BW: Why Apple Needs Fewer Resellers

Business Week:: Jobs & Co. has a big problem with independent Mac dealers. One solution: Eliminate them where they're too close to Apple Stores

Callers to Mac Tech Systems in Bend, Ore., are getting an ominous phone greeting: "Due to lack of support from Apple, Mac Tech Systems will not continue to provide service for or sell Apple products." The long-time independent Mac reseller isn't just sounding off to callers. It's suing Apple, joining a growing group of West Coast independents who allege that the Cupertino (Calif.) computer and software maker has acted in bad faith to its loyal locals. Can these relationships be saved -- and should they be?

One of the most common allegations is that Apple's own sales team and customer-service reps have constantly disparaged independent resellers. This group also alleges that Jobs & Co. has failed for years to properly credit them on equipment they've shipped back to Apple. Other charges are floating around, none of them pretty.

In an ironic twist, one of the suing companies, Macadam, is still pictured on Apple's own Web site in a 1998 feature about the iMac's launch. Macadam also happens to be one of the largest independent resellers in the country and a mainstay of San Francisco's Mac culture. An Apple representative declined to comment for this story.

RETAIL-STRATEGY SHIFT. Complaints from Mac resellers are hardly new. For years, these dealers have griped that Apple headquarters treats them badly, withholding product shipments, refusing to address billing concerns in a timely manner, and pulling other sundry tricks. Apple has always denied these accusations. But CEO Steve Jobs's moves to build a fleet of his own retail stores and place Apple-badged employees in CompUSA's big-box outlets to goose sales have only reinforced the indies' impression of mistreatment.

Everyone knows that Apple is in the midst of a big retail-strategy shift. But it needs to provide some clarification and guidance to the independents, many of whom have dedicated their life's work to supporting the Mac. Apple should view the lawsuits, which could ultimately cost it tens of millions of dollars and seem to keep coming, as a wake-up call that someone at corporate HQ needs to make some hard decisions.

For starters, Jobs & Co. should decide whether it wants any third-party resellers at all in areas within shouting distance of Apple's own Mac boutiques. Servicing these resellers must be far more costly than supporting the Apple Stores. Apple can also pocket far higher margins by selling its machines at retail price at its own outlets, rather than selling wholesale to the indies.

SINK-OR-SWIM TIME. I think Apple should take a compass, draw a circle around each of its stores, and cut off all resellers that fall within a certain distance. I would leave in place the consultants who sell Apple wares as part of their gigs advising companies and organizations (Mac Tech in Bend will continue to consult on companies' Apple projects, for example). But the rest of the crowd -- meaning those who can't survive as consultants -- probably isn't worth the hassle anymore if they live too close to Apple's own retail turf.

The numbers back me up. One-tenth of Apple's worldwide sales now come from its own stores, according to Charles Wolf, a veteran Apple watcher at investment bank Needham & Co. (he owns Apple stock and has a hold on it.) That figure should climb smartly this year, as Apple continues to open more stores. What's more, Wolf calculates that Apple is getting an exceedingly high internal rate of return on its store investments -- on the order of 52%.

So it seems Apple is doing a better and better job selling through its own stores. And unlike the resellers, Apple's snazzy outlets attract not just Macheads but Windows users who might make the switch. The stores even get sweet rental rates at malls because they're foot-traffic magnets.

SPREADING THE WORD. I feel bad for the resellers who have worked so hard all these years, and I hope their skill sets will transfer to consulting or other areas. And I think Apple will eventually come to the same realization I'm laying out here, so it's better to get the word sooner rather than later.

Of course, across huge swaths of the country customers still have to visit a reseller or CompUSA to get their Mac fix. The campaign to boost sales at CompUSA has clearly helped: In January, Apple announced a 42% improvement in revenues from CompUSA sales in the quarter ending December 28, 2002, compared to the same quarter the previous year. Still, most CompUSA stores have only one Apple-badged rep. That's hardly enough during say, back-to-school or Christmas time.

In areas where it doesn't plan to build an outlet, Apple needs to shore up the indies. Traditionally, it has largely left these folks to fend for themselves. If Apple wants to get a bigger bang for its buck, it should invest more in training and monitoring the local resellers. Then, if they're still underperforming, cut them loose. Now that Apple has taken a stronger stance toward defending and extending its brand, this should apply everywhere in the retail chain.

NEW REGIME. So, here's Salkever's Two-Point Plan: Get more support out to CompUSA stores during seasonal bursts. And in the off-season, use some of that manpower to pump up and train the independents.

Clearly, Apple is moving its retail strategy in the right direction. The numbers don't lie. But a bit of clarity on the reseller issue and an enhanced strategy to physically reach potential Mac users beyond the range of the Apple showrooms could add a few points to the bottom line -- and that's a lot in these days of tech malaise.

By Alex Salkever (edited by B. Kite)

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