Apple's Retail Grab: What Risk?

Since Apple started opening retail stores, analysts have questioned the strategy. Comparisons have been made with Gateway without looking seriously at the different approaches or at differences between Apple and the Wintel market. In most cases the argument has been that Gateway couldn't make it work, PC retail is failing under the onslaught from Dell, so Apple is doomed from the start.

The only real difference between companies in the Wintel sector is price. Build quality is largely determined in Asia with many companies using the same third party factories. Consequently Dell, which doesn't have to pay a retail margin, will stay the strongest Wintel company for the foreseeable future provided it keeps production costs under control.

This Wintel sameness has worked against Apple at the retail level. With the Apple market share holding at about 5%, there has been little reason for any chain salesperson to bother with them. They received no incentives to sell them, and over 90% of customers were going to walk out of the store with a Wintel computer anyway. Even worse, they would have been hired because of their familiarity with Wintel, so Apple was trying to convert Wintel users - and in some cases Wintel advocates - into Mac sales people. Consequently Apple product has often been buried at the back of the store in an ill frequented, ill kept area.

Store within a Store (SWAS) looked to change this. Raising the visibility of Macs was a start, but it couldn't overcome the lack of interest from the sales staff unless the store manager was willing to put effort behind it. Training sales people didn't help, because the vast majority didn't believe they would make any extra money from it.

The Apple online store has allowed Mac users a good buying experience from the comfort of their homes. It now accounts for a substantial part of Mac sales while indirectly emphasising the lack of quality of the Mac retail buying experience. However, few new users or Wintel converts are likely to buy a Mac over the Internet without already being convinced of the merits. So unless Apple was willing to stay at 5% of the market, it had to find a way of using retail to its advantage.

The Demo Days allowed Apple to test the real Apple retail market at minimal cost. As well as giving a much needed sales boost, it showed the strength of user loyalty, that dedicated Apple sales people would increase sales and that Apple could attract experienced users to help it sell through retail.

It is these factors of loyalty and experience that will allow Apple to keep its operational retail costs down. Apart from the costs of leasing and equipping a suitable space, the major cost in retail is staff. Apple has employed experienced users, which immediately reduces the cost of training. Their loyalty to Macs and desire to be Apple employees will keep staff turnover down. This lack of turnover and the fact that Apple can easily recruit new staff from the Mac user pool will minimise recruitment costs and means that Apple doesn't have to pay top dollar except for well qualified technical people to man the genius bar.

The stores have been laid out to seduce consumers. It helps to give the faithful a shrine, but Apple needs potential Wintel converts and new users to stroll through those doors. Inside they can see that lots of software is available for the Mac, try out the systems that interest them, and convince themselves (with a little help) that Apple is a better solution.

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Although Apple's approach is compared to Gateway's, there are few similarities. Gateway has chosen secondary locations. These cut store costs but immediately limit passing traffic and impulse buying, which is further reduced by the stores carrying no stock and all ordering being carried out over the Internet. While this helps Gateway maintain low channel inventory - it ranks after Apple and Dell - it means that customers have to wait for their computers to be delivered and therefore have the opportunity to buy elsewhere. Gateway isn't focused on the consumer market to anything like the extent of the Apple Retail Stores.

Gateway has the advantage of recruiting from the much larger Wintel user pool, but is in competition with every other Wintel sales outlet for the best people. This, with Gateway's weak financial position over the last two years, will have led to higher staff turnover than Apple is likely to experience.

What is generally viewed as Gateway's over aggressive expansion of outlets should also be compared with Apple's steady expansion to 26.

It is this steady growth which will allow Apple to refine the model without major disruption. Apple carefully analysed customer feedback from the first two openings and took the time to make sure the data was meaningful. This led to a doubling of the Mac software available in each store. Future analysis will show the best malls to be in and the best positioning for the stores. If this recession deepens and some stores become unprofitable, Apple can halt or reduce the rate of expansion. Apple has freedom of action because Wintel manufacturers are bleeding red ink and, through lack of product differentiation, are unable to profitably follow Apple's lead.

Apple's Retail Grab will be continued next week.