Apple revs up retail store strategy

Apple Computer is planning to open an additional 18 stores as it considers new ways to woo Windows users to the Mac. Is the company learning from the mistakes of Gateway?

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Apple Computer is expanding its retail store strategy as it considers new ways to draw Windows users to the Mac, according to sources close to the company's plans.

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The Cupertino, Calif.-based company is considering a number of in-store demonstrations to attract potential PC users, the sources said. One strategy under consideration would involve bringing Windows PCs into the stores, where customers could presumably be shown the advantages of Macs.

If the proposal is adopted, PCs from one or more manufacturers would be compared with Macs, the sources said. Apple also plans to run Connectix VirtualPC--emulation software for running Windows on Macs--on store demo units. This too would be part of the "conversion" strategy, showing potential PC customers that they could continue using current Windows software on their new Macs.

"There's this pervading perception of the Mac as being this alien, niche product," said Technology Business Research analyst Tim Deal. "If you can actually show PC users it's not as alien, not as different as they might think it is--something the Apple stores already are good at doing--certainly it's going to increase sales."

Apple plans to open an additional 18 stores this year, bringing the total to 49.

In an interview this week with CNET News.com, Apple CEO Steve Jobs said the number of stores would "get up into the 40s" this year. That would be consistent with the 49-store strategy. Apple said in April it would open 20 more stores this year.

Apple opened its first retail store in McLean, Va., about a year ago. The company originally planned to open 25 stores last year, but reached 27. The current total is 31.

Among the cities where Apple plans to open new stores between July and November: New York City's Soho district and Los Angeles in July; Novi, Mich., and Wellington, Fla., in August; St. Lois, Mo., and Towson, Md., in September; and Las Vegas, Pasadena, Calif., Denver, and Oakbrook, Ill., in November.

Gunning for profitability
The expansion strategy is part of an effort to make the company's overall retail strategy profitable, without getting into the real-estate business. Apple is trying to learn from the mistakes of struggling PC maker Gateway, which continues to close stores after overexpanding.

Gateway last month shuttered three of its Gateway Country stores, electing not to sign new leases as the old ones came up for renewal.

"The last thing Apple wants to do is get into the real-estate business," said IDC analyst Roger Kay. "There's a balance they must achieve if they want to make these stores profitable."

Conservative expansion makes sense, Kay added. "There's fixed cost that they have to surpass by spreading more (sales) volume across the base."

During the holidays, Apple retail stores brought in $48 million in sales, but overall lost about $8 million. The loss lessened during Apple's 2002 second fiscal quarter, ended March 30, to $4 million on sales of $70 million.

"Those are definitely encouraging figures," Deal said. "That's certainly an indication they're on a road map to profitability. We knew there would be more stores. It stands to reason their retail strategy would become more robust this year."

But sources close to Apple emphasized that the company has taken a conservative accounting approach to the stores, treating them strictly as retail operations competing against other computer dealers. If Apple treated the outlets as manufacturer's stores, which would benefit from in-house manufacturing and distribution mechanisms, the retail operations would be profitable.

Software and peripherals attached to PCs have emerged as important revenue generators. Apple sells a monitor with about 75 percent of Macs sold through retail stores, the sources said. Apple sells only flat-panel monitors in the stores, and these typically generate more profit than CRT models. While Apple has greatly expanded the number of high-margin software titles it carries in the stores, about 5 percent account for 90 percent of sales, the sources said.

The stores also are hot spots for 802.11b wireless networking sales. Apple is the only computer manufacturer that builds wireless capacity into all its systems. About 20 percent of people buying a Mac in the stores also pick up an AirPort wireless network or base station.

The continued expansion apparently also is fostered by booming sales in most markets where Apple opened retail stores last year. During the second quarter, sales of Apple products jumped by about a third year over year in cities with a store, the sources said.

"What that indicates is that the physical presence of Apple in some of those markets has removed some of the mystery about the Macintosh, the Apple platform," Deal said.

Preaching to the unconverted
As the store expansion continues, Apple will increasingly turn its attention to converting current PC users to Macs. An estimated 40 percent of the 5,000 people visiting an Apple retail store each week are PC users. But this strategy is ever-developing and changing because of what the company has learned about PC buyers.

Apple's faithful group of customers tends to buy Macs for emotional reasons, such as styling, and because the computers are vital to what they do for work or leisure. But through surveys and other means, Apple has learned that PC shoppers are more price- and value-conscious and tend to treat computers more as appliances.

At an Apple store in Cambridge, Mass., one PC owner said he's not yet ready to commit to a Macintosh.

"Not really," said Federico Pena, who works for a local management consulting company. "I'd need it mainly for work reasons. All the work I do is in the PC environment. It would be a struggle to have a computer that's different."

Emulation software that would let a Mac run Windows applications probably wouldn't make a difference, he said. Or, at the very least, the Apple salespeople would have to run a convincing demo.

"As far as I understand," Pena said, "it's far from being fully compatible."

Given the number of non-Mac users visiting the stores, Apple sees converting Windows-based PC users as essential to expanding the company's market share. Apple's U.S. PC market share stands at 3.7 percent, according to IDC. Demonstrating the value of a Mac over a PC, in areas other than price, will be a main focus of the stores going forward, sources close to Apple said.

"Apple bumped Acer for the No. 9 slot in the top 10 PC vendors, so its retail strategy has been key in improving market share," Deal said.

An Apple representative declined to comment, citing the company's quiet period before its mid-July earnings announcement.

News.com's Jonathan Skillings contributed from Boston.