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A Great Future in Store for Apple?

By Charles Haddad The Apple store blazed with light, beckoning those strolling along Palo Alto's main drag on a chilly Friday evening. Inside, the shop hummed with people toying with iPods, digital cameras, and iMacs. Children were hunched over a low table, playing games. Every nook of the store buzzed, except one: the checkout counter. The sole person on line was a teenage boy, clutching the latest version of the strategy game Civilization.

This scene, witnessed by yours truly in early January, captures what Apple is doing right -- and wrong -- with its 27 new stores. The stores are doing a great job of drawing all kinds of visitors, Mac and PC lovers alike -- even folks who have never owned a computer. But Apple's young clerks aren't making sales.

You don't have to take my word on this. Needham analyst Charles R. Wolf has documented the phenomenon in a recent edition of his newsletter, Wolf Bytes. He found that Apple's outlets are persuading about only 1% of all store visitors to buy Macs -- and most of those buyers are already Mac enthusiasts. That's pathetic, considering Apple reported more than 800,000 people passed through its stores in December alone.

DEARTH OF A SALESMAN. All is not lost. In private, Apple acknowledges its clerks are doing a poor job of selling Macs. The company even admits the clerks aren't to blame. Apple stressed Mac expertise -- not salesmanship -- when it trained them. That's what has made the stores a dream come true for us Mac enthusiasts. But now Apple plans to beef up its instruction to teach clerks how to close the deal.

It won't take much to turn the stores around. Wolf fed Apple's retail numbers through his various financial-modeling spreadsheets and came to a wonderful conclusion: The company need persuade only one more percentage point of visitors to buy Macs for its stores to become a smashing success.

Here's Wolf's analysis: In a chain of 100 stores, 2% of store visitors buying a Mac would translate into 73 weekly sales per store, or about 377,000 total annually. And that would boost Apple's U.S. market share in computers to 6.5%, from 4%. Apple expects to have 124 stores by the end of 2003.

YOU'LL NEED THIS, TOO. Not too shabby. But wait, there's even better news, at least for Apple's bottom line. The average transaction price in an Apple outlet is a lot higher than on the company's Web site or at big retailers such as CompUSA. Wolf calculates that, customers drop an average of $2,050 when shopping at a store, which is some $400 more than the companywide figure.

The reason is twofold. First, 40% of store buyers are newbies. They tend to spend more than longtime users, who typically are, say, upgrading their version of Microsoft Office rather than buying their first copy. Second, clerks are doing a good job of explaining why new users need such extras as Airport cards and Office. Together, these factors are upping Apple's gross margin on new users to 36%, Wolf calculates, vs. the company's overall gross margin of 31%.

Still, don't count on Apple turning its stores into big profit centers just yet. It will take time to teach clerks how to sell better. Plus, the company is still rolling out the stores. It has invested $90 million so far in the stores, according to the company's recent Securities and Exchange Commission filing. It shows Apple stores booked $48 million in sales during the first fiscal quarter and lost $8 million -- largely due to start-up expenses.

THE iMAC ADVANTAGE. If you exclude startup expenses, the stores are already doing pretty well, Wolf figures. His numbers show every store basically breaking even, earning an average of $250,000 in cash per year, with after-tax profits of about $13,000. That's darn good when you consider this is the worst market for PCs in a decade. And Apple did especially poorly during the important back-to-school and Christmas selling seasons, as Mac loyalists held out for the new iMac.

Dare I say it? The pieces are falling into place for the Apple stores to take off. The new iMac, which has gotten rave reviews, will hit the market next month. And computer sales are starting to stir industrywide once again.

If Apple can just pump up the salesmanship, the stores would be filled with the sound of ringing cash registers. And the company might even grab a few more converts. Haddad, Atlanta-based correspondent for BusinessWeek, is a long-time Apple Computer buff. Follow his weekly Byte of the Apple column, only on BusinessWeek Online

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