European financial crisis has ripple effect on U.S. businesses
MADRID — The newest Apple store in Spain, like its counterparts in other parts of the world, is designed to draw you in. Stone floors, glass doors, and rows of blond wood tables stocked with scores of gleaming iPhones, iPads and MacBooks as far as the eye can see.
On a recent weekday afternoon, the cavernous showroom was missing only one thing: customers.
Only a handful were scattered throughout the store — and most were just browsing. “I would have liked to buy lots of things, but I have no money,” sighed Nacho Corral, a 37-year-old government worker whose salary was recently cut 7 percent along with those of other civil servants.
The eerie emptiness of the store, in an upscale shopping mall in Madrid, is an indicator of the growing severity of the impact of the European financial crisis on U.S. companies.
In the latest series of earnings announcements from U.S. corporations, top American brands such as Whirlpool, Ford, General Motors, Starbucks and Apple have reported disappointing revenue because of Europe’s troubles. These results, over the past two weeks, have heightened concerns on Wall Street about the health of U.S. business.
The ripple effects of the European financial crisis, like its roots, are complex, but the impact on European consumers may be one of the easiest things to understand. As unemployment rates have soared — to a high of 11.2 percent in the euro zone as of Tuesday — consumer spending has plummeted. Surveys show that many Europeans, regardless of whether they have a job, have become increasingly uncertain about their economic future and are holding off on purchases of big-ticket items such as cars and appliances as well as splurges such as tech gadgets or an extra cup of coffee.
Their reluctance to spend has become a drag on U.S. corporate profits and a problem for President Obama as he seeks to keep the American economy growing in the run-up to the November election.
Adding to the unease was the announcement Thursday by Europe’s top central banker, Mario Draghi, that he wasn’t ready to take new steps to address the euro zone’s escalating debt crisis. While Draghi, president of the European Central Bank, said he was preparing to take new measures for the future, the lack of action caused stock markets on both sides of the Atlantic to fall, with the Dow Jones industrial average losing about 0.7 percent.
Losses for manufacturers
There was also troubling news from GM, which reported Thursday that it had lost $361 million in Europe in the second quarter, compared with a profit of $102 million in the same quarter last year.
The latest round of discouraging reports started last week, when the world’s largest appliance maker, Whirlpool, said its sales fell 7 percent in Europe, the Middle East and Africa from 2011. As a result, overall sales were down more than expected.
The next day, Ford announced that its total profit in the second quarter had fallen 57 percent. The company said it had lost $404 million in Europe, compared with a profit of $176 million in the region during the same period last year. Ford’s forecast for the near future was even gloomier: It doubled its expected losses in Europe, where auto industry sales are at their lowest in almost 20 years.
In Spain, the Focus and Ford’s other small cars have been a hit in recent years, but the market has grown challenging. With several major Spanish banks in dire straits, getting a car loan has become almost impossible for many prospective buyers.
Alfonso Cantero, 38, general manager of a Ford dealership in Madrid and son of the owner, said sales have fallen about 50 percent from when his family purchased the store in 2005.
Despite an amazing promotion from Ford — a 25 percent discount — few Spaniards are buying, he said. On a recent morning, salesmen sat at their desks, surrounded by shiny new hatchbacks staring into space as only two customers, a father and son, came into Cantero’s showroom during a three-hour period. In the end, they decided not to buy anything. Two mannequins, a man and a woman dressed in the summery hue of orange, were strategically placed at either corner of the store to make the place feel more lively.
“People are afraid,” Cantero said. “They don’t know what’s going to happen this month or next month, so they don’t want to buy something they may not be able to afford in the future.”
The day after Ford offered its dismal view of the situation in Europe, Starbucks said its fiscal third-quarter profit was 43 cents a share, nearly three cents less than analysts expected, and blamed poor performance in Europe. Chief executive Howard Schultz said that he had dispatched two top executives to the region to address the problem and that the company planned to close several of its European outlets.
Juan Soto Serrand, president of the American Business Council in Madrid, said such reductions in stores and staff have become normal for many U.S. corporations in Spain.
“Consumer companies are experimenting with advertisements, heavy discount policies, but there’s no question that multinational businesses are having a difficult time,” he said.
Biting into Apple’s sales
The real earnings shocker has been Apple. The company had phenomenal growth late last year and early this year. But for the quarter ending June 30, Apple had surprisingly poor iPhone sales and blamed it on falling demand in Europe. As a result, Apple said it missed its revenue targets.
Spain has been especially challenging for Apple. Analysts say the company entered the Spanish market relatively late and has been trying to make inroads into Android’s dominant market share at an extremely difficult time. About 5.7 million Spaniards, or 24.6 percent of the working age population, are unemployed, the highest rate in the industrialized world. Retail sales have fallen for the past 24 months.
Apple has begun experimenting with a radical new strategy in Spain by giving devices away.
Through deals with banks (if you sign up for direct deposit for your salary, you can qualify for a free iPad) and telephone companies (for an 18-month contract, you can get a free iPhone), Apple has tried to target middle-class consumers with stable incomes.
The question is whether Apple will be able to retain these customers’ loyalty.
This week, Prisilla Bejarano, 23, who works as a clerk in an accessory store, was checking out the company’s newest products at Madrid’s Gran Plaza 2 mall. Nearly every retailer in the mall except for the Apple store had “Rebajas” or “Sale” signs plastered on their windows advertising merchandise up to 70 percent off.
Bejarano said she received her iPhone for free a few months ago when she signed up for a phone contract, but she broke it and was waiting to see whether it could be fixed. She said that although she adores her iPhone, she’s planning to buy “a different, cheaper brand” if the phone can’t be repaired. She has a stable job, at least for the time being, but is saving all her money in case the worst happens. “I can’t allow myself any splurges right now,” she said.
A few tables away, Tomas Ortiz, a 42-year-old telecommunication engineer, was standing across one of the tables from his young daughter as they simultaneously swiped their hands across the screen of identical black iPads. He said he loves the technology and thought he could afford the device. But he had been mulling the purchase for three days and kept coming to the same conclusion: “I think it’s too much.”
Corral, who got a free iPhone two months ago, also left the store empty-handed. A runner, he was eyeing the iPod Nanos and Shuffles, but he concluded that one would be an unnecessary expense.
“For now,” he shrugged, “until the economy improves, I will run with my big smartphone.”