Analyst 'cautiously optimistic' about Apple retail

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Joseph Beaulieu, an analyst with Morningstar.com (an independent company that provides mutual fund, stock, and variable-annuity investment information), thinks that Apple's decision to open its own line of retail stores is a good strategy.

"When Apple Computer announced its intention to open 25 retail stores by the end of this year, some investors were enthusiastic, but most were skeptical," he writes in an online column. "But with Apple's market share in the PC industry mired at around 5 percent, I think Apple needed to do something bold, and the retail strategy looks promising."

The analyst thinks that by opening retail stores in high-profile shopping malls, Apple can raise consumer awareness of its products. Plus, those who actually get some hands-on time with the company's products are often impressed what they can actually do with their products, he writes.

"Apple's focus on the whole product is a striking contrast to Dell and Gateway, which tend to market their PCs as merely a bundle of parts that the customer can pick and choose," Beaulieu says.

The financial risks are minimal, he adds. Though Apple plans to spend US$85 million to build out its first 25 stores, and has signed store leases valued at $203 million, the company has around $4 billion in cash and investments (and no debt) on its balance sheet, "so the price tag on the stores isn't much of a problem," Beaulieu says. However, there are risks.

Apple will have to carry large amounts of inventory in its stores, as well as lots of third-party products, such as digital cameras, digital video cameras and personal digital assistants. "The consumer electronics market is notoriously fickle, and one false move could leave Apple carrying huge amounts of rapidly depreciating inventories," Beaulieu says.

And, of course, other computer makers haven't found the retailing biz to be so easy. Just ask Gateway, which has had to close some of its Gateway stores.

"But there are critical differences between Apple and Gateway," Beaulieu explains. "Most importantly, Apple is not a victim of the PC price war. Of all the PC vendors, Apple is in a unique position because it does not have to play the pricing game on Dell's terms. As anyone following the travails knows, Dell has been slashing prices on its products, thereby forcing the other clone-PC vendors to follow suit in an effort to retain market share. Apple doesn't appear to be after price-sensitive customers [therefore] I don't think that Apple will get squeezed in the same way that Gateway has, trying to support the hefty overhead of retail operations while engaging in a price war with competitors that don't have the same overhead expenses."

The analyst says he's "cautiously optimistic" about Apple's retail strategy. He thinks that the company has a good chance of gaining some market share and breaking out of its niche over the long term, though it won't be a quick fix.

Apple's latest retail store opened in Peabody, MA, this past weekend. See our Sept. 1 report for details.

This story, "Analyst 'cautiously optimistic' about Apple retail" was originally published by PCWorld.

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