Recessionary price sensitivity

We know that consumers are more frugal in a recession, whether due to losing their job, fear of losing their job, or (in this case) due to a decline in asset values. Such fear might be manifest by postponing purchases of big ticket items (cars, homes, appliances, computers) and more aggressively price shopping for those durables and non-durables that they do purchase.

Analysts reported that Apple’s retail computer sales in January were down 6% from last year, while other data estimated that Apple will face a 5-10% decline in sales in Q1 2009 vs. 2008.

The WSJ blamed it on the company’s traditionally effective price gouging differentiation strategy:

The data suggest that Apple's premium pricing, which helped boost revenue when demand was strong, may be hurting the company now that consumers are being more careful about their spending amid the recession.

I am certain that Apple’s sales and profits will be hurt by the recession — as will every other seller of big ticket items.

But — despite the temptation to generalize from other premium price producers — I haven’t seen any evidence that Apple’s premium pricing has anything to do with it, or for that matter that it will do worse than its competitors. Its competitors in music players — like Sony and Samsung — are in serious trouble.

Among its PC competitors, HP’s stock fell 10% last week on news of lousy earnings, including a 19% drop in PC revenues; (unlike Apple) it’s forcing pay cuts on its employees. Dell’s earnings are due Thursday, and right now the expectation is that they’ll be as bad as HP’s.

The consumer-oriented part of the PC industry will face the same recession problems as the rest of the consumer electronics industry, while the B2B part will suffer at least a proportionate share of capital budget cutbacks.

The fate of the car makers is a reminder of what happens in a demand contraction: the strong firms get temporarily weaker, and some already weak firms end up permanently dead. (Or wearing the fig leaf of an acquisition). Apple, like Toyota, will have some bad quarters but bounce back.

Last summer, Siemens bailed out of the PC joint venture with Fujitsu, which probably means a retreat from Europe back to Japan.

Coincidentally, the only possible growth for the PC industry this year will be in netbooks, where branded manufacturers will compete with the Taiwanese ODMs that created the category. Most of this will cannibalize existing PCs — $400 netbooks replacing $1000 or $1500 laptops. If the prospect of growth attracts excess entry, this just means that there will be brutal netbook price wars this year until some firms give up, retreating into tiny niches.