Apple Computer's ( AAPL) retail stores have been a boon to its overall business, but that may mean bust for some of its key partners. A
growing portion of Apple's sales have been coming through its expanding network of company-owned retail outlets. But some of the company's resellers -- independent retailers and businesses that sell Apple products -- complain that a portion of those sales are being taken from their businesses. Sales through Apple's stores or Web site bring in higher profit margins for the company than those through third parties. But the company has a fine line to walk between pursuing these high-margin sales and nurturing its network of resellers, which still represent a huge portion of Apple's overall business. Apple and its resellers have had a "love-hate relationship for a long time," says Van Baker, an analyst at industry research firm Gartner. Apple's stores have helped to antagonize that relationship in some cases, because sales through them are "clearly business that didn't take place in the distribution channels," he says. In a statement, an Apple representative said that the company "values its reseller partnerships as integral to the growth of Apple." Apple, however, is clearly aware of that fine line. "The company's business and financial results could be adversely affected if expansion of its direct sales to end-users causes some or all of its resellers to cease or limit distribution of the company's products," Apple said in its annual report last year. Apple now has about 120 stores, up from 86 at the end of September last year and just 65 in September 2003. The stores are mostly located in affluent, urban and suburban shopping areas in the U.S., although the company has recently opened a series of stores in Japan, Canada and the U.K.
In contrast, Apple has "thousands" of resellers, according to its Web site. These range from retail giants such as CompUSA and Best Buy ( BBY) to mom-and-pop shops and independent businesses in small towns. Apple doesn't break out the retail value of its reseller sales or the wholesale value of its shipments to resellers. But in the first nine months of this year, just 17% of its overall sales came from its own retail stores, implying that a large portion of its business came from its reseller network. Retail stores' share of Apple's overall sales has been climbing rapidly, generating 14% of the company's overall sales in its last fiscal year and just 10% in fiscal 2003. Some resellers charge that those gains are coming out of their cash registers. Mac Made Easy, an Apple reseller in Honolulu, has lost half its sales since Apple opened a retail store in the city about 18 months ago, says owner Betty Markowski. Although Apple promised not to go after her customers, that's precisely what the company has done, Markowski says. She says the company has lured away some customers by stocking its own store shelves with in-demand products that she's been unable to get. Others have been lured away by discounted prices or free services that she can't offer. As a result, Markowski has cut Mac Made Easy's staff from 20 to 8, and she worries that her business, which she has run for 13 years, won't survive. "They're killing us," she says. "They have no loyalty to their resellers. That's really too bad because the resellers have stuck with them for so long." Other resellers say the impact of Apple's stores hasn't been all negative. Although Apple's store in Grand Rapids, Mich., has only been open a couple of months, CompuCraft, a reseller there, has already seen a drop in the number of walk-in customers, says Brian Swets, the company's technical service manager.
CompuCraft has also lost some of its consumer business, including iPod and lower-end computer sales. But the company's core business is in selling higher-end systems to graphics professionals; if anything, that business has picked up since the Apple store went in, Swets said. "I must say that we were worried about it" when Apple opened its store, "but so far our experience has been pretty good," he says. But Swets acknowledges that not everyone is so lucky. Before the store went in, CompuCraft checked with other resellers about their experiences. Those, like CompuCraft, that focused on business sales seemed to do fine when an Apple store came to town. But those that focused on consumer sales didn't, he says. Indeed, such stores will likely have a difficult time competing against Apple. The computer company has made a point of picking posh locations close to the affluent consumers that it craves. And the company has spent a considerable amount making sure its stores display and market its products in the best possible way. Indeed, the company's retail operations didn't start posting a profit until last fiscal year, after three years of losses. In contrast, many of the company's resellers are small businesses with limited marketing budgets often stationed in out-of-the-way locations. "It's an uphill battle for
the resellers," says Tim Deal, an analyst with Technology Business Research. "It's very difficult to compete with Apple's retail presence." So far, most resellers haven't had to worry much because of the limited number of Apple stores. But the company's network of stores continues to grow rapidly, and more and more resellers may be threatened, says Deal. Because of the growth of the retail chain, "there's not as much incentive for Apple to support these third-party resellers to the same degree they once did," he says. "In the future, if Apple becomes more mainstream, they might not be as selective in where they put their stores."
But the problem for Apple is that its resellers still are an important component of its business. In areas where the company has no storefronts, they are the company's emissaries. And even in areas where they do have stores, they can tap into business, institutional and educational customers that aren't visiting Apple's stores. "They do a good job of increasing that footprint of Apple around the world," says Crawford Del Prete, an analyst with IDC, an industry consulting firm. The question is whether the resellers competing in the same market with Apple's stores can survive on niche markets not served by those stores, and whether resellers in other areas will face similar competition in the near future. "America is becoming homogenized," says Deal. "Whether its Wal-Mart or Apple stores, the days of independent business owners are numbered and becoming more challenging." Apple isn't the first manufacturer to face the issue of channel conflict. Compaq, for instance, saw an outcry from its resellers in the 1990s when it proposed to sell its computers directly to customers. Other technology and nontechnology companies, from Sony to Nike, have faced similar issues. Some analysts believe the company will learn from these predecessors. Even if Apple's stores hurt some of its resellers, some analysts think Apple will do what it can to nurture its overall reseller network. And some argue that instead of being hurt by the stores, some resellers are actually benefiting from them in that they help promote Apple's products to customers who are considering the Mac platform and allow consumers to test them. "These kinds of relationships are always tense," says Del Prete, "but I don't see a strategy that suggests that Apple is going to move to go direct at the expense of its small independent resellers. I think they serve different functions."