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APPLE: THE ONE TO WATCH

Another quarter, another strong performance from Apple. But the pattern of growth is changing and the Apple Watch presented challenges. So how did the company do?

Apple is one of those companies about which astonishing statistics are calculated. It’s hardly surprising really, as the numbers Apple often produces are, indeed, quite astonishing.

This quarter is no exception. Apple took more in its Q3 reporting period – some $49.6bn – than the combined revenues of Amazon, Best Buy, JC Penney, and Sears in their latest respective quarters. On top of that, unlike almost any other company of its size and scale, Apple continues to post stellar revenue growth, with sales this quarter up by almost a third. This financial muscle is reflected in the fact that Apple now holds some $202.8bn in cash and marketable securities; almost enough to pay down the entirety of the Greek debt burden of $271bn.

The truly global reach of Apple is one of the reasons for its phenomenal success and scale. While the more established markets of the Americas and Europe still provide the bulk of revenues (61.6% this quarter), China is now Apple’s fastest growing market with sales up 112% year-over-year. Two years ago China accounted for 13.1% of Apple’s revenues; today it accounts for 26.7%. With a target of 40 Apple Stores in the country penciled in for the middle of next year, it is only a matter of time before China displaces the United States as Apple’s largest single market.

Apple Q3 year-over-year revenue growth by region (%)

"It's only a matter of time before China displaces the United States as Apple’s largest single market."

While Apple’s success is beyond question, it does not immunize the company from making the odd misstep. This quarter that misstep came in the form of Apple Watch – or to be precise, in the way Apple Watch was launched. Unusually for Apple, and barring a handful of exceptions, it only made the watch available through its own stores. In this case available meant having to pre-order rather than walk in and pick up the device on the day of its release.

Despite Apple’s protestations that it was ‘trying something different’ or ‘wanting to provide the best possible retail experience’, the decision really came down to the fact that there was an acute shortage of devices thanks to a problem with a supplier which produced the taptic component. Naturally, this lack of supply suppressed sales across the quarter and also deprived other retailers of the traditional revenue bump they receive from new Apple launches.

Apple does not provide a breakdown of sales of the watch, instead opting to put revenue into a broad category covering accessories, iPods, Apple TV, and other sundries. However, it is clear that Apple Watch sales were well below some of the analyst estimates made at its launch: one of which pushed as high as 7 million units over the quarter.

Analyzing the numbers and overlaying data from our consumer panel, Conlumino estimates that across the quarter Apple sold 3.2m watches with an associated sales revenue of $1.49bn. This, in the world of Apple, is what a misstep looks like! Against the backdrop of challenged supply and the fact that the device only had 680 points of sale, these are solid numbers that suggest the Apple Watch is on course to provide the company with a strong future sales line. This is especially so as the new and enhanced operating system, watchOS 2, is launched and more apps are added for the device. The likelihood is that, as Apple now ramps up supply, the watch will be a key gifting item this holiday season.

Breakdown of Apple’s Q3 ‘other products’ revenue, $m

    Note: accessories includes Beats products; hardware includes Apple TV.

    Interestingly, the lack of stock did not deter customers from visiting Apple Stores to experience the watch, and across the quarter retail and online saw a 49% rise in customer visits. Notably, mobile traffic to online stores during the quarter equaled desktop traffic for the first time ever. The App Store also saw strong growth of 24%, its best ever quarter.

    While Apple has arguably created an ecosystem of success around its products, with many retailers, developers, accessories firms, and others, benefiting from its phenomenal growth, it has also distorted spending. Many consumers now prioritize buying personal electronics over and above other retail categories. This is one of the reasons why some segments of retail, such as the teen fashion market or toys, have found growth more challenging as they increasingly compete for share of wallet with the electronics giant. This, of course, is all part of the genius of Apple. It has created, and continues to create, must-have products on which consumers are willing to spend large amounts. It then keeps them spending with upgrades, apps, music and accessories.

    Looking ahead, the power of Apple shows no sign of dissipating. True, its growth may become more reliant on markets outside of the U.S., but its marketing savvy, its technological prowess, its constant innovation, and its ability to deliver a great experience as well as a great product all put it well ahead of the competition. For now, Apple remains the one to watch.

    This piece is taken from our Viewpoints service, which provides subscribers with analysis and opinion of retailers’ results as and when they are released. For more a free trial of this service, click below and complete your details.

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