Store Personnel Cuts Linked to Profit Goal

August 15, 2012

A series of recent administrative moves by Sr. VP Retail John Browett to reduce the number of Apple retail store employees was being positioned to employees as a way to increase efficiency, but sources say they were actually intended to increase the chain’s contribution to company profit. The staff reductions are in direct contradiction to the chain’s global reputation for excellent customer service, a goal set day-one by former Sr. VP Ron Johnson. According to those with close ties to the retail stores, Browett feels the stores are “too bloated” with employees, and is willing to gamble the stores’ legendary customer experience to gain back a few points of profit margin. Browett’s decision reportedly came despite strongly-worded advice from Retail segment veterans that reducing personnel ahead of the annual Back-to-School promotion and the September introduction of the iPhone 5 could create a customer service catastrophe. Browett disagreed with his staff, and said the chain needs to learn to run “leaner” in all areas, even if the customers’ experience is compromised. Rumors of employee lay-offs and a hiring slow-down surfaced within the last two weeks, but until now the reason for the cut-backs hasn’t been clear. Other related rumors say Apple is quietly dropping the free workshops that retail stores have offered since Day 1, and that staffers are instead pointing customers to the $99 One to One training service. Management is also pushing employees to sell more iPhones with carrier contracts, hoping to increase revenues. Update: Within 24 hours of this posting, a story by The Wall Street Journal stated that Browett had admitted the personnel changes were a mistake and the changes had been rescinded. However, he denied that any employees had been laid off.

Browett assumed the Sr. VP position at Apple four months ago, recruited from UK-based Dixons, an electronics chain. He had been hired to return the faltering Dixons chain to profitability in the face of the poor European economy and competition from other retailers, including Best Buy. While at Dixons Browett changed the format of the PC World and Currys chain of technology stores and launched a campaign to improve customer service. He managed to keep the chain from bankruptcy, but financials results are generally down from when he joined the company in 2007.

According to numerous tipsters, over the past two weeks Browett has ordered store management personnel to reduce the number of employees. The first reports of cut-backs came from the UK, but the reports later spread to the United States and other countries. The actions include:

  • Cease all recruiting and hiring events
  • Make no promotions
  • Immediately lay off newly-hired employees who are still on probation
  • Reduce available hours for part-time employees
  • Reduce or eliminate available overtime
  • Lay off or fire employees who can only work more than 32 hours a week and not part-time

Despite these actions, Apple’s job opportunities Web site still includes scores of “Current Openings” for retail stores, including some posted just this week.

Like any retail chain, Apple retail’s financial results and other statistics have had their ups-and-downs. Most figures have generally increased since 2001 when the first stores opened, but there have been quarter-to-quarter downturns.

For example, the reported number of retail employees increased each quarter from 2001 until 2007, when the first reported turn-down occurred. Since then, there have been four instances where the number of employees has declined quarter-to-quarter.

However, the way Apple reports the number of retail employees in financial reports masks the true number of people who are employed to work in the retail stores, making quarterly comparisons difficult or impossible.

For example, in its latest financial filing, Apple reported that it had 41,100 “full-time equivalent” (FTE) employees for the quarter ending July 31, 2012 . That is, the hours of part-time employees are consolidated into 40-hour blocks and then counted as one employee. In theory, there could be two, three or even four employees constituting one reported full-time equivalent employee.

Based on information obtained from store employee rosters, about 60 percent of a large mall-based Apple store are full-time employees. Based on that figure, and assuming the part-timers work an average of 20 hours a week, Apple would be employing about 25 percent more employees than represented by the FTE figure, or 51,125 (taking into account about 1,000 administrative employees at headquarters or other administrative offices).

As for revenue and profit, those employees generated over $14.1 billion in sales during fiscal 2011 and a profit of $3.1 billion. To operate the stores, Apple reports it spent $612 million on capital expenditures during 2011 and had about $2.4 billion in future lease commitments. Apple does not separately report other retail store operating expenses.

More specifically, Browett is aiming to increase the chain’s 22 percent profit margin reported for the latest quarter. That figure is in the mid-range of profit margin reported over the past five years. Retail store profit constitutes about 10 percent of the entire company’s profit each quarter. Overall, Apple’s profit margin was about 24 percent for 2011, with about two-thirds of that generated by sales of the iPhone.

There have been many claims that Apple’s retail stores are “the most profitable in America.” However, there are no surveys or statistics to support that claim. The chain’s mid-range 22 percent profit margin suggests that many other stores or chains could have a more profitable operation.

Typical retail storefront profit margins in the U.S. vary greatly in the range of just one or two percent up to 35 percent, mostly dependent upon the type of products being sold.

This graph shows how the profit margin of the retail stores has fluctuated over the years, but generally in the range of 15% to 30% since Q3 2007. It is this figure that John Browett reportedly wants to increase through employee cutbacks and other actions.

This graph overlays the quarterly changes that have occurred in the number of visitors and number of employees at Apple’s retail stores. While the scales for the two graphs do not correspond, the graph does show how the two figures interact.

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