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JUNE 17, 2004
By Alex Salkever Apple, Respect Your Resellers They blame company-owned stores for ruining their businesses. If Jobs & Co. refuse to heed those complaints, both sides will suffer The success of Apple's retail stores has been one of the most surprising chapters in the feel-good story of the Think Different company's comeback. When the retail outlets were launched in 2001, analysts howled that CEO Steve Jobs was pouring money into a black hole. Now, one-time doubter and Apple (AAPL ) bear Steve Milunovich of Merrill Lynch says the retail risk has passed. According to Apple, the chain has been profitable for two consecutive quarters, and it expects to see margins rise from 2% to 5% as customer traffic continues to increase. Not everyone is smiling, however. Tony Verga, who owns CDS Group, a certified Apple dealer and consultant in Phoenix, has been selling Macs and providing Mac-centric consulting services for nine years. When Apple opened two stores in the Phoenix area in 2002, Verga saw an immediate impact on his business. Apple had previously referred service calls to CDS. But increasingly, Apple refers service customers to its own retail operations, claims Verga. "My guess is that they want to do it all," he says, estimating that his business is down by at least 10% since those stores opened. Verga is one of a growing number of smaller third-party Apple resellers crying foul. Five particularly aggrieved resellers have filed a lawsuit in California's Santa Clara County Superior Court alleging that Apple gives its own stores preferential access to hot products and lower wholesale prices. PAIN-RELIEF FORMULA. Two of the complainants, Thomas Armes and Tom Santos, are seeking to recruit more Apple resellers for the suit via a damning Web site, TellonApple.org, and a number of Apple resellers with whom I spoke are thinking about adding their names to list of plaintiffs. Armes, who claims he was the second-largest independent U.S. reseller, closed his five-store chain and laid off 75 employees in the spring of 2003, in the wake of a contract dispute with Apple. While Apple declines to comment on pending litigation, executives have stated repeatedly that independent resellers get the same treatment as Apple stores. By alienating folks like Verga and Armes, who have been the backbone of Apple's distribution network for the past 30 years, Jobs & Co. are skating on thin ice. The new stores are essential to Jobs's strategy. As Apple moves away from selling only Macs to become more of a consumer-electronics company, the stores are a critical way to leverage Apple's brand and showcase newfangled digital wares to affluent consumers. But independent resellers still account for more than 50% of Apple's domestic sales. Should they abandon the outfit in a huff, Apple could suffer. What should Jobs & Co. do? Apple must craft a plan to rebuild and reinvent its ties with small resellers. First, it needs to be honest and admit that Apple stores are hurting the resellers' business and that not all of them will survive. Second, Apple has to treat those that do hang on as integral parts of its organization and sales effort. Finally -- and most crucial -- Apple needs to ease the pain by coming up with programs to encourage these longtime partners to help it accomplish goals it can't achieve on its own. WHERE'S THE PROOF? For example, Apple could award higher commissions and faster restocking to resellers that make deals to sell, say, 10 or more of the new X-serve servers. Or it could offer a special bonus for orders placed through resellers by large corporations, a target market for Apple. That way, people like Verga might once again see a prosperous future in working with Apple, thereby furthering Jobs's goals as well. To date, Apple has denied that its policies are hurting resellers. Apple retail guru Ron Johnson contends that the company has evidence that third-party dealers located close to an Apple store actually benefit from a symbiotic relationship. But when I asked an Apple spokeswoman for those numbers, she was unable to provide them. Apple's own publicly reported numbers tell a clear tale, however. Revenue growth from the stores has outpaced total revenue growth. Retail sales have increased by more than 900% from December, 2002, to March, 2004, and Apple says it now does one-third of all repairs in its stores. Those are repairs the third-party folks can no longer do.
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