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Taking Back the Market

How Apple Retail Can Profit from the Recession

Tim Nash - 2008.12.04

Popularity: LEMLEM

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In every recession, there are opportunities. Apple has a larger cash mountain than any of its competitors in retail, and with the right kind of investments will come out of the recession stronger than ever.

Black Friday

The first overall US sales figures from the "Black Friday" weekend look okay, although generally the number of customers seems to be down. The question yet to be answered is how much the combination of heavily discounted stock and a souring economy will cause people to hold back buying until the last possible moment. When people know that bargains will hang around for some time - and possibly be even better after Christmas - why buy now?

From analyst reports Black Friday sales were good at Apple Stores. As Apple, as usual, limited any advertised discounts, customers will still expect to buy from its retail stores at full price.

Focus on Value

Where Apple needs to do more is showing the value of the purchase. For Macs, not only emphasize the free software that comes with it, but also what you can do with that software.

Another simple campaign:

What is your old PC worth? What is a same age Mac worth?

Find out for yourself here - look on eBay (with simple instructions).

It is very easy to forget that the majority of people use their PCs in a very limited way and need pointing in the right direction.

3 Major Costs

Apart from inventory, the three major costs in retail are employees, the lease commitment, and the cost of rebuilding and fitting out the store. Since Apple produces most of the stock and is one of the leaders in supply chain management, that side is as under control as it ever will be.

Apple Retail has always been able to recruit from a pool of motivated, experienced users. This has kept down recruitment costs, training costs, and staff turnover. The successful steady expansion and busy stores too have helped motivate the staff, and Apple is now recognized as one of the top retailers. Everyone wants to be part of a success story.

What Apple should avoid, if at all possible, is widespread layoffs. While Wall Street will undoubtedly make noises about Apple needing to be lean and mean, given how well they have managed their own companies, that advice can be ignored. If Apple comes through the recession without layoffs, it will be very attractive to people wanting to make a career in retail. This will not only cut future hiring costs but, as these people move out into retail management elsewhere, also open wide the retail sector for Mac sales.

The Poor Economy

The bad news and bankruptcy filings have started, even though the Christmas quarter is typically the strongest in retail and the recession has only just started. Circuit City has filed for Chapter 11 and Best Buy issued a warning of reduced profits and revenue - and that's only the electronics sector. Mall anchor tenant Nordstrom has cut profit forecasts three times this year. Other retailers will suffer. Some will end up going out of business. This will both free up prime locations and reduce their cost.

Most of Apple's leases are for 10 years. During this kind of lease, typically there will be two rent reviews, and Apple has much more leverage in negotiations now than when the Retail Stores started. So wherever Apple has not locked in agreed rents long-term, it can negotiate more favorable terms.

Shopping Mall Considerations

Apple is a destination store. Last quarter the stores had 42.7 million visits.

If the 11 "high profile" stores attracted 20 million visits between them, the other stores still averaged over 8,000 visits per week. Without destination stores, malls do not function, which is why stores like Nordstrom are at the corners - to encourage shoppers to walk between them and impulse buy elsewhere.

"We feel Apple will bring in a customer who may not have visited us before," said Susan Holland, University Park Village's property manager (Fort Worth Star-Telegram).

Most malls are financed with borrowed money. The credit crunch, combined with failing small retailers, means fewer small retailers will want to pay expensive mall rents. With less demand for space, the operators will have to reduce rents. Because smaller retailers often pay a percentage of sales to the mall owner while anchor tenants and destination stores pay lower rents, reduced demand for small spaces can affect mall revenue a lot.

Similarly, much of the high-end property market is funded with borrowed money. Since most high-end retailers need aspirational middle class customers to keep profits up, few of these retailers will want to take on an expensive new property when a long downturn is forecast. Apple will have much less competition for top sites, and the owners of these properties will be much more willing to cut a deal with Apple, as they know it can pay its bills.

So over the next 12-18 months - or until mall and property owners accept how bad the retail market is - it will make sense to reduce store openings to those sites where substantial commitments have already been made and new countries where Apple wants market intelligence.

Apple Stores Overseas

In countries, like France, with lease restrictions on what businesses can be in the location and zoning restrictions, rules and preferences will inevitably be relaxed. Paris, for instance, will prefer to have Apple on the Champs Elysées drawing a crowd instead of a store selling discount goods or an empty shuttered one.

In the same way that the two original Apple Stores were opened in California months before the nationwide rollout started, opening a store or two to find out how well the standard retail model works with local laws seems to be the pattern in Europe.

Only one Apple Store in Italy 16 months after its opening. This after Ron Johnson said two more would open in Milan, in March at the annual stockholders meeting.

The first German Apple Store will open this weekend in Munich. It is in a wealthy state, Bavaria, but one that hasn't as yet liberalized shopping hours. So stores like Apple must close by 8 p.m. and are closed Sunday and for all national and state public holidays (13 in 2008).

However two are already open in Switzerland, with another under construction in Zurich, as Apple has it's largest local market share there.

Only in Britain, Apple's largest European market, has the expansion been rapid, but now it is suffering from similar problems to the US, with a cooling housing market and problems in the large financial services industry.

In Japan, according to Apple's 10K, revenue was up year-over-year, and there are encouraging signs of selling more Macs even though the PC market is down and the figures don't include the seven Japanese stores.

A Good Time to Grow

With much less available rebuilding and store fitting work, costs will naturally be lower. The problem in this area will be giving any specialist companies enough work at a reasonable price to keep their teams intact. If Apple is able to do this, it will earn the loyalty of owner managed companies.

So the costs in key areas can be reduced, but much of Apple Retail's success in this downturn will depend on keeping visitor numbers up. Busy stores keep up revenue. Fortunately there are low cost initiatives which will make visitors want to come back and position Apple for strong growth in better times. LEM

Tim Nash lives with his wife, her website on the area ariege.com, two daughters, a cat, and a dog in the French Pyrenees. He has worked for computer companies for more years than he cares to remember, lapsed for a while after the Apple II, but became a Mac fan when his wife introduced him to the IIsi.

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