its two long floors and a food court. Lifestyle centers are designed to lure high-end retailers such as Coach, Bebe, Coldwater Creek, and, increasingly, Apple. Sinclair knew that women's clothing retailer Coldwater Creek would be a central part of the design, but received "a pleasant surprise" when--cloaked with the company's usual secrecy--it emerged that Apple would be occupying one of the smaller retail spaces within the center.
Indeed, the Apple store, flanked by retailers Coach and Bebe, drew far more shoppers on Saturday afternoon than either of the neighboring stores. It wasn't clear how many shoppers actually left the store with new iMacs or iPhones, but kids gathered to have their pictures taken next to an elf wearing iPod headphones as they excitedly discussed their own iPods.
As it has become clear that the world is entering an economic downturn as bad as anything seen in the last 80 years, many have wondered whether Apple, with $24 billion in the bank and virtually no debt, is "recession-proof." NPD released numbers Tuesday that indicated that Mac growth may be ebbing as a recessionary mindset takes hold among U.S. consumers, the base of Apple's support.
One way to judge Apple's ability to ride out a recession is to track its performance in some of the areas hit hard by unemployment and foreclosures, such as Modesto, Las Vegas, and southern Florida. Apple has a reputation as a trendy tech supplier to the digerati on either coast, but it has been expanding its retail empire beyond its strongholds in San Francisco and New York for years now, and has been generating results.
Despite their clear desire to get on with their day, Maciel and his children were excited to have an Apple store in their neighborhood, even if it meant they had to make the half-hour trek past dairy farms and nut trees from the tiny town of Hilmar to the mall. Still, they aren't the kind of rabid Apple fanatics that kept the company afloat in years' past: the Maciels were not in the market for a new iPod this year, having upgraded the kids' iPods last year.
Nonetheless, Maciel seemed confident that even if things get worse next year and he has to slash his spending further, Apple would remain on his short list. Judging by the three strangers at the malls' Sweet River Bar and Grill who struck up a conversation about their new iPhones, and the steady parade of families passing in and out of the Apple store, there are others in the San Joaquin Valley who feel that way too.
Coming up Thursday: Working overtime for venture capital funding
Fewer people are expected to buy iPhones and iPods this quarter, but Mac shipments may hold down the fort for Apple.
(Credit: CNET)Even Apple may not be immune if consumers continue to sit on their wallets this holiday season.
Piper Jaffray, usually able to find the bright side of any Apple news, predicted Monday that iPhone and iPod sales are set to decline in the coming weeks amid what is expected to be the worst holiday season for the PC and consumer electronics industries in quite some time. Mac sales seem healthier thanks to Apple's latest crop of notebooks, but aren't growing as fast as they were last year.
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Piper based its outlook on surveys it performed inside Apple retail stores around the U.S. during a 25-hour period in November, counting the number of Macs and iPhones sold inside each store. It supplemented those expectations with data from market watcher NPD for sales of both the Mac and iPod for the month of October.
With $24 billion in the bank, no debt, and products that still appear popular with the public, Apple is in excellent shape to ride out what is expected to be a rough couple of quarters for companies that depend on consumer spending. The company's several-year run of double-digit percentage increases in revenue and profit may be coming to an end, however, as most such runs eventually do.
Let's take a look at the numbers:
iPhone
Piper's data suggests that Apple will sell 6.4 million iPhones during the September to December quarter--Apple's first fiscal quarter--compared with the last quarter, when the company blew away expectations by selling 6.9 million units. The handset market in general tends to enjoy a 15 percent sequential boost in the holiday quarter compared with the June-September quarter, though this won't go down as a typical holiday season.
Apple retail stores were each selling on average 98 iPhones a day in July, when the iPhone 3G was released. In November they were only selling around 28 per store, which looks like a 71 percent decline and helps explain reports that Apple was cutting iPhone production heading into the current quarter.
However, those numbers don't tell the whole story, according to Piper. There was obviously pent-up demand for the iPhone 3G following a quarter in which Apple was sold out of iPhones for almost six weeks. And Piper also notes that Apple's retail stores are not the only place to find iPhones this quarter. AT&T obviously sells a few, and Apple added Best Buy as a distributor during the quarter.
When you factor in the increased number of countries selling the iPhone this quarter as well, Piper only expects a decline of 8 percent. Not that that's good news for Apple, of course, given how important the iPhone has become to its finances.
Mac
Apple can take comfort in the fact that the Mac numbers don't appear to be cratering, according to Piper's numbers. Piper is predicting that 2.6 million Macs will be sold during the quarter, which would be flat compared with last quarter's totals.
Last year in a healthier economy, Mac shipments increased by 7 percent in the first fiscal quarter compared with the fourth, so this year's totals are a bit off but still growing at a solid pace year-over-year. If Apple sells 2.6 million Macs during the holiday quarter, that would be a 13 percent improvement over the 2.3 million Macs shipped during the year-ago period.
On the last Apple earnings call, COO Tim Cook said he thought Mac sales were a little weaker than expected during the July to September quarter because potential buyers delayed their purchases of new notebooks, knowing that new models were around the corner. NPD's data seems to suggest that theory was on track following the launch of the redesigned MacBooks, recording a 28 percent jump in Mac sales in October compared with October 2007.
Still, Piper expects Mac demand to slow down in November and December. No new models are expected between now and Macworld in January, and the rush of buyers who upgraded in October are likely done buying Macs for a while.
iPod
Apple's best-selling product looks set to take a hit during the quarter, which is traditionally a blowout quarter for the iPod division. Shipments are expected to decline about 15 percent compared with last year's holiday quarter, coming in between 18.5 million units and 19 million units this time around.
There's no way to know at this point whether that is a reaction to Apple's latest crop of iPods unveiled in September or another symptom of an economic slowdown. A key number to watch will be the revenue growth or decline associated with the iPod group: Apple has been heavily advertising the iPod Touch as the "funnest ever" (and currently most expensive) iPod, and if revenue growth comes in slightly down or even flat against a 15 percent decline in unit shipments, the upselling strategy is probably working.
Competitive outlook
Apple's competitors aren't expected to fare much better during the quarter. Intel may not be a bellwether for tech anymore, but it is most certainly a bellwether for PC demand, and the $1 billion shortfall between Intel's previously expected fourth-quarter revenue and what it now expects indicates that the HPs and Dells of the world aren't expecting a stellar quarter.
On the handset side, Research In Motion could capitalize if iPhone shipments do decline, with the Storm and Bold making their way onto the stage. But it's unlikely that RIM will have a standout quarter itself, given the epic slowdown in business tech spending that usually accompanies one of these recession things.
And seven years on, there still doesn't seem to be a major competitor to the iPod. Apple is pushing the iPod into new territory as well, taking on portable gaming systems from the likes of Nintendo and Sony.
Apple's ability to post consistently strong growth figures quarter after quarter looks like it's coming to an end. If it's any consolation to fanboys and investors, however, at least it wasn't the company's fault.
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