Is Apple stocking its own shelves first?

Shortages of the new flat-panel iMac have Macintosh dealers grumbling that the computer maker is showing preferential treatment to company-owned retail stores.

Shortages of a hot new product have Macintosh dealers grumbling that Apple Computer is showing preferential treatment to company-owned retail stores--something the company promised would not happen.

Savvy shoppers are finding limited quantities of the new flat-panel iMac trickling into Apple's 28 retail stores, while Mac dealers amass huge waiting lists of customers. Some dealers claim they have received only five to 10 units since the new iMac's Jan. 7 debut, but they have waiting lists of 50 people or more. Apple stores and the company's online site have experienced backlogs too, but they've still been able to get their hands on hundreds of the popular computers. Some Apple stores even have models in stock right now.

When Apple opened its first retail store in May, company executives pledged not to put their own stores before long-loyal Mac dealers. But dealers say that is not what's happening.

"Apple pumps a lot of hot air at us...telling us we're a top priority and they really need us," said one angry Northeastern dealer, who asked not to be identified. "But when it comes down to actually getting the product, it's very clear who the top priority is, and that's the Apple Store online and physical retail stores."

Apple declined to comment about the shortage or its business relationship with dealers.

Apple's apparent approach of putting its retail stores before dealers may be necessitated by the need to show Wall Street that the retail strategy can succeed. After opening its first two stores in May, Apple expanded to 27 locations by the end of the year. But the Cupertino, Calif.-based company failed to show a profit at retail last year, as originally forecast. The retail stores posted a slight loss instead, according to Apple filings with the Securities and Exchange Commission.

"Apple's got a two-pronged in-house distribution method with the stores and their Web site, which does a good chunk of their business," said NPDTechworld analyst Stephen Baker. "As a company, they have a responsibility to protect where the majority of their business is going. As a public company, they have to sell to where they're going to make the most money."

But Apple's conflict between direct and dealer sales is nothing new in the industry. Compaq Computer, Hewlett-Packard and other PC manufacturers selling direct and through dealers have found it difficult to create the right balance.

"The bane of any company trying a multinational distribution strategy that includes a captive distribution method is shortages and allocation problems," Baker said. "It's almost impossible for anyone in that situation to find an equitable manner to distribute products to both internal and external customers."

The iMac shortage is getting worse for many dealers, although historically the company has resolved similar supply problems within a few months of their start.

"In the past, they have remedied these things fairly quickly. It's been a quarter or two at the most," said Roger Kay, an analyst at IDC. Typically, Apple will generate hype on its newest products but then does not prepare enough products to fulfill immediate demand. A shortage ensues, but it works itself out through manufacturing tweaks and managing to ship some products. Some customers also drop off the waiting lists. Similar bubbles have occurred with some Apple notebooks and desktops in the past four years.

Dealers cry foul
Until the iMac shortage, many dealers were more accepting of the increasing deference given to the Apple retail stores, although some expressed misgivings. But limited availability of the new iMac has heightened tensions during what is typically a slow selling period for Macs.

One Midwestern dealer in a trendy area reported having received about two dozen high-end iMacs, which in no way "satisfied demand," he said. The Apple Store down the road, by contrast, had been getting regular shipments of the high-end iMac, according to a sales representative. Both stores were out of new iMac stock on Tuesday.

A Southeastern dealer, who struggled to contain her frustration, said Apple's recent actions had made staying in business very difficult. "We're in worse trouble now because we can't get the machine everyone wants," she said. "We might have to close the store tomorrow because of one thing: We can't get flat-panel iMacs."

The store has more than 60 outstanding iMac orders but has received only a handful of the top-of-the-line iMacs. Her store is about a 30-minute drive from an Apple retail shop that, according to an Apple Store sales representative, has sold several hundred new iMacs.

"In this current economy, it's already difficult to move boxes," said Tim Deal, an analyst at Technology Business Research. "Some of these dealers that already don't have the deep pockets and don't have the sort of backing that Apple backs its own stores with may suffer. Some may be forced to close."

Deal said that when Apple opened retail stores, it "spelled doom for these smaller dealers, who have been loyal."

Random calls on Tuesday to five other Apple retail stores--in Chandler, Ariz., Durham, N.C., Littleton, Colo., Plano, Texas, and Woodcliff Lake, N.J.--found that they had iMacs in stock. Most had both the top-end and midrange models on hand, with one store out of the high-end iMac. Sales representatives indicated the iMacs were selling briskly, with one having worked through its waiting list of 300 before starting a new list.

Dealers in those same areas did not fare as well. Random sales calls to smaller Mac dealers and CompUSAs turned up no flat-panel iMacs for sale. This apparent pattern of availability in Apple stores has some dealers fuming.

"I really can't talk about this fiasco, because it makes my blood boil so much," said one exasperated Mac dealer on the West Coast. "I know that if I drive over to the Apple Store, I can buy a SuperDrive iMac. But I can't get Apple to send me one to sell." The iMac with SuperDrive CD- and DVD-burner is Apple's high-end model.

The price Apple pays
The supply situation has only worsened for many dealers. As of Monday, PC distributor Ingram Micro had a 19.2-week backlog of high-end iMac orders, up from 18.6 weeks seven days earlier. The distributor had four units on hand with 123 in transit from Apple. Since Apple started shipping the new iMac on Jan. 28, Ingram Micro has received and sold fewer than 1,100 units. The distributor had yet to receive any of the other two models, although 160 midrange iMacs reportedly were on their way from Apple.

Over at fellow PC distributor TechData, a bad situation had only gotten much worse. The high-end iMac backlog jumped to 15.5 weeks from 10.7 weeks over seven days. On Monday, the distributor had 9 units on hand, with 51 high-end and 40 midrange iMacs in transit from Apple. The backlogs are often longer than actual demand because of double and triple ordering, but the length of the backlog is still fairly long.

The majority of independent Mac dealers buy their products from distributors, with a smaller number going directly to Apple.

Putting priority on its own stores over dealers could come at a high price for Apple, considering how many more dealers there are, analysts said. CompUSA alone has more than 220 locations, compared with 28 Apple stores. Independent dealers add almost another 200 stores carrying Macs.

"The relationship with dealers is an important one," said ARS analyst Toni Duboise. "It's not something any company wants to do--degrade the relationship with these important partners. I know Apple wants their own stores, which offer a consistent experience, but they have to court these dealers if they want any hope of increasing their market share beyond 5 percent."

ARS found that in what Duboise called "shelf share," Apple presence dropped 40.5 percent from January to February in stores selling Macs. The market researcher tracks about 150 stores in 17 metropolitan areas, 25 of which carry Apple products. None are Apple retail stores.

Apple had 12.1 percent shelf share in January, but only 8.2 percent in February--a drop from third to fifth place. Apple's pulling out of Circuit City was one factor, although half those stores still had Macs for sale in February. But ARS found Mac product shortages to be the larger problem.

"The legacy products are not being replaced by the new ones because the retailers aren't getting them," Duboise said. "There is a direct correlation in shelf share--getting your product out there in front of customers--and selling products. Apple is not following through on that simple strategy."