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THE DAY AHEAD: Apple&#039&#039s retail strategy bets big on tourists

COMMENTARY--Attention all tourists: Apple Computer wants you.

Yeah you, the poor schmuck who's browsing through boutiques with your wife in Soho (that's in New York City for those who don't live here).

Yeah you, the gadget head who is lost in one of the largest malls in America.

Yeah you, the clueless tourist who only needs a little direction, but can't get it because the natives aren't that friendly and walk too fast.

And you, the person who has expendable income and is known to envious journalists as an "upscale consumer."

Apple (Nasdaq: AAPL) wants you to visit its hip retail stores, which will be officially unveiled Tuesday. Once you stroll into this digital haven, you'll get iMacs in all kinds of environments. See little Johnny using his iMac for homework. See dad cut a video. See that cool student impress classmates with her iBook. Get demonstrations that will boggle the mind. Oh yeah, and buy something from Apple.

That's essentially Apple's thinking behind its retail strategy. Rumor has it that Apple CEO Steve Jobs visited a Sony store--the ones that show off all of Sony's cool toys--and knew right away he needed an Apple showcase. In late 1999, Apple even hired Allen Moyer, a former Sony executive involved in retail projects such as the futuristic Metreon retail-entertainment complex in San Francisco.

Wall Street is mixed on Apple's retailing idea largely because it remembers Gateway's willy-nilly expansion of its Country Stores. Wall Street knows that the PC business is already cutthroat and the fixed costs involved with stores could hurt Apple's profit margins.

Is Apple crazy? Maybe, but Apple, which wants to expand its user base, needs to do something. That's why Apple is courting tourists. Apple wants to be the Disney World of the PC market.

Aside from Apple's first store, which will be in McLean, Va., most of these outlets will be in high-traffic tourist locations such as Chicago, Bloomington, Minn., and Memphis, Tenn. The idea is to use the stores as a marketing vehicle. Inventory will be light, and the big goal will be to convert folks into Macheads by showing off some toys.

Apple's strategy isn't that different than what Sony does with its showcase stores and Nike does with Niketown in tourist havens. You don't visit these stores to buy stuff necessarily, but to see cool displays and cutting edge products.

In New York, Apple is setting up shop in Soho, one of the trendiest areas around. Apple took out a lease on a 25,000-square-foot store in Soho at the beginning of the month. The PC maker is taking over the digs of Restoration Hardware, an upscale home-furnishings store. At this point, Apple hasn't done much with its new home. The empty store still has the Restoration Hardware markings on it. A big blue dumpster--the type used when you gut buildings--sits out front.

For the most part analysts are supportive about Apple's plans, but they acknowledge that if the company goes bonkers with the retailing gig, they'll downgrade the stock in a heartbeat. A.G. Edwards analyst Brett Miller is sold on the concept.

"Apple has been watching Gateway's attempt at retailing for the last year and a half," said Miller. "The stores will be more about brand equity. If you're going to go after consumers you need to raise awareness and generate excitement."

Miller said Apple is going after the high-end tourists in the shopping districts. He paints a scenario where a vacationer (one of those folks that films every moment) wanders into an Apple store and learns how to hook his camcorder into an iMac. This vacationer learns how to download the video into iMovie, edit it and create a film. By then he's hooked and a lifelong Apple customer.

To Miller, Apple's retail push is all about foot traffic. By launching stores now, Apple should be able to showcase its wares in the summer, just in time for the back-to-school shopping season. Education is one of Apple's big markets, but it has been slipping due to inroads by Dell Computer (Nasdaq: DELL) and other PC vendors. If enough vacationing kids play with iMacs, Apple can retake the education market.

That's the theory at least. In a research note, Lehman Brothers Dan Niles said he was "somewhat cautious" about Apple's retailing effort. Citing added inventory, fixed costs and logistics with opening new stores, Niles said there are plenty of risks: "This environment is already difficult for companies without stores and difficult for those companies (Gateway) who try to excel through both channels."

Niles may have a point.

There are no guarantees that Apple stores will do well. According to Restoration Hardware spokesman Dave Glassman, the company's Soho store just wasn't "fiscally living up to expectations." He added that Restoration Hardware had trouble selling big-ticket items for Soho's trendy residents. "It's a very trendy of-the-moment place," he said.

However, Glassman said Apple may do OK in Soho because the PC maker has cool designs and is a trendsetter. Just don't expect Apple to make a lot of money on this effort. "If it's an extension of the brand, it's a great place to do that," he said. "Our stores had to turn a profit."

Perhaps Times Square would be a better location for Apple's big splash.

In either case, Apple's retailing moves are going to be an interesting experiment. At the very least it'll be amusing to see how Apple's New York City store competes for attention against its neighbors, including Prada, Armani, numerous boutiques and the Guggenheim Museum Soho. TDAIN
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