Magazine

Commentary: Sorry, Steve: Here's Why Apple Stores Won't Work


By Cliff Edwards

For years, Apple Computer (AAPL) CEO Steven P. Jobs has tried working with retailers to make shopping for Apple's stylish products as appealing as using them--everything from setting up kiosks to special sections adorned with Apple's Think Different posters. Still, the computer maker's share has fallen, and Jobs figures he knows why. "Buying a car is no longer the worst purchasing experience. Buying a computer is now No. 1," he griped at the MacWorld trade show in January.

Now, he's taking matters into his own hands. On May 19, Apple will open a swanky new retail store--the first of as many 110 nationwide--at Tyson's Corner Galleria mall outside Washington. While Apple execs won't comment on their plans, the idea seems clear: Well-trained Apple salespeople in posh Apple stores can convince would-be buyers of the Mac's unique advantages, including its well-regarded iMovie software for making home videos and its iTunes program for burning custom CDs.

"CAVIAR." With its top-notch brand and proven marketing panache, Apple should have a shot at improving on the Gateway Country Store model. And it will give Apple fresh outlets to sell its own products such as the titanium PowerBook and other companies' consumer gadgets such as Handspring Inc.'s Visor handheld line. The company would gain new revenue as a reseller of other electronic goodies and have more control over marketing and servicing of its products. What's more, Apple could boost margins by cutting out middlemen and wooing buyers to higher-priced models.

The way Jobs sees it, the stores look to be a sure thing. But even if they attain a measure of success, few outsiders think new stores, no matter how well-conceived, will get Apple back on the hot-growth path. Jobs's focus on selling just a few consumer Macs has helped boost profits, but it is keeping Apple from exploring potential new markets. And his perfectionist attention to aesthetics has resulted in beautiful but pricey products with limited appeal outside the faithful: Apple's market share is a measly 2.8%. "Apple's problem is it still believes the way to grow is serving caviar in a world that seems pretty content with cheese and crackers," gripes former Chief Financial Officer Joseph Graziano.

Rather than unveil a Velveeta Mac, Jobs thinks he can do a better job than experienced retailers at moving the beluga. Problem is, the numbers don't add up. Given the decision to set up shop in high-rent districts in Manhattan, Boston, Chicago, and Jobs's hometown of Palo Alto, Calif., the leases for Apple's stores could cost $1.2 million a year each, says David A. Goldstein, president of researcher Channel Marketing Corp. Since PC retailing gross margins are normally 10% or less, Apple would have to sell $12 million a year per store to pay for the space. Gateway does about $8 million annually at each of its Country Stores. Then there's the cost of construction, hiring experienced staff. "I give them two years before they're turning out the lights on a very painful and expensive mistake," says Goldstein.

Harsh words. Still, Job's instinct that Apple has to take some dramatic steps is on target. In recent years, Apple has succeeded mainly by getting its 25 million-strong customer base to upgrade to pricier machines with higher margins. But only 12 million of them are due for upgrades in the next couple of years, analysts estimate. Meantime, Dell Computer Corp. and Compaq Computer Corp. have been stealing share from Apple in the key education market.

What's more, Apple's retail thrust could be one step forward, two steps back in terms of getting Macs in front of customers. Since most Mac fans already know where to buy, much of the sales from Apple's stores could come out of the hides of existing Mac dealers. That would bring its already damaged relations with partners to new lows. In early 1999, Best Buy Co. (BBY) dropped the iMac line after refusing a Jobs edict that it stock all eight colors. Sears, Roebuck & Co. (S) late last year dumped Apple, sources say, after concluding that sales were too hit or miss. And in recent weeks, Mac-only chains such as The Computer Store and ComputerWare have closed down, citing weak margins. Now, faced with competition from Apple, others may cut back. "When you choose to compete with your retailers, clearly that's not a comfortable situation," says CompUSA Chief Operating Officer Lawrence N. Mondry.

Indeed, rather than taking on the retailers who ought to be its partners, Apple would do better improving how it works with them. A good step would be to end the "think secret" approach that shrouds every new-product announcement. Covert operations worked beautifully when Jobs first arrived on the scene; his charismatic stage presence and Apple's eye-popping designs created priceless buzz. Now, retailers complain that the secrecy prevents them from doing advance advertising to hype sales and clear out inventory. "They are the most secretive company I've ever done business with," says one top retailer. "They should let the news leak out, to convince the world how exciting their stuff is. That's how everyone else does it." Maybe it's time Steve Jobs stopped thinking quite so differently.

Corrections and Clarifications

"Sorry, Steve: Here's why it won't work," (News, Analysis & Commentary, May 21) reported that several Mac-only chains, including The Computer Store, have closed down, citing weak margins. While a single store by that name in Wichita Falls, Tex., did cease retail operations in August, 2000, it is not affiliated with Computer Stores Northwest, Inc., which operates a chain of six stores also called The Computer Store in the Pacific Northwest. Computer Stores Northwest says it has no plans to close any of these stores. BusinessWeek regrets the error.

Edwards covers Apple from San Mateo, Calif.


We Almost Lost the Nasdaq
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

 
blog comments powered by Disqus