Sony And palmOne Try Boutiques

They hope that this high-end strategy for flogging the brand will help them avoid commodification

When Apple Computer Inc. (AAPL ) announced in May, 2001, that it planned to open its own stores, many industry watchers, including BusinessWeek, scoffed. Manufacturers ranging from Gateway Inc. (GTW ) to Dell Inc. have opened stores and kiosks -- only to shut them down. Yet three years later, Apple's 75 stores are not only helping turn new customers on to the company's computers and music players, they're also surprisingly profitable.

That success has prompted a pair of rival gadget makers to hang out their own shingles. Sony Electronics Inc. (SNE ), which has long had three big flagship stores, and PDA maker palmOne Inc. (PLMO ) are both racing to open smaller, boutique-style outlets in upscale locations around the country. Sony, which opened its first boutique outside San Diego last year, opened its third in Boston on May 6. Over the next year, it plans to open at least seven more. And palm-One, which opened its first store in 2001, now boasts 11; by yearend, it hopes to have 15. The goal? By selling directly to consumers, both hope to draw attention to their brands, which have tended to get lost lately amidst the bewildering array of gadgetry now found in electronics stores. "Properly executed," says retail consultant Kurt Barnard, "these stores can be invaluable assets."

Neither company is aiming to sell a lot of gadgets directly; instead, they're more interested in educating consumers about their products. Much like Apple's outlets, the new stores are staffed with salespeople well versed in the complexities of their digital offerings; palmOne's stores are even designed to look like cafés, so customers can relax and give the products a go. And both companies are targeting women, who may be more likely to walk into a boutique-style store than the disorienting emporiums where most gadgets are sold. "This is about putting consumers in an environment that's more lifestyle-oriented," says Michael Fasulo, Sony Electronics' president of retail operations.

Will it work? Most analysts agree that Sony and palmOne stores can help shore up their brands in the minds of well-heeled shoppers. The malls they have chosen feature such upscale retailers as Coach, Nordstrom, and, yes, Apple. By putting shops in high-traffic, upscale areas, the two companies may pull in new customers who are more likely to buy items on impulse. Moreover, by dealing directly with customers, they may gain better insight into fast-changing trends in consumer electronics.

What the stores won't do is provide a quick fix of what really troubles both Sony and palmOne: a U.S. market flooded with me-too products that have become virtual commodities. The result: a consumer with little brand loyalty, who buys the cheapest possible gadget. In that, their experience may be closer to Gateway's than Apple's. The PC maker's hip, helpful stores never got much traction because Dell could always undercut it on price. And it's not as though visitors to Sony's and palmOne's stores will find bargains. Both companies are holding prices near list, in part to avoid alienating big retailers like BestBuy Co. (BBY ) and Wal-Mart Stores Inc. (WMT ) that sell their products.

BAIT AND SWITCH?

Sony and palmOne figure that even if visitors to their stores don't buy anything, the experience will lead them to pick up their products elsewhere. In an early test of this strategy, palmOne handed out rebate slips to people who visited its stores and found that 31% later bought palm products at other stores or online. "This isn't about cannibalization," says palmOne's Retail Stores Director Kanwal Sharma. "It's about growing the market."

Still, risks abound. Retail shops -- especially high-end ones -- have high fixed costs. Consumers may use the stores to educate themselves about a gadget and then buy a rival product at a cheaper price. And the comparison with Apple may not hold much water; unlike Sony and palmOne, it has a suite of original products and a famously cultish following. Observes Apple Senior Vice-President Ronald B. Johnson: "No matter where you go, Apple products tend to command higher prices." Neither Sony nor palmOne can say that -- not anymore.

By Cliff Edwards in San Francisco

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