This quarter is crunch time for the Apple Retail Stores - if they
can't trade profitably in the run up to Christmas, in the busiest
retail quarter of the year, and after all the opening publicity, then
there isn't much hope.
Fortunately all the signs from Cupertino are positive, even if
statements about making a small profit have been revised to a small
loss in the wake of September 11 and the recession. The dire November
sales figures are in from the clothing chains, but with manufacturers
like HP and eMachines talking up their retail sales, the PC business is
looking more like the fairly strong, incentive driven, car market than
any other model. Even a small profit still looks possible, but we will
all know more in January.
But if Apple Retail Stores and having Apple sales staff in CompUSA
outlets leads to a substantial increase in sales, can Apple afford not
to control the buying experience in all outlets?
The rollout of the Apple stores and putting Apple sales people in
the chains radically improves the buying experience. It also has some
more subtle benefits: Anyone shopping for a computer will see Apple
computers always running properly, find Apple staff more knowledgeable
than most of the computer staff, and because of these factors will see
more people in the Apple section enjoying the latest and greatest.
Crowds beget crowds, and they reinforce the perception that things are
happening in the Apple world, giving even nonusers a more positive
feeling towards Apple.
This positive feeling will quickly disappear when customers enter a
Mac outlet where the sales staff, "the experts," are pushing Wintel and
are uninterested in Macs. Apple needs to staff these locations or the
quality of the buying experience will be patchy, which will itself keep
sales depressed.
This need to increase the sales staff to cover both new Apple Retail
Stores and Stores within a Store (SWAS) is bound to increase the head
count and hence the break-even point over the next 12 months. The
recently reported "stealth cuts" have managed to maintain roughly the
same head count level until the success of the new retail program is
proven. In future quarters, though, retail expansion will have to come
though profitability, so the head count increases should be
self-financing.
So if the best way of increasing retail sales is through dedicated
Apple sales staff, does Apple need so many chain outlets?
Clearly SWAS will become the minimum requirement in any store,
possibly combined with a program where Apple and the chain share the
gross margins of the additional Mac sales generated by the Apple sales
person. The additional margin could then help Apple pay for and retain
better staff.
However, given the likely retail environment next year, it won't be
surprising if at least one major chain is unwilling to go with this or
Apple is unwilling to commit to the staffing levels required. So we
should expect some contraction. If Apple is indeed the BMW of the PC
business, this contraction should be seen positively. All luxury car
manufacturers require a substantial investment in premises and staff so
that the sales and after sales experience is as positive as possible.
It is this that builds brand loyalty. So while Apple needs to have
enough retail outlets for new customers to easily buy one, resources
are best concentrated on those outlets willing to invest in giving the
best Mac experience. This should increase both the number of Mac users
and the high likelihood of them buying Mac again in the future.
All of this looks positive, but another retail factor can depress
the share price. The last reported figure for Apple's US market share
was 4.7% in October, up from 4.5% in September. However, a recent
report suggested that the Apple retail market share was falling in
November, with the inevitable effect on the share price.
The problem, particularly with interim reports, is that they make an
estimate based on a very limited sample of outlets. This is unlikely to
include any Apple retail stores but may include, for instance,
chain stores selling Macs in the same area as an Apple retail store but
without an Apple sales person.
Since nearly all reported buying experiences say how bad these
outlets are, many of their Mac customers will buy at the Apple store
where they know their business is appreciated, leading to an apparent
fall in sales. This is in some ways a short term problem as those sales
will show up in the quarterly reports from Cupertino but may lead to a
rush of doom sayer articles in the press prophesying Apple's imminent
disappearance, which will inevitably reduce the trickle of converts
from Windows.
If retail stores can be shown to be adding to Apple's sales and
bottom line, we will certainly hear about it when earnings are released
in January. Management has taken a calculated risk and deserves any
credit. It is after the Q1 earnings are out that the retail factor will
start to be a serious part of the share price.
However, retail share analysts favorite yardstick is comparative
sales in stores open for at least one year. For this we will have to
wait another year. 
Apple's Retail Grab will be continued next
week.
