For Apple, Good Things in Store

A New York flagship store proves that the iPod maker's retail operation has been a success -- and may boost sales all by itself

It's a great space that Apple Computer (AAPL) has picked for its latest Manhattan retail store. The underground concourse outside the General Motors (GM) building has never been anything special. As far as retail properties go, the building itself is perhaps best known as the home of the big toy store FAO Schwartz, and more recently as the outdoor studio of The Early Show on CBS (CBS).

But now the big glass cube that marks the entryway to the Apple store underground is what steals the show (see BW Online, 5/18/06, "Apple's New Store Is Pure Glass"). But then again, Apple is used to one-upping the competition, visually and otherwise.

Apple is opening what's likely to be considered its flagship store on May 19, the fifth anniversary of the announcement of plans to build a retail business. The timing hits home the message that Apple's strategy -- much criticized at the outset -- has been a success. Retail stores last year accounted for about 17% of sales, and consumers picked up some 609,000 Macs at retail stores around the world, to say nothing of iPods.

My hunch is that the proportion of total sales will grow as the result of this store alone. Consider this: Apple retail stores generate about $4,000 per square foot per year, said Ron Johnson, the Apple senior vice-president in charge of the retail operation, in remarks on the morning of the opening. This new store boasts 10,000 square feet, which suggests about $40 million in sales per year is an easily attainable goal.


But sales expectations for this store could go even higher. One reason: location. It's adjacent to some of the highest-end shopping Manhattan has to offer. Bergdorf-Goodman and the Plaza Hotel (sadly being converted to condominiums) are across the street. Tiffany (TIF), Tourneau, Henri Bendel, and Louis Vuitton all have stores close by.

Then there are the tourists, many of them from outside the U.S. At least for now, all are eager to take advantage of the relatively weak dollar as measured against such currencies as the euro, British pound, and yen.

According to NYC & Co., which tracks statistics on tourism to the city, of the 43 million people who will visit New York this year, 7.15 million of them will come from overseas. In 2005, 1.1 million came from Britain, 762,000 from Canada, 327,000 from Germany, and another 322,000 from Japan.


And as it turns out, as BusinessWeek Online explained earlier this week, products like the iPod cost more overseas (see BW Online, 5/17/06, "Where Do iPods Cost Most, Or Least?"). If you live in Buenos Aires and plan a trip to New York, why bother paying as much as $592 for an iPod nano you can pick up in the Big Apple for $249?

Tourists from overseas can't help but be an important calculation for the location of this store. And I'm not the only one who thinks so. I ran into Charles Wolf, analyst at Needham & Co., who lives near the store, and has been walking by it every day for months as the construction work progressed. "What's going to make this store is the international crowd," he says. Considering the dollar's weakness against the euro, "the Europeans will be coming in here and not just buying one computer, they'll be buying dozens. That to me is the real secret to this store. Apple can talk about reaching the people who live on Manhattan's Upper East Side, but it's the international tourists who are really going to make this store go."

So there's every reason to believe that Apple will sell a lot on Fifth Avenue. But what about the costs to run it? The store has a big head count of about 250 to 300 and will have to be staffed 24 hours a day. I don't know what Apple sales associates make in the retail stores, but I'd guess they make more in Manhattan than they do in Denver or Atlanta, or Newark, Del. The retail segment's head count was north of 3,700 people as of the end of September.


And what about building the store? That glass cube can't have been cheap. As of September, Apple's capital expenditures related to retail amounted to $529 million since it launched the retail business in 2001. My guess is that by next September, the construction of the new store will cause that number to grow. A hint in the most recent 10K filing suggests that certain "high profile stores" designed to "function as vehicles for general corporate marketing, corporate events, and brand awareness" will require "substantially more investment" than Apple's typical retail stores. The lease commitments on these stores -- as of September, Apple said seven met the "high profile" definition -- range from $4 million to $46 million. I expect the top end of that range to go up by the time Apple files its next 10K.

Finally, there's the matter of the lease. Manhattan real estate doesn't come cheap. Or does it? Wolf reckons Apple got good terms from Macklowe Properties, which owns the GM building. "They got a terrific price on it. This underground space was totally useless to Macklowe. You can bet that Apple is getting a really good break on the lease vs. what it would have cost to be a block south of here." I overheard another analyst, Gene Munster of Piper Jaffray, use the phrase "the cheapest house in a rich neighborhood," while talking with Johnson, the Apple vice-president.

Johnson didn't seem to like the phrase, but there's no shame in getting a good deal. And there's plenty of reason to think Apple will get just that on Fifth Avenue, as it's done with the larger retail adventure so many people dismissed five years ago.

Before it's here, it's on the Bloomberg Terminal.