Are Apple's stores 'a necessary evil'?

Several dealers nearby existing or future Apple stores are expressing fears that they will lose business in the short term, but the consensus seems to be that the stores are necessary if Apple is to regain market share in the brutally competitive PC market.

Among resellers' fears is that customers will opt to buy at the Apple-owned stores because of their sleek looks or because Mac fans believe that by giving business directly to Apple, they can best help the Mac community.

"It's going to hurt us, but it's a necessary evil," said Scott Grenz, general manager of Capitol Mac in Richmond, Va.

Apple has plans to launch a total of 25 stores this year, including the Palo Alto, Calif., shop that will open Saturday.

The company opened its first store in May in McLean, Va.--about 100 miles away from Grenz's shop. Grenz said he believes Apple has plans to open another one near his store. An Apple representative declined to comment.

Although Apple has not released any recent sales figures, the Virginia store appears to be doing a brisk business. One saleswoman there said the store is busy nearly all day, with the exception of dinnertime. And a source familiar with operations said the store moves an average of 500 software titles each week.

The strategy of using retail outlets to sell computers is not new. Gateway has based a large part of its strategy in recent years around a nationwide network of stores, only to admit earlier this year that it built too many stores and needed to scale back. And although many industry watchers have lauded Apple's attempt to use the stores to draw in new consumers, Apple has a challenge that Gateway did not: trying to avoid stepping on its dealers' toes.

It is difficult to separate the impact of the new stores from that of a weak economy and the recent terrorist attacks, but some Mac resellers situated near the Apple-owned stores say the new shops are eating into business.

Trying to assuage fears
Larry Moon, vice president of Di-No Computers in Pasadena, Calif., said his store has lost 20 percent of its business since May, when Apple opened its retail outlet in Glendale, the next town over in suburban Los Angeles.

Still, Moon said, the Apple store is trying to be a good neighbor, sending customers his way when they need service or products that the company-owned stores don't offer. Apple is also offering nearby dealers an advance peek at new stores before they open and is trying to assuage fears that it is looking to put its dealers out of business.

And although the new stores pose a threat to the consumer business of existing stores, many dealers already get most of their profits from Apple's professional-oriented products--especially considering the razor-thin margins on iMacs and other consumer-oriented products.

"We've had to," Grenz said. "The money isn't made selling iMacs."

For example, one dealer noted, the margin that retailers earn on the new $799 iMac is so small that when a dealer buys a system through the distribution channel and sells it to a customer who uses a credit card, the dealer actually loses money on the sale.

Competition from Apple isn't entirely new, either. As far as basic computer sales go, Apple has been offering competition for some time from its online store, notes retail analyst Stephen Baker of NPD Intelect.

"Apple has been aggressively selling off of its Web site," Baker said.

A win for everyone?
Mac dealer Thomas Armes, who owns Elite Computers and Software across from Apple's headquarters in Cupertino, Calif., said he is not too worried about Apple's new Palo Alto store, which is about 10 miles away.

"I hope that it is going to drive sales up in the Mac market, which would be a win...for everyone," he said.

The important potential of the Apple-owned stores, dealers say, is drawing in computer buyers who would not otherwise consider a Mac.

Don Mayer, CEO of Small Dog Electronics in Waitsfield, Vt., said he sees Apple's stores as important for showcasing Mac products. He also sees the retail outlets "as good for my business." Still, being in a sparsely populated area, Mayer is not especially worried Apple will open up shop nearby.

Baker said Apple's stores could weed out some weaker dealers, but he added that those with strong service and a good relationship with their customers should come out fine.

He also questions dealers who say they have lost business because of the Apple stores.

"There are so many external events going on right now that it is pretty hard for retailers to isolate the stores as a reason they are having problems," Baker said. "It is an easy target."

A level playing field
One of the dealers' biggest concerns is whether Apple will play fair by ensuring that independent dealers get new products as quickly and in as much volume as the Apple stores.

Tom Santos, president of Macadam computers in San Francisco, said that at one point the Apple stores had the iBooks with the combination CD-rewritable/DVD drive, while he was still unable to secure any of those models.

The playing field "does not seem to be level at all," Santos said.

And this past weekend, Santos said Apple stores were flush with free copies of the OS X 10.1 update CDs, while some other Apple retailers were given as few as 10 copies.

Apple has said it will try to keep everyone on an equal footing.

Another big question is just how many stores the company will eventually open.

Moon said he is concerned that Apple is talking about opening a store just two blocks from his location in Pasadena.

"That really concerns me," he said. "I will have two right on my doorstep."

But even Moon sees Apple's move as potentially a good one, if it draws more people to the Mac and helps Apple's bottom line.

"They have to be in business for us to be in business," Moon said. "We're an Apple-only dealer. We just have to figure out a way to work around it."

News.com's Joe Wilcox contributed to this report.