A Tip from Apple's Branches


By Charles Haddad I'm hoping Apple Computer's new retail stores are a whopping success -- and not just because it will help secure the company's often tenuous-seeming future. The success of these stores might work as a cudgel to knock some sense into other computer retailers, too.

Right now, computer retailing is a stellar example of what I call the "dis-service" industry. Many stores look no better than a disheveled warehouses. Their shelves are littered with broken display models. They're staffed by young clerks who don't know a byte from a bit. Or at least they feign ignorance, resentful, I suspect, because work steals precious time from playing their beloved Game Boys, PlayStations, and computer shoot-'em-ups. But that's a subject for another column.

My point is this: Apple is trying, if only indirectly, to turn the dis-service model of computer retailing on its head. It wants to sell computers the way Crate & Barrel peddles blenders and plates. That is, house products in a cheery, colorful store that's fun to shop in. What a concept!

SHORT ARMS, DEEP POCKETS. Apple stores, however, are more than just pretty faces. Every computer on display works. And they're filled with demonstration software, letting customers try out products. The staff is knowledgeable, able to explain, say, how Apple's wireless-networking software works.

And -- get this -- clerks are actually interested in selling you something. It's an approach to computer retailing that industry consultant IDC has lauded as "revolutionary" in a recent report penned by analysts Anthony Penzarella and Mark O'Donnell.

What's driving Apple's store strategy is a simple insight: Service sells. You see, Apple understands what most of its competitors don't -- or refuse to -- comprehend: That computers, contrary to conventional rhetoric, are not really commodities. True, as with televisions, the price of computers is always falling. But computers aren't nearly as easy to set up as TVs. In fact, most people find computers complicated, finicky, and bewildering devices that fall way short of their advertised promise. It takes a lot of handholding to help people get the most our of their computer, whether Mac or PC.

Apple's stores may represent a powerful insight, but that doesn't mean they're a guaranteed success. We're a nation of cheapskates. Seven out of 10 of us choose low price over quality or service. We'd rather keep buying that $20 personal stereo every year than cough up sixty bucks for one that might last 10 times longer. So can Apple persuade consumers that price isn't everything when it comes to computers?

MARGINAL PROFITS? Apple also faces a high financial hurdle in making its stores work. In the IDC report, Penzarella and O'Donnell estimate the stores as a whole need a gross margin of 25% to become profitable. The figure is based on two assumptions, $35-a-sq.-foot average rents and Apple keeping its inventory low.

At first glance, those don't seem like tough goals. Apple, after all, had a gross profit margin of 27.1% in 2000. But as Penzarella and O'Donnell wisely note, the third-party software on sale in Apple stores typically sells at margins way below 25%. That means Apple will likely have to jack up prices for that software to keep its stores profitable.

Will such higher prices scare off shoppers? So far, they haven't. The company's initial two stores, in Tysons Corner, Va., and Glendale, Calif., have been busy. Sales are especially brisk for new laptop models and the wireless Airport networking gear and software. In the first weekend, Apple reported it sold 238 systems, garnering $600,000.

WORTH COPYING. These figures, of course, mean little as of yet. Given all the publicity surrounding the openings, you'd expect the initial stores to be packed with the faithful. The real test will be whether customers keep coming back -- and whether they bring along a bunch of friends, too. While the challenge is huge, Penzarella is hopeful. "The reality is that Apple's new model makes sense, and it is destined to be copied," he writes.

If Penzarella is right, and I hope he is, Best Buy and CompUSA may have to rethink their strategy. I'd start by clearing all that digital detritus littering their stores so customers can try out the machines. Next, permanently dispatch indifferent clerks to play their Game Boys full time, and, finally, hire some trained personnel -- preferably people with cheerful dispositions who don't mind talking to customers. Haddad, Atlanta-based correspondent for BusinessWeek, is a long-time Apple Computer buff. Follow his weekly Byte of the Apple column, only on BW Online


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