Any company doing business in China has a tough time.
During September and November, Chinese authorities imposed strict lockdowns and other COVID control measures in a futile attempt to contain the outbreak across the country.
Then, in December, Chinese authorities quickly lifted the lockdown and other social distancing measures. The policy change was followed by a record-breaking COVID outbreak as the disease spread across China’s cities, with some officials estimating the number of daily cases in the tens of millions.
Now, the economic damage from the chaos of COVID is in the earnings report, whether it’s because production is disrupted from locked factories, or sales are down as consumers stay home to recover or protect themselves. But the company hopes that China’s reopening will mean the worst is over for profits.
The COVID outbreak in China may be receding, although health officials are still waiting to see if cases may rise again after the Lunar New Year holiday. China’s Centers for Disease Control and Prevention said on Wednesday that the number of severe COVID-19 cases in hospital patients had dropped 89% from a peak in early January.
China’s official data puts the number of COVID-19 deaths at just over 84,000, but that is likely low. A model from UK-based research firm Airfinity estimates the number of COVID-19 deaths since December 1 at 1.19 million.
Apple
On Thursday, Apple reported its first decline in quarterly revenue since 2019. The US-based tech giant reported monthly revenue of $117.2 billion for the most recent quarter, a 5% year-over-year decline.
In an earnings call, Apple CEO Tim Cook blamed COVID for falling sales, which fell short of analyst expectations. Cook said that “challenges related to COVID-19” disrupted the supply of the iPhone 14 Pro and iPhone 14 Pro Max through most of December, resulting in longer shipping times.
Last November, Foxconn, Apple’s main supplier, implemented mobility controls at its iPhone factory in Zhengzhou to prevent an outbreak from developing. Factory workers, numbering up to 300,000, were banned from leaving the premises and eating in public places. Many workers have fled back to their hometowns, while those who remain are frustrated by the COVID measures and fear infection. At the time, Apple warned that factory disruptions could affect holiday shipments of the latest iPhone models.
Today, Apple thinks the disruption is over. “Production is now back to where we want it to be,” Cook said Thursday.
The company also said Beijing’s COVID controls hurt sales in China, one of the company’s most important consumer markets. But the company is optimistic that demand will recover as the country reopens. Cook told analysts that Apple stores reported a spike in traffic in early December, after China lifted its COVID controls. “It’s also demanding,” Cook told analysts.
Apple shares fell 3.7% in after-market trading.
Starbucks
Starbucks reported $8.7 billion in monthly revenue on Thursday, a record for a coffee company and an 8% year-over-year increase. But the company’s results were dragged down by stagnant demand in China, Starbucks’ second-largest market.
The coffee company reported a 5% increase in overall global store sales. But sales in China fell 29% as consumers stayed at home. The decline was even steeper in December – the start of China’s record-breaking COVID surge – with sales down 42% compared to December 2021.
China’s population decline is so great that it offsets strong growth elsewhere in the world. In the company’s earnings call, Starbucks CEO Howard Schultz noted that the company saw strong sales growth in all international markets “except China,” and the company would have reported double-digit growth in international sales if China was excluded.
But the coffee company also believes the worst is behind it. The state’s reopening “positions the state to resume pre-COVID levels of consumer, social and economic growth,” Schultz said. “Great consumer demand in China is waiting for the launch,” he said.
Starbucks shares fell 1.8% in after-market trading.
Estee Lauder
The Estée Lauder Company reported sales of $4.62 billion for the most recent quarter, a year-over-year decline of 17%. The company blamed the COVID-19 lockdown and rising cases in China for dragging down retail sales, particularly in the Chinese tourism hotspot of Hainan.
The company said the COVID-19 disruption “resulted in prolonged store closures” and “resulted in tight inventory by certain retailers that had previously placed orders in anticipation of returning travelers that began to be delayed.”
But the cosmetics company hopes that the return of the Chinese will support the company’s recovery. “Where there is clear traffic, our brand responds very well,” said Fabrizio Freda, the company’s CEO, on the company’s earnings call.
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