Apple shrinks its distributors

Electronic News, Feb 9, 1998 by Cynthia Bournellis

Cupertino, Calif.--Apple Computer slices and dices once again. Most recent were the employee cuts at the company's Claris subsidiary (EN, February 2). This time it's the retail channel. Focusing on its new relationship with CompUSA, Inc., which in November began rolling out the Apple "store within a store" program to sell Apple branded products in superstores nationwide, Apple said it will phase out its hardware products currently sold at Best Buy, Circuit City, Computer City, Office Max and Sears. Channel consolidation has been ongoing at Apple, particularly outside the United States. Narrowing down its base of domestic partners is part of a new U.S. product distribution strategy the company unveiled in November, along with its direct online Apple store business. At that time, Apple had stated it would reduce channel inventory, increase Apple advocacy, and streamline channel operations.

The renewed focus on CompUSA is one Apple believes will advocate the Apple brand and increase profits. Apple is no longer a ubiquitous product that requires mass distribution. "As long as a vendor can reduce the less productive partners, sales and profits increase," said Bruce Stuart, president of ChannelCorp Management Consultants, Inc., in Vancouver, Canada. He said higher street prices of Macintosh systems are expected to result, as well.

Lackluster profit over a brand is one way of terminating a vendor/reseller relationship. And Apple's declining market share hasn't helped. Unit market share through U.S. retail fell from 6.1 percent in 3Q96 to 3.4 percent in 3Q97, according to market research firm Dataquest. "When we are one-quarter or 12 percent of a large retailer's volume, it's not profitable for them to keep our line," said Mike Muench, VP of retail sales at Apple.

Typically, retailers sell by the good, better or best approach--meaning they offer entry level, mid-range and high-end computers. In this model, the retailer may offer a couple of choices per product brand. "You might see 25 computers on the wall, of which two or three might be Apples," said Mr. Muench. "And, you won't find a lot of software in those locations or peripherals, particularly in the Mac area, because the volume of PC products to Macs is mOre."

While it appears that Apple is going with one large national retailer (Apple defines national superstores as ones having 100 plus locations in nearly every major metropolitan city), the rational behind Apple's decision makes sense. "They are systematically reducing partners and focusing on partners who want to make an investment in this program," said Mr. Stuart. "This is a much more focused behavior than I've seen in years."

The "store within a store" at CompUSA is intended to redefine the retail buying experience. With this format, the customer gets a full assortment of Apple products, a knowledgeable sales staff and several hundred software titles and peripherals. "Apple customers are knowledgeable, and they want to deal with people who know the strengths of the product line," said Mr. Muench. He said there are differences in the way Macs and PCs are sold, noting that typically, PCs comes with the same configurations, therefore, the buyer's decision eventually comes down to the best price or best brand. "Buying a Mac has to do with what you can do with the machine versus what you can do with a PC."

CompUSA is nearing completion of the "store within a store" program in nearly 150 locations. The company reported that as of December when the program was launched at certain sites, sales of Macintosh systems jumped from 3 to 14 percent. The challenge for Apple at this point will be to maintain this partnership with CompUSA. "If it goes sour, then Apple will find it very difficult to sign up the national retailers it dropped," said Dataquest industry analyst Kimball Brown.

The tight partnership with CompUSA does not represent a retreat from retail, said Apple officials. However, the company will continue to evaluate the channel. Meanwhile, Apple will continue to offer products at the retail level through regional chains, specialized Apple dealers, computer dealers, value-added resellers and catalogs.