Apple gambles with retail plan

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Apple Computer's plan to open 25 stores this year amid slowing demand for personal computers and a sluggish economy has analysts and industry insiders scratching their heads. They're wondering whether Apple's foray will pay off, or whether it will end up as a cool showroom for consumers to test drive, rather than plunk down cash for, a bite of the Mac.

Analysts and industry insiders say talk has circulated for some time about the possibility that Apple might build its own retail presence from the ground up, instead of solely relying on retailers such as CompUSA and an assortment of smaller chains and catalog merchants. Apple Chairman Steve Jobs' May 15 announcement detailing the retail strategy may not have been a total surprise, but the timing of it, several observers believe, is questionable. The venture is costly, given the upscale locations the company has targeted, and risks alienating Apple's existing retailers.

"Obviously we're disappointed. In a perfect world we want to be the only ones [selling Apple]. We don't want to share. But I understand Apple's desire to have more control over the process," said Larry Mondry, president-chief operating officer of CompUSA. The chain has partnered with Apple for nearly a decade, launching Mac stores-within-stores in 1997. "Apple's been a good partner. I'm sure we'll work our way through this."

"There are definitely risks they're running with this strategy," said Anne Bui, senior analyst, personal computing, International Data Group's IDC, a technology-research firm.

Apple's newspaper ad trumpeting the store openings says the company has a 5% market share. But IDC data tell a different story. Apple's worldwide share of the personal computer market for the first quarter 2001 was 2.4%; its U.S. share was 3.4%. Ms. Bui notes that Apple's share hasn't hit the 5% mark or beyond in a long time. The company expects to break even on the retail operation by year's end, and become profitable by fiscal year 2002.

In a report on Apple stores, Merrill Lynch analyst Steven Fortuna expressed concern about the extent of the strategy that is "distant from Apple's traditional core competencies, and would add to the cost structure, already high relative to the competition."

Regarding attaining profitability in 2002, "I think it's highly optimistic," Ms. Bui said.

Apple will spend $60 million to launch the first 25 stores, most of it going toward technology infrastructure and inventory-control systems. "If it's an abject failure, it's not that much [money]," said David Bailey, a Gerard Klauer Mattison research analyst. "Look at it as a marketing effort and not a sales effort."

So where does that leave traditional advertising? Apple spends more than $150 million a year on advertising via Omnicom Group's TBWA/Chiat/ Day, Playa del Rey, Calif. Spending on national ads could be pared if the retail effort takes off. More likely, targeted media buys will help drive traffic into stores, making brand advertising less essential.

Retail is a tricky proposition for PC marketers. Even Gateway, whose Country Stores chain launched in 1996, has applied the brakes. After a re-evaluation earlier this year, the company closed 27 underperforming stores. Gateway will have 302 stores in the U.S. by the end of June, 11 of which opened this year. Currently, there are no plans for additional store openings in 2001, Gateway said. The cow-spotted marketer pulled out of 1,000 OfficeMax stores this year.

"I think Apple appeared to be undaunted by the decision that Gateway made," Ms. Bui said, adding, "the decision to go forth with the retail strategy is based on this level of confidence that they have with the customer." Apple claims nearly 25% of its sales come from www.apple.com, so its own retail chain is a logical extension. Rod Johnson, head of retail operations and a former VP-merchandising and retail at Target Stores, was unavailable for comment.

Apple's stores will target affluent, tech-savvy consumers and carry the entire Macintosh line, showcase more than 300 software titles, include a "Genius Bar" staffed with Apple specialists and offer 300 peripherals by marketers Handspring and Palm.

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