250 stores now open, lease commitments of $1.4 billion, capital
expenditure of $1.4 billion, and easily the largest head count of any
Apple division with 15,900 full time staff positions at the end of the
last quarter. The whole of Apple only has 32,000 employees.
Retail is a major part of Apple, yet it is largely ignored by
technology analysts in the rush to give their latest Mac, iPhone, and
iPod projections. In the conference call after last quarter's figures,
despite record sales and a record 50 store openings in FY 2008, no
analyst asked about store openings for the coming year to see how
confident Apple is.
Some analysts think sales will be down slightly but up from last
year, others that the huge spending downturn could leave the stores
empty.
Retail Failures
With the worsening retail market, many store chains will suffer. In
the lead up to Christmas, normally the season when stores make most of
the year's profits,
Circuit City has filed for Chapter 11 bankruptcy and in the UK the
800 Woolworths stores are reportedly up for sale for £1.
The news from most PC companies trying to sell into a saturated,
depressed US market will be bad. Most people and organisations want to
use products from successful companies. This is why Microsoft has had
such a hold. However, that hold will be loosened in a downturn where
most PC companies are seen to suffer and Apple is seen to be
successful.
Sitting on a cash mountain of $24 billion with no debt and driven by
a belief in investing in downturns, Apple can really benefit. Remember
Apple Retail was started in the last recession.
Positive Image
Every time someone sees a busy Apple Store it reinforces the image
of a successful company, especially when other stores are largely
deserted. The next time the MS bore or the guy from IT starts sounding
off about Windows owning the market, bring up the thought "those Apple
stores sure look busy." Even if this is only said sometimes to friends
and coworkers, it adds to the positive feedback for Apple - and
personal experience often outweighs cold, hard statistics.
Apple's mini stores always seem crowded with the normal number of
staff and a few customers even when the stores clearly aren't busy. If
there aren't many other customers, experience from other electronic
stores means you expect to be pounced on by the staff and pressured
into buying a computer. So I believe they mainly attract customers who
already know the Apple experience, not the "new to Mac" customers
which, according to Peter Oppenheimer, Apple's CFO, are 50% of retail
Mac sales, and therefore the mini stores don't work as well as the
normal size stores.
PC Sales Will Suffer
Along with the PC manufacturers, retail PC outlets will suffer.
Microsoft is making noises about Windows 7 being available next year to
cover the lack of enthusiasm for Vista. Few will find the need to buy a
PC unless it answers an immediate need and is at a rock bottom price
and, unless you already know what you want, it is hard to buy in a near
empty electronics store.
It is hard to browse with any kind of enthusiasm when staff are
nervously asking if you need any help. Retailing is about seeing,
touching, playing with the electronics you want to buy. It needs
confidence in the retailer and the customer for that impulse buy to
happen. While there are people who buy when unhappy, most of those
prefer a bright, busy store.
So while Apple can keep the visitor numbers up for each store, there
will be this highly visible contrast with the rest of the industry:
Apple stores crowded and the PC sections of other stores very
quiet.
Apple Is Cautious
It seems like Apple is already taking precautions to maintain this.
In New York, despite paying nearly $6 million a year in ground rent, a
new store near the Empire State Building isn't going ahead. In
Washington, DC, no plans have been filed for conversion of a building
bought a year ago. It makes a lot of sense to hold off on the capital
expenditure for new stores and concentrate customers in existing stores
wherever there are Apple stores close by.
While there are no temporary positions this year and reports of
fewer hours for part timers, Apple Retail so far seems to have
avoided layoffs, even though the stores are well staffed. Having
"geniuses" and "creatives" spend some of their time on the floor with
customers would be worth trying out even in better times, to give the
employees variety and see how good they are in other roles.
Since 2006, the average number of employees per store is up by more
than two-thirds, but the revenue up by only one-third. At least part of
this is due to increasing customer service with more "geniuses" and
more warranty work done through the stores and training initiatives
like 1to1.
Apple Is Open
Genius bars also add to the visitor numbers. They always have a
queue of people with problems, but these are problems being solved, and
Apple is a company that lets everyone see this. It doesn't have the
Returns Department hidden away where new shoppers can't see it. This
adds to the impression of being open: Look we have nothing to hide.
That you can go there and get a problem solved gives new users
confidence. They can see that customer service isn't outsourced and, on
the whole, customers with problems aren't irate. The "genius" part may
be hype, but it beats store customer service elsewhere.
What can we reasonably project? There will be more Circuit City type
bankruptcy filings, more retail chains in trouble, and more marginal
electronics store closings. Because of the crowded store effect, more
PC users will switch and, where convenient, more Mac buyers will buy in
Apple Retail rather than outlets like Best Buy. Provided they keep the
visitor numbers up, Apple Retail will stay in profit and Apple will
gain market share.
Projections
For this Christmas
quarter:
- A year ago, the average number of stores open was 201.
- If there are no more openings this year, the average number will be
249 (206 in the US).
- Over 80% of stores are in the US, which is where Apple typically
makes over 55% of its sales.
- This last year, in each quarter, Apple Retail had year-over-year
increases for average sales per store of 30%, 42%, 33%, and 15%
respectively.
- Even if the average sales per store is the same as last year's
Christmas quarter ($8.7 million), sales for the retail division will be
$2.107 billion.
Where are the gains over the last quarter ($1.72 billion), which
ended September 30?
According to NPD, US retail Mac sales in October were up 28%
year-over-year, and iPod sales were off 20%. If this continues - and
the increase is likely skewed because of two weeks of new MacBook sales
- it would lead to Apple Retail Mac sales up 49,000 or roughly $70
million (using last quarter's Average Selling Price, which is usually
lower because of student sales).
iPod sales this quarter last year were just over 22.1 million. A 20%
drop would reduce that to 17.7 million - 60% more than last quarter. At
that ASP, if the stores only sell 15% of these it will add $150
million. Since the launch of the App Store, more of these will be the
iPod touch, with a higher ASP, as it picks up market share from Sony's
PlayStation Portable.
iPhone sales also follow GAAP subscription accounting over 24
months. 3G iPhones ASP was about $650; that is just over $81 per
quarter. Even if sales are flat compared to last quarter, this quarter
includes the same revenue as last quarter + a full quarter of iPhone 3G
sales. If the stores only sold 15% of the 4.9 million iPhones bought by
users, when their only competition was AT&T outlets, that will add
another $60 million.
While gift card sales are expected to be down, these sales only
count when the cards are exchanged usually in January/February.
Continued Success
Despite all the economic problems, Apple Retail can look forward to
another successful quarter with sales maybe breaking through $2 billion
for the first time. That would make sales up over 17% year-over-year,
and that kind of record breaking will be in short supply.
Further Reading
