The boom in wireless headphones and big — really big — TVs over the holidays is expected to carry over into this year, setting the stage for what had been shaping up to be a banner year for consumer electronics sales.
Even with unanticipated roadblocks, it still could be, especially with newer technologies such as 5G being embedded in phones and smart devices such as doorbells, locks and smartwatches hitting a sweet spot. The long-awaited release of PlayStation and Xbox consoles, which many expect to hit shelves before the holidays, also could provide an uptick in the latter part of the year.
As the only national retailer left devoted to the category, Richfield-based Best Buy is well-positioned to benefit from the potential growth.
But the rosy outlook has become murkier in recent weeks amid the outbreak of the coronavirus in China, the biggest source of consumer electronics in the world. More than half of Best Buy’s products by revenue are produced or assembled in China.
That makes the overall picture much trickier, said UBS analyst Michael Lasser.
“Overall, demand should be healthy,” he wrote in a recent research report. “But, with new mobile and console launches weighted to the back half of the year, there could be a near-term lull. Also, the coronavirus may negatively impact the [consumer electronics] supply chain.”
Apple warned investors last week that it doesn’t expect to meet its revenue projections for the first months of the year as production in China resumes more slowly than anticipated, potentially leading to a temporary shortage of iPhones. Most of Apple’s products are assembled in China, a country that has also become an increasingly important market on the consumer end as well.
Apple’s relationship with China is similar to many American companies, and the ripple effects of the deadly illness that has led to factory and store closures across China is starting to be felt across a swath of industries from car manufacturing to medical devices to luxury brands.
Best Buy has not said anything yet about the effect of the coronavirus on its supply chain or business, but the topic is sure to come up during its fourth-quarter earnings call on Thursday. Many analysts say they’re expecting Best Buy to be more conservative with its guidance for the year because of it.
Best Buy no longer has any stores in China. As part of its successful turnaround efforts, the company in 2014 sold its 184-store Five Star chain as it refocused its strategy on North America.
A report by analysts at Wells Fargo earlier this month said further delays in the restart of production in China following the Lunar New Year, when businesses shut down for days, could result in out-of-stock items in U.S. stores as early as mid-April. Best Buy, as well as Walmart, Dollar Tree and Minneapolis-based Target, among others, are at the most risk, the report said, since they rely on more frequent inventory replenishment from China.
At the same time, retailers are better prepared to handle disruptions from the coronavirus outbreak after hustling last year amid President Donald Trump’s trade war to move some production out of China to avoid higher tariffs.
Best Buy CEO Corie Barry told reporters in August that many of its vendors had begun shifting operations out of China to countries such as Vietnam, Taiwan, South Korea and Mexico. While about 60% of Best Buy’s business was potentially affected by tariffs on Chinese goods, she said she expected that percentage to drop to 40% by this year because of manufacturers’ migration.
Michael Pachter, an analyst with Wedbush Securities, noted that some of the bigger screen TVs that Best Buy sells now come from Mexico. Still, he added that nearly half of Best Buy’s revenue comes from computers and mobile phones, which are both largely assembled in China.
“My guess is that you’re going to see some supply constraints, so I suspect they will warn about the balance of the year,” he said.
Before coronavirus became a major concern, a number of firms and industry groups put out robust forecasts for growth in consumer electronics for the year. The Consumer Technology Association projected 4% growth, noting that smartphone sales were expected to increase this year after dipping last year. The NPD Group, which doesn’t include smartphones or video games in its estimate, called for 5% growth, with products such as wireless headphones, Chromebooks, 65-inch and bigger TVs, smartwatches and smart home devices expected to see double-digit growth.
If that pans out, it would be the best results in years. Last year saw 3% growth, and the year before that 2%, but those followed years of declines, according to NPD’s data.
“But if things are tight in the first half of the year or there’s any kind of production issues [because of coronavirus], that will be a tough number of meet,” acknowledged Stephen Baker, an NPD Group vice president.
Still, he noted that the appetite for the latest gadgets and devices is high right now, with the industry in a robust upgrade cycle, particularly of higher-priced premium products.
“Before, you saw people reluctant to upgrade when they were afraid that the products they bought wouldn’t be future proof,” said Baker. “I think we’re in this cycle right now where people are looking at products out there — 65-inch TVs, thinner computer notebooks — and are really feeling like they meet their needs now and will meet their needs for awhile. The pricing and the products are really attractive. So they’re buying now and are not worrying about what the next generation of products look like.”