Apple's Retail Grab: The Future

Apple's latest 10K is out, stating that there will be a small loss in retail Q1 and expectations are that there will also be a small loss for this fiscal year. As Fred Andersen and his colleagues have always tried to downplay financial expectations, this should be seen as the minimum unless the U.S. economy gets much worse and/or the traffic in the stores lessens considerably as novelty wears off.

Investment seems to be averaging about $4m (million) per store. Forecast capital investment for FY2002 is $200m. For the last two fiscal years expenditure, other than on the retail segment, has been about $140m, but in 1999 it was only $71m. So, after all those openings to take advantage of the annual Thanksgiving-Christmas spending splurge, this suggests 15 to 30 store openings up through September 30.

As this retail initiative requires strong per store investment and commitments to 5-12 year leases, most Wintel companies have the neither margins nor are sufficiently profitable to follow Apple's lead.

Only Sony, with it's broad range of consumer electronics, could sensibly do so. However, Sony only expects to make a small profit overall in the FY ending March 31. Sony, too, is heavily committed to making Playstation into a digital hub and needs to spend the next couple of years beating back the Microsoft Xbox and Nintendo GameCube to hang on to it's large profits in the games market.

Apple, with over $4 billion in cash and cash equivalents, can afford to expand the retail stores at a pace which is governed by their success and the strength of the economy without issuing new shares or taking on additional debt.

Since Apple retail stores are performing a number of useful roles -- advertising Macs to all the passersby, showcasing Apple designs and technology, attracting new computer users, bringing old users back into the fold, converting Wintel users, showing OS X to the Unix community and acting as magnets for Mac users -- how should we judge their success?

With investment funds always at a premium, there is no point in rolling out the chain unless the retail stores will significantly increase Apple's profitability in the long term. At the very least, this increase has to be equal to the interest from the cash and short term investments which have been used to fund the investment. When risk is taken into account, the profit should be higher.

So store profitability will largely determine the rate of expansion and how far Apple will extend the chain both within the USA and to other countries. Providing this is also enough to cover the division's central overhead, it will also help drive Apple's profitability. The rate of expansion will also show how management views the U.S. economy and how the economy is affecting Mac sales.

The effect of the stores on Apple's market share will also be an excellent measure in the short and long term. However, until the retail stores are included in the major market surveys, their contribution can only be seen when turnover and their Mac unit sales are broken out of Apple's quarterly returns.

If most of the sales in retail stores would have been made through the website, then Apple is just adding overhead and decreasing profitability. As Apple's online sales are at full price, it is highly likely that a Mac user, wanting a standard configuration and living reasonably close to a retail store, will go and pick it up there. While there, they will often see and buy some extra gadgets or software, so the average for "standard" sales will be higher. In addition, many Mac users will visit to see what is available and walk out with a purchase. These effects, combined with the retail store sales of cross platform software and hardware, should increase the Mac market for third parties and therefore bring more software and peripherals to Macs.

Sales which would have been through other chains will help the retail stores break even but won't be enough to justify the investment. It is only expanding the user base that can do this.

Adapting the model to other countries won't necessarily be straightforward. Within the European Union, mall shopping isn't so widely developed. In Britain there are a few highly successful malls; many stores are still downtown. In Germany shopping hours can be highly restricted, so stores can be closed on Saturday afternoon and Sunday. In France out of town shopping is often centered on large supermarkets, which may also sell computers.

However in these and all other countries where Apple operates, it should seriously consider having at least an HQ store in an upscale mall or good downtown shopping area. Other Apple retailers could then see what is possible, large customers (and Apple employees) will be more enthusiastic if they see a crowded store, and it will allow Apple solutions to be properly showcased.

How to drive the store traffic?

So far Apple has relied on the Mac community, local PR, and mall traffic to fill the stores. While this got them off to a good start with the help of the busiest shopping season, more will be needed for the rest of the year. Some of this will come from Steve's product launches, and some from making available point releases of OS X and other Apple software too large to download without a high speed connection.

More can come from traditional ads and promotions.

However Apple should look seriously at forging relationships with other specialist retailers. Although the retail stores sell cameras, etc., they can not offer the same range or expertise as a good camera store. iPod stores an hour of footage and is the ideal backup to a camcorder with FireWire. So let the camera stores sell iPods and loan them an iMac or iBook with iMovie and show the staff how seamlessly it all works together. When they are convinced, the camera stores will refer customers, and the Apple stores can in turn refer customers who want to choose cameras outside of their limited stock. Similar relationships could be made with record stores or chains such as Borders.

Retail stores offer a way out of the low market share Apple has been condemned to since the poor marketing decisions of the early 90s.

Specialist Apple dealers have been left out of this series, as the Apple retail stores are designed to appeal to consumers. Most dealers are good, or they would already have disappeared. They already have a loyal customer base, mainly in business sectors, which require specialist knowledge and on-site support that Apple stores don't offer.

If properly qualified dealers are allowed to service all Macs and concentrate on business markets they should flourish as more Mac are sold and there is greater Mac visibility.