Apple Stores: Sale of the Century?

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Depending on who you talk to, Apple's decision to open a chain of retail stores is either a great move that was a long time coming or a foolhardy venture that's likely to blow up in the company's face. One thing is clear in the wake of Apple's announced move into the retail market: there's no shortage of opinion, both positive and negative, among retail researchers, Wall Street analysts, and Apple watchers.

Count David Goldstein, president of the Dallas-based growth-strategy consulting firm Channel Marketing Corp., among the critics of Apple's retail plans. "It makes absolutely no sense whatsoever for them to open retail stores," he says.

"Apple will turn the lights off within two years and will have a very bad and expensive experience," Goldstein adds.

George Rosenbaum, chairman of the Chicago-based market research firm Leo J. Shapiro & Associates, disagrees, hailing Apple's retail move as a "brilliant idea."

"One wonders what took them so long," Rosenbaum says.

Survival of the Fittest

The way Rosenbaum sees it, opening a retail chain is an appropriate strategy if Apple is to survive.

"They cannot achieve the production they have to unless they control their own retail distribution," Rosenbaum says. "If they depend on other retailers, they have to struggle to maintain visibility and a presence in stores."

Even an online-only presence isn't enough for Apple, Rosenbaum contends. The company faces stiff competition from other online retailers and can't reach out to consumers who aren't familiar with the Apple brand.

"By opening retail stores, Apple can leapfrog all of this," Rosenbaum says. By operating the stores, Apple can control the presentation of its products. The stores also give Apple the visibility to attract new customers while providing a showcase for the company's institutional and industrial customers.

"People can try it, touch it, squeeze it, see it work, and understand what the Mac and Apple really are," Rosenbaum adds.

Lehman Brothers analyst Daniel T. Niles agrees that Apple is opening the stores to increase brand awareness and make it easier for consumers to buy Macs. "Trying to enhance the buying experience and educating the customer through advertising and third-party retail channels is a tough proposition so Apple is taking matters, so to speak, into their own hands," Niles wrote in a Lehman Brothers research note.

Niles had some initial reservations about the concept of Apple retail outlets. But after Tuesday's announcement, he wrote, "We believe . . . that Apple has the ability to start attracting new customers with the launch of their higher-end retail store strategy. This should help reverse current market trends of having a 5 percent share of the installed PC base, but only a 3 percent share of current sales."

Retail Today, Gone Tomorrow?

Critics like Channel Marketing's Goldstein aren't so confident. Computer makers that try to enter the retail market usually end up pulling out of it, Goldstein says. They're unable to provide the add-ons, peripherals, and upgrades that consumers demand. And their prices are generally higher than those of other resellers--not a selling point for consumers who are looking for good value.

"There are some things about the Apple brand that will ensure the same experience," says Goldstein, noting Apple's small market share. "They appeal to a very small sliver of the total market."

But Niles said Apple is positioned to avoid many of the retail mistakes made by other computer makers--most notably Gateway, which closed 27 stores in March and is dropping its store-within-a-store arrangement with OfficeMax. Unlike direct seller Gateway, Apple already enjoys a large retail presence through third-party resellers, Niles noted. The company picked "prime real-estate locations for its new stores rather than haphazardly placing them within strip malls," he added.

"We believe the high-end nature of the location suits the target demographic of Apple users who tend to be concerned with performance, design, and aesthetics rather than just price," Niles wrote.

This high-end strategy could backfire on Apple, Goldstein says. "Apple could be perceived as a Chanel-Gucci kind of computer," he says. "That would further drive it into a niche market."

Mac Resellers--Friend or Foe?

Goldstein believes Apple has been relatively successful in reaching its customers through third-party retailers. By pursuing its own retail efforts, Apple could force those retailers to cut back on their Mac offerings, including software and peripherals. "That could make life more difficult for Mac users as a result," he adds.

One East Coast reseller, speaking on the condition of anonymity, said Apple's move into retail could potentially benefit third-party retailers. But he's still concerned that Apple-owned stores will eat into his buisness.

"If they're going to break even and make a profit in the second year, they have got to sell professional systems," the reseller says. "And if they are selling professional systems, they're going after the very core of what our business is as an Apple specialist."

However, ClubMac president Mike McNeill said the retail stores are an important step if Apple wants to increase the number of Mac users. "If the retail stores are successful in this endeavor, I'm all for it," he says.

That doesn't mean third-party retailers won't be affected by the Apple stores, though. "We will more than likely see some effect to our consumer sales of iMacs and iBooks, however we may also see an increase if Apple convinces someone to buy but is not able to sell a full solution," McNeill adds. "Long term it should help, as once the customer becomes a regular Mac user, we should be able to sell to that customer."

Apple executives insist the company's retail stores won't hurt Mac resellers. "Our strategy isn't to put our resellers out of business, but to work side by side with them," Apple CEO Steve Jobs said at Tuesday's preview of a store in McLean, Virginia. "We think our stores will help resellers a lot by increasing exposure to the Mac platform."

Even if the Apple stores only wind up cannibalizing sales from existing Mac dealers, Apple still comes out ahead, said Niles of Lehman Brothers. The distribution costs don't change, and Apple gets to keep the percentage of sales from its stores that might otherwise have gone to third-party retailers.

Apple expects the stores to break even by the holiday shopping season and to turn a slight profit next year. But Shapiro's Rosenbaum contends that just breaking even would benefit Apple because of the visibility a brick-and-mortar retail presence gives the company.

That's crucial, because these are tough times for the economy in general and PC makers in particular. A study by Leo J. Shapiro & Associates found that the number of U.S. households planning to buy a computer fell 3 percent from April to May. The number of households actively shopping for a computer dipped 2 percent.

The slow computer market gives Apple all the more reason to launch its retail chain, Rosenbaum says. "It's the best possible timing because competition is up and sales are down. They need all the showcasing possible," he adds. "Without this, in a down market like this, they would have it even tougher. In other words, in times like these, Apple needs to go the extra mile."

Goldstein remains unconvinced. Consumers haven't indicated that they're having trouble finding outlets that sell Macs, he says. So he wonders who Apple hopes to serve with its new stores. "It's another case of Apple being Jobs driven and not consumer driven," Goldstein says.

Jim Dalrymple of MacCentral contributed to this report.

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