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Taking Back the Market

Apple Retail Will Break Records This Christmas

Tim Nash - 2008.11.26

Popularity: LEMLEMLEM

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250 stores now open, lease commitments of $1.4 billion, capital expenditure of $1.4 billion, and easily the largest head count of any Apple division with 15,900 full time staff positions at the end of the last quarter. The whole of Apple only has 32,000 employees.

Retail is a major part of Apple, yet it is largely ignored by technology analysts in the rush to give their latest Mac, iPhone, and iPod projections. In the conference call after last quarter's figures, despite record sales and a record 50 store openings in FY 2008, no analyst asked about store openings for the coming year to see how confident Apple is. Some analysts think sales will be down slightly but up from last year, others that the huge spending downturn could leave the stores empty.

Retail Failures

With the worsening retail market, many store chains will suffer. In the lead up to Christmas, normally the season when stores make most of the year's profits, Circuit City has filed for Chapter 11 bankruptcy and in the UK the 800 Woolworths stores are reportedly up for sale for £1.

The news from most PC companies trying to sell into a saturated, depressed US market will be bad. Most people and organisations want to use products from successful companies. This is why Microsoft has had such a hold. However, that hold will be loosened in a downturn where most PC companies are seen to suffer and Apple is seen to be successful.

Sitting on a cash mountain of $24 billion with no debt and driven by a belief in investing in downturns, Apple can really benefit. Remember Apple Retail was started in the last recession.

Positive Image

Every time someone sees a busy Apple Store it reinforces the image of a successful company, especially when other stores are largely deserted. The next time the MS bore or the guy from IT starts sounding off about Windows owning the market, bring up the thought "those Apple stores sure look busy." Even if this is only said sometimes to friends and coworkers, it adds to the positive feedback for Apple - and personal experience often outweighs cold, hard statistics.

Apple's mini stores always seem crowded with the normal number of staff and a few customers even when the stores clearly aren't busy. If there aren't many other customers, experience from other electronic stores means you expect to be pounced on by the staff and pressured into buying a computer. So I believe they mainly attract customers who already know the Apple experience, not the "new to Mac" customers which, according to Peter Oppenheimer, Apple's CFO, are 50% of retail Mac sales, and therefore the mini stores don't work as well as the normal size stores.

PC Sales Will Suffer

Along with the PC manufacturers, retail PC outlets will suffer. Microsoft is making noises about Windows 7 being available next year to cover the lack of enthusiasm for Vista. Few will find the need to buy a PC unless it answers an immediate need and is at a rock bottom price and, unless you already know what you want, it is hard to buy in a near empty electronics store.

It is hard to browse with any kind of enthusiasm when staff are nervously asking if you need any help. Retailing is about seeing, touching, playing with the electronics you want to buy. It needs confidence in the retailer and the customer for that impulse buy to happen. While there are people who buy when unhappy, most of those prefer a bright, busy store.

So while Apple can keep the visitor numbers up for each store, there will be this highly visible contrast with the rest of the industry: Apple stores crowded and the PC sections of other stores very quiet.

Apple Is Cautious

It seems like Apple is already taking precautions to maintain this. In New York, despite paying nearly $6 million a year in ground rent, a new store near the Empire State Building isn't going ahead. In Washington, DC, no plans have been filed for conversion of a building bought a year ago. It makes a lot of sense to hold off on the capital expenditure for new stores and concentrate customers in existing stores wherever there are Apple stores close by.

While there are no temporary positions this year and reports of fewer hours for part timers, Apple Retail so far seems to have avoided layoffs, even though the stores are well staffed. Having "geniuses" and "creatives" spend some of their time on the floor with customers would be worth trying out even in better times, to give the employees variety and see how good they are in other roles.

Since 2006, the average number of employees per store is up by more than two-thirds, but the revenue up by only one-third. At least part of this is due to increasing customer service with more "geniuses" and more warranty work done through the stores and training initiatives like 1to1.

Apple Is Open

Genius bars also add to the visitor numbers. They always have a queue of people with problems, but these are problems being solved, and Apple is a company that lets everyone see this. It doesn't have the Returns Department hidden away where new shoppers can't see it. This adds to the impression of being open: Look we have nothing to hide. That you can go there and get a problem solved gives new users confidence. They can see that customer service isn't outsourced and, on the whole, customers with problems aren't irate. The "genius" part may be hype, but it beats store customer service elsewhere.

What can we reasonably project? There will be more Circuit City type bankruptcy filings, more retail chains in trouble, and more marginal electronics store closings. Because of the crowded store effect, more PC users will switch and, where convenient, more Mac buyers will buy in Apple Retail rather than outlets like Best Buy. Provided they keep the visitor numbers up, Apple Retail will stay in profit and Apple will gain market share.

Projections

For this Christmas quarter:

  • A year ago, the average number of stores open was 201.
  • If there are no more openings this year, the average number will be 249 (206 in the US).
  • Over 80% of stores are in the US, which is where Apple typically makes over 55% of its sales.
  • This last year, in each quarter, Apple Retail had year-over-year increases for average sales per store of 30%, 42%, 33%, and 15% respectively.
  • Even if the average sales per store is the same as last year's Christmas quarter ($8.7 million), sales for the retail division will be $2.107 billion.

Where are the gains over the last quarter ($1.72 billion), which ended September 30?

According to NPD, US retail Mac sales in October were up 28% year-over-year, and iPod sales were off 20%. If this continues - and the increase is likely skewed because of two weeks of new MacBook sales - it would lead to Apple Retail Mac sales up 49,000 or roughly $70 million (using last quarter's Average Selling Price, which is usually lower because of student sales).

iPod sales this quarter last year were just over 22.1 million. A 20% drop would reduce that to 17.7 million - 60% more than last quarter. At that ASP, if the stores only sell 15% of these it will add $150 million. Since the launch of the App Store, more of these will be the iPod touch, with a higher ASP, as it picks up market share from Sony's PlayStation Portable.

iPhone sales also follow GAAP subscription accounting over 24 months. 3G iPhones ASP was about $650; that is just over $81 per quarter. Even if sales are flat compared to last quarter, this quarter includes the same revenue as last quarter + a full quarter of iPhone 3G sales. If the stores only sold 15% of the 4.9 million iPhones bought by users, when their only competition was AT&T outlets, that will add another $60 million.

While gift card sales are expected to be down, these sales only count when the cards are exchanged usually in January/February.

Continued Success

Despite all the economic problems, Apple Retail can look forward to another successful quarter with sales maybe breaking through $2 billion for the first time. That would make sales up over 17% year-over-year, and that kind of record breaking will be in short supply. LEM

Further Reading

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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