February 2, 1998 3:25 PM PST

Apple pulls out of some retailers

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Apple Computer (AAPL) today said it is pulling its Macintosh computers from four major stores, indicating a hasty retreat from broad-based retail sales.

Apple will halt sales activity at Best Buy, Circuit City, Computer City, Office Max, and Sears in order to "focus" its distribution efforts with national computer retailer CompUSA (CPU).

Apple has decided to withdraw from retailers who are not willing to commit more resources to sales of Macintosh products, the company said.

The Cupertino, California, company asserts the move will strengthen its retail strategy. "This does not represent a retreat from retail, but instead a redefinition of what the retail buying experience will be for our customers," insisted Mitch Mandich, senior vice president of sales for Apple, in a prepared statement.

The CompUSA focus will solidify a deal announced earlier this year whereby CompUSA features Apple products using a "store within a store" concept. To bolster flagging sales of Macintosh systems and products, CompUSA has expanded its floor space and presentation of Macintosh systems.

"I'd still consider them to be in regroup mode. To do [retail] right, they've got to narrow it down to [retail cha ins] that they can support," said Mike Hagan, president of Associated Research Services, a PC industry research firm that specializes in marketing and distribution issues.

But establishing a retail presence such as the CompUSA "store within a store" is an expensive proposition, and costs a computer vendor $25,000 to $75,000 a month at CompUSA, Hagan estimates.

Louis Mazzucchelli, an analyst with Gerard Klauer Mattison, theorized that some customers entering the major retail stores looking for a Macintosh have been persuaded by sales clerks to go with a Windows-Intel computer.

"This has been Apple's strategy. If customers are not getting a positive buying experience in the store, then we'll just take it out and go some place where that is the focus and where the effort will be directed," Mazzucchelli said.

"Their retail revenues are substantial," said Mazzucchelli. But despite the reduction in retail outlets to sell their hardware, Apple may actually see its retail sales rise, he said.

Sales of Apple computers accounted for 7 percent of all PC sales at CompUSA's 148 stores in December, but at the 57 stores that had been outfitted with the store-within-a-store concept, Apple sales represented 14 percent of all computer sales that month. That represented an increase from a low of 3 percent of sales before the improved store presence.

Computer City said it is phasing out its Apple hardware because Apple has an exclusive arrangement with CompUSA, said a spokeswoman. The major computer retailer started to remove Apple hardware late last week and expects to have its shelves bare of these products by the end of the week.

Nathan Morton, chief executive of Computer City, said he had contacted Apple last September and proposed a store-within-a-store concept, as a means of boosting Mac sales at his computer chain. He said Apple's loyal following of buyers was what prompted his proposal.

"We spoke with their people, but were never given an opportunity to work with them," Morton said. "Initially, people were enthused that we were interested in their business, but it became apparent over time they had made another deal."

Two months after he floated out his idea to Apple, the computer maker's cofounder and interim chief executive, Steve Jobs, announced he had struck a deal with CompUSA to develop a store-with-in-a-store format within the retailer's stores.

Despite the withdrawal of Mac computer sales at its U.S. stores, the affect to the computer chain will be minimal, Morton said. "We feel we could have made them a bigger share of our business, but it won't materially affect us going forward," Morton said.

Computer City will still carry Apple hardware in its Canadian stores and will also continue selling Apple software and peripherials in its U.S. stores.

Computer City said Apple accounted for 1 percent of its hardware sales in fiscal 1997. Overall, Apple commands a bit more than 3 percent of the PC market.

At Circuit City, Apple sales account for less than 1 percent of its hardware sales.

"We've know that this was coming for sometime," said Morgan Stewart, a spokesman. "We have been working with Apple for sometime about phasing it out."

Circuit City carries one to three pieces of Mac merchandise in its stores and expects to move all its Apple inventory by the end of the month.

Last week, Best Buy said it would no longer stock Apple computers on its shelves after it runs out of existing inventory. Apple said that the decision was a mutual one: Apple focuses on the education and publishing market, while Best Buy targets home buyers.

Best Buy said Apple hardware sales accounted for a half a percent of its total computer transactions, ringing up roughly $4.2 million in the third quarter for the retailer.

Even as Apple retreats from retail, it is in the midst of building efforts to sell systems over the Internet. In November 1997, the company unveiled a special Web site where customers can buy Apple hardware, with some systems being available in a build-to-order (or custom) configuration. That effort will become increasingly important as Mac systems become available from fewer retailers.

"In the case of Apple, many [customers] are repeat buyers. That's still a big portion of their sales volume. In that case, the Internet site would certainly help those buyers get what they want on build-to-order basis," said Hagan.

Apple reported revenues of $1.6 billion in the first quarter, down from $2.1 billion a year ago. The drop in revenues came at a time that is seasonally the strongest due to the holiday selling season. Shipments also dropped in the quarter, and Apple's worldwide market share fell to 3.1 percent in 1997, its lowest level ever. Apple commanded a 5.2 percent share the previous year.

Apple posted a surprising $47 million profit in the first quarter, however, compared with a loss of $120 million a year ago.

Shares of Apple dipped in trading today, closing at 17-11/16, down 5/8 from Friday.

Retailers said they plan to continue to honor warranties on Mac computers they have sold.

 

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