Morgan Stanley Conference - March 1, 2004

During a March 1, 2004 Morgan Stanley Semiconductor and System Conference, Apple CFO Fred Anderson and Corporate Controller Peter Oppenheimer (soon-to-be CFO) answered questions from the audience.

During his preliminary remarks, Anderson said the company had taken a different approach from others by not making "massive" cuts in expenses, but actually increased the research and development (R&D) budget to bring out innovative products. He said R&D increased from $300 million in 1999 to $500 million last year. He mentioned in particular the development of OS X, the iLife applications, the iPod and the iTunes Music Store.

Anderson said the second drive of growth is the retail stores. He said the company was "controlling more of the point of sale," and mentioned the new stores in Ginza (Tokyo) and San Francisco.

During the question-and-answer session Anderson mentioned that Apple sold 733,000 iPods during the past quarter, and would have sold more if they had been available. He said the company didn’t know exactly what the demand for iPods was during the last quarter and holiday selling season, but only that they could have sold more.

In response to a question about the future of the Apple stores—will there ever be 100, 200 or 300 stores?—Anderson responded, "We do not have a Gateway strategy," referring to that company’s 300 stores. "That's not our strategy," he said. "We going to continue to go with a combined go-to-market strategy."

He repeated what he’s said at other meetings, that Apple requires each prospective store location to be profitable. They determine this by using regression analysis, based on the installed Macintosh user base with a 10 to 15-mile radius of the prospective store location.

"I want to leave you with the thought that we're very cautious about this," Anderson said. "The goal is not to satuate the market with stores."

Another questioner said the stores contribute about 15% of revenues now, and wondered if that figure would increase to 20-25% and then stabilize. Anderson would only say, "I think it will continue to grow over time." He said the company is not sees growth through the addition of stores, but is also "very focused" on same-store sales increases of 10-15% each year. He said that besides shifting PC users to the Macintosh platform, Apple is focusing on small business sales. He said there is at least one sales associate in each store that focuses on small business sales.

A person in the audience asked what percent of retail store sales represent PC users. Anderson said that 40-50% of CPU unit sales, depending up on the quarter, are sales to previously non-Mac users.

As for the sales strategy, he said Apple’s plan was to place stores in high-traffic lifestyle centers, where someone walks by, notices the lifestyle applications and hardware, and comes in the store. "We're ambushing Windows users as they walk by," Anderson said. "Maybe they intended to just go to a shopping center to visit Bloomingdales, and they walk by our store and say, 'This is inviting. I'm going to go in a learn something.'"

Someone asked if there was room of H-P products in Apple store, and Anderson responded by saying the stores already sell certain H-P products. "We continue to broaden our offering of third-party products," he said. When asked if the number of H-P products might increase (perhaps as a result of the recent iPod deal with H-P), Anderson said Apple’s number one priority is its own platform.

A person asked what retailer Apple used as a model for its own retail store—was it The Gap? "Honestly, we've kinda created our own store environment and our own strategy along the way," Anderson replied. He said Apple didn’t know the retail business, and so brought in Ron Johnson from Target, and he built a team with experience from Bloomingdales, Polo, Ralph Lauren, and the Gap, for example. "We try to learn from other very successful retailers," and apply that to the technology industry, he said. "We've added our own thoughts along the way."

Analysts' Conference - February 24, 2004

During a Goldman Sachs Technology Investment Symposium in Phoenix, chief financial officer Fred Anderson talked about the company's financials, including about the retail stores. Much of the 26-minute talk repeated information that's been previously released.

Asked where the company would be "max'ing out" on the number of retail stores, Anderson repeated that the company has 76 stores today, would be opening the 77th "flagship" stores in San Francisco this weekend, and would be opening the second international store in Osaka before the end of the year. He said the company is targeting "somewhere around 80 stores" by back-to-school September.

As for expansion beyond that, Anderson said the stores are already creating "significant" growth for the company. He repeated that the company has developed a financial model based upon the sales experience of the existing stores. This model, based on regression analysis, can reliably predict the sales of a potential location in a Metropolitan Statistical Area (MSA), based on the known Macintosh user base within 10-15 miles of the location.

"We don't plan to open any stores that we don't believe we have a chance to break even within the first year of operation," Anderson said. Unlike other companies, he added, Apple does not intend to have 300 stores--only profitable stores, and the enhancement of the company's brand and other Apple resellers.

He said the gross margin for Apple's stores was 3.3%, giving them $9 million profit on revenues of $273 million during the latest quarter. That does not include $52 in manufacturing profit, Anderson explained, which is money retained by the company as profit, and which isn't attributed to the stores.

Asked if the company was pleased with the 3.3% margin for stores, Anderson said the company is "very pleased" the stores are profitable. He said the retail team is very focused on increasing same-store sales.

Asked if the company had any plans to move or down-size any stores to improve their individual profitability, Anderson said, "No." He added that there is no existing store location which the company would now change. He said the company's store prototype during the first year of retail operation was about 7,000 square-feet. Only later did the company create a smaller 4,000 square-foot prototype. He admitted that, if they had to do it over, Apple would have created smaller stores during that first year.

Analysts' Conference - November 5, 2003

During a conference for financial analysts, vice-president of retail Ron Johnson provided many insights into the operation of Apple's retail stores, and a preview look at the Ginza (Tokyo) store. During his talk, Johnson alternated between discussing obscure marketing facts and figures, and the more personal aspects of creating stores that provide a pleasurable customer experience.

The analysts' meeting is typically where companies explain their financial figures and put a positive spin on the companies efforts to reduce costs and increase sales. The intent is to put the company in a more favorable light among analysts, who typically recommend stocks to institutional investors. Check the Yahoo Web site for a list of analyst recommendations on Apple.

He also revealed upcoming changes to the Genius Bars, increased focus on business sales at the retail stores, and that less than 6% of applicants are hired to become Apple store employees. He said the retail stores will begin offering on-site repair services, and in some cases guaranteed next-day repairs. He said the Ginza store will feature a stainless steel facade, but did not mention the spiral glass staircase that we've already confirmed. He said there will be 80 stores open by back-to-school 2004, or 11 more than are open now.

Johnson's remarks reinforced previous statements that Apple, and Steve Jobs specifically, intended the stores from the very first day to turn a solid profit, and not to be simply a marketing or advertising gesture. His insights also demonstrate the complexity of forging a positive customer experience, and the extent to which Apple is willing to go to find the perfect solution--albeit Apple apparently has a 95% customer satisfaction rating.

The entire 4-hour was posted [link expired] on the Apple Web site with audio segments. Also appearing at the meeting were Fred Anderson, Tim Cook, Phil Schiller, and Steve Jobs. Here is a summary of Johnson's 37-minute remarks:


Johnson opened by recalling a quote that a reporter or analyst made two and one-half years ago upon Apple opening its first retail store. "I give them two years before they turn out the lights on a very painful, and expensive mistake." Johnson joked, "I remember that if you don't."

He noted the stores achieved their first profit during the latest quarter. "So we're very happy at this place in our world, we've achieved profitability."

He said the company's priorities at start of the year were to open great new stores and expand, and to achieve strong financial performance. "This has never been a marketing venture for Apple," Johnson explained. "Steve was very clear from day one, we didn't need stores for marketing.. Apple had a great brand, we had great awareness. We had to drive sales and profits for our retail stores."

Looking ahead, he said, "We're going to be intensely focused on core retailing efforts." He said Apple would continue to innovate to make the stores the best place to buy computers.

He repeated there will be 74 stores by Dec. 31st, and noted the company entered 13 new markets during the last 15 months. He pointed to a "strategic" presence in the San Francisco Bay area with five stores, New York City (9), Chicago (4), Los Angeles (7) and San Diego (2). He noted that California has 16 Apple retail stores. "We feel really good about our market coverage," he told the analysts.

Ginza Store

Johnson described the upcoming Ginza (Tokyo) retail store, which opens Nov. 30th:

  • Japan is the second-largest geographic market after the United States

  • The country has 10 times the population density of the U.S., and 40% of all computers are bought in the two cities Tokyo and Osaka.

  • Tokyo does over 2.5 times the revenue for Apple as Manhattan

  • Ginza is the busiest retail street in the world--they close the street to vehicle traffic during the weekends because of the pedestrian traffic

  • The store will feature a stainless steel facade, three stories tall, clad in glass.

  • The entire product line will be displayed on the first floor, and there will be a view to the second floor, where the Genius Bar will be located

  • Traditionally computer repair services are provided at separate locations by Japanese stores. In what Johnson called a "strategic break-through," Apple will offer repairs for all products at the store

  • The third floor is devoted to a theater

  • The fourth floor is devoted to software and third-party products

  • The store is about the same size at SoHo (NYC), but is spread out on five floors

He said the store would open 30 days ahead of schedule, partly because an important employee bonus cycle in Japan begins Nov. 30th.

Financials

Johnson showed a slide of retail store sales and commented, "You see a very nice slope, a very consistent slope, a very nice rate of growth." He said the stores contribute about 10% of the company's total revenues. "We believe our best days are ahead on a profit perspective, and that's our primary goal." He said as the stores' sales volume has increased, so has their profitability.

For the entire fiscal year, he said, 47% of those who bought computers at a retail store were buying their first "Mac," as he termed the computers. During the month of September, that figure rose slightly to 48%. "So, consistently about half the people who are buying computers in our stores are buying their first Mac," Johnson said.

He said the company tracks 10 or 11 "key metrics" to evaluate their stores' performance:

  • traffic: growing for all periods and stores; some analysts thought the traffic wouldn't return to previous levels

  • conversion, increasing "dramatically"

  • average weekly volume per store

  • the percent of sales of CPUs and iPods - it grow as people trade up

  • beyond the box revenues (iPod, 3rd party, .mac, Applecare), it "continues to accelerate"

  • 3rd party market rates, growing

  • new to mac - currently, 47% of computers buyers are new to the Macintosh

  • employee turn-over ("which is by far the lowest in the retail industry") is steady. He didn't mention the turn-over rate on the audio, but presumably it was on the slide.

  • customer satisfaction remains as high today as when we had two stores: over 97% of store customers would recommend to a friend to buy at an Apple store

  • operating expense per store per week, "nice drops"

  • store build-out costs: they're going down

"We feel very good about the core metrics," Johnson concluded.

The Stores

The current stores hosted 114 million visitors during the past year or, as Johnson described it, 175 MacWorld conferences every two days. "The stores are meeting their goal of introducing the brand to new people and letting them experience our best technology," he said.

He presented a chart that examined the people who walk into the store--browser and buyers. The chart included figures from the first 25 stores, and for the first 95 weeks they were open for business: the first week about 6% of visitors buy a computer, but now the slope of conversion (marketing term for generating a sale from a prospective customer) is 13% to 14%, and the figures continues to grow. "This just indicates that people love to shop in our stores, and they come back frequently to buy more," Johnson said. "It's a very healthy statistic, especially with our traffic growing at the same time."

Johnson revealed that Apple hired 978 employees for its retail stores last year, out of 16,438 applicants, or slightly less than 6% of those who applied. Johnson recalled a comment he made at the Palo Alto store opening near Stanford University--where he went to school. "I made a clever comment--at least I thought it was, because I went to Stanford, that it was harder to get a job in the Palo Alto Apple store than to get into Stanford." He said the statement is still true.

"We have a very robust environment of people wanting to work in our stores, and that's helped with our operating expenses, because we obviously pay what the market will bear, but it also helps with our service," Johnson said. "The pay-off from having great applicants is having great people, and that shows in the satisfaction with our stores."

As for customers, a survey found that 95% were "extremely" or "very" satisfied with their overall shopping experience, and a remarkable 97% would recommend an Apple store to a friend. "People love to buy in our stores," Johnson said.

He noted that Apple had re-done all its "prototypes," or standardized store models. They have large store model, 45-feet wide with stone floors, wooden tables, Genius Bar in the middle with LCDs, and full seating in the theater. He said these now cost substantially less to build than the early prototypes.

The 30-foot stores are the most common, and also have stone floors, wood tables, and "great economics," Johnson said.

There is also a two-story store prototype, with a 40-foot Genius Bar with 18 seats, and a theater with seating for up to 74 persons.

Having the three prototypes allows the company to pick the right one, "for the right volume opportunity," he said.

He noted that last week "Business Week" magazine recognized Apple as the first leading company to mix store design and architecture to solve a business problem. "We're incredibly proud of that," Johnson said.

Overall, there's been a 10% reduction during past year in cost per foot to build the stores, and they are "substantially" less costly to maintain than previous versions, he said.

He noted that Apple stores hosted 34,000 unique events within the stores last year, including daily presentations, workshops, 350 school nights, Apple Camp and more. The high-profile SoHo (NYC) store held 180 events during its first 30 days, North Michigan Avenue (Chicago) hosted 320 events in its first 30 days, and the Ginza (Tokyo) store will hold 420 events in its first 30 days. "And that's why our stores are successful. It's not just about buying a Mac. It's more than a store," Johnson said.

He said the company's priorities are: add new stores, improve financial, examine core metrics, and innovate to improve the customer experience.

The upcoming (2003) holiday season will be the third for the retail stores. "It's our most important quarter of the year," he said. "We think it's going to be a great holiday." He noted that Apple had refreshed nearly the entire product line within the last 60 days, providing plenty of sales opportunities.

He showed a slide of the 2001 holiday season, the first for the retail stores--it showed flat sales through the holidays. "We weren't known as a place for gifts," Johnson said. A graph of the 2002 holiday season sales showed a slight increase, the sign of a typical holiday sales selling cycle. it started to show a typical holiday gift slope. started to show a typical holiday build. we had a break-out qtr last year.

This year, Apple has an complete marketing program for the holidays, built around the slogan "Someone you Know...", which is up on the Web site now. He said the company has identified 25 gifts that will drive 75% of store purchases during the season. "There's lot to chose from," he said, including speakers, headphones, iPods, digital cameras and more. "We're marketing now like a great retailer would," he said. "We're excited about the holidays."

The store computers will feature an interactive gift guide that will ask the customer questions, and then recommend an appropriate gift.

Future?

What's next, Johnson asked himself. "We're not going to turn out the lights," he promised. He said the goals were simple: to maintain sales momentum and to keep the sales chart slope on a "steady, upward trajectory."

The primary goal is to accelerate profitability, he said. The first two years the company worked to gain profitability for its retail stores. "Now it's payback time," Johnson said. "We want the retail stores to be a new lever of profit growth for the company."

The priorities that will accomplish these goals will be to focus on so-called "comparable" stores sales, and, "only on delivering the right store in the right market." Johnson noted that this is the year that computer retailer Gateway added 100 retail stores to their line--their third year, and Apple's third year of retail store operation. "They put out way too many stores," Johnson remarked. "We're only going to add stores that deliver incremental volume and incremental profit to our retail strategy."

He then explained the economics of retail selling. "Retailing is a fixed cost business. We have made our investment. The stores are built. The leases are signed." Now that Apple has made the investment, he said, "We drive sales growth, we drive profitability."

To make his point, he then showed a slide that showed the additional expense associated with increased volume growth:

  • for 5% sales growth, the increased cost would be $2 million

  • for 10% sales growth, the additional cost would be $3 million

  • for 20% growth, the additional cost would be $7 million

He then touched on three areas of major activity within the retail stores: key item merchandising, the Genius Bars, and sales to small businesses.

The "conversion" rate has improved from 6% to 14%, but the company wants to grow that figure more rapidly during the coming year. He called this task a "major opportunity" for sales growth, up 1% would add 50% to comp store conversion.

"The Genius Bar is in many ways the heart and soul of our stores," Johnson said, and revealed that one out of five visitors to an Apple retail store come to visit the Genius Bar.

He said over the next four months the company will install large LCD screens at the Genius Bars to allow employees to give classes, share advice, tips and tricks to visitors. Apple will also install a reservation system at the Genius Bars to allow visitors to sign in, then browse the store until their name is called. Johnson also said the system will allow on-line access, so you can sign up from home on the Web, and then show up in the store for your visit.

Retail stores will also take on a more expanded role for repairs: high-profile stores are doing many portable and desktop repairs in-store now, but that concept will be rolled out to other stores in the coming months. "We believe these things are really going to help drive people to buy Macs, because the service is unparalleled, even compared to a Dell, which has a great phone line, but it is a telephone. We have face-to-face help, face-to-face try, face-to-face diagnostics, and two-day turnaround time on repair. By investing in the Genius Bars, we invest in the place to buy CPUs."

As for small business, Johnson said when they first opened the stores, "We didn't spend one minute on small biz, only consumers." Consequently business sales were just 2% in 2001, but now have increased to 10%. He said small business, with 10 or fewer employees, has no one to call on them. Rather, they typically shop Staples, Office Depot, Best Buy. "And our stores have a hell of alot better service than those stores do," Johnson said.

The retail stores already sell a Pro Card that provides some special services. The card's benefits will be expanded to include a 30-day test drive on computers, 10% off software for one day, advance notice of special events, on-line appointment sign-ups with the Genius of their choice (who specializes in a particular product or solution) up to one week in advance, and guaranteed next-day repair service.

He said average repair time is now down to two days, but they hope to reduce that to one day in the future.

Every Wednesday is "Business Day" at Apple retail stores, and they will soon open early for Genius Bar consultations just for businesses. Further, businesses will be able to schedule on-demand presentations on particular Apple products and solutions.

"We're going to do a lot of energy at trying to improve small business in our store, and we'd like to see the day when it's 20% of our volume... we think we can get there soon," he said.

updated Apple has planted a trio of brochures in its retail stores that focus on the company's business-related services.

Johnson remarked that his daughter had gone to Chicago to buy an "American Girl" doll. "Why wouldn't a great Mac person go to a high-profile store to learn about design or publishing?" he asked. "We've got to make these stores do a lot more work for Apple in the biz phase."

He reiterated that there will be 74 stores as of Dec. 31, 2003. As for future stores, "We are going to be very careful in the United States. We are only going to add back stores that we guarantee will cover a market, or provide strategic build-backs. And because of this good coverage, rather than rushing out to open more stores, we want to learn more about cannibalization, about comp store volume, on the impact of our profit. We're going to turn our eyes toward Japan."

Johnson would not say how many high-profile stores Apple will build? He did say, "Long-term, there aren't many high-profile opportunities." He noted that SoHo (NYC) was #1 in volume and profit among the stores, and The Grove (S. Calif.) was #2 for volume.

He said there will be 11 more stores open by "back-to-school" 2004, or a total of 80 stores by then. He said half of them will be 4,000 square-foot stores, and that five of the stores will be considered high-profile (the ones we already know of).

He presented a surprising figure: today the smaller, 30-foot wide stores deliver more traffic than the larger 45-foot wide stores, and they produce 90% of the sale volume of larger stores. Johnson said the company expects the smaller stores to do more volume next year.

While he declined to issue a forecast for 2004, he said the company wants to increase the slope of the sales graph at a, "steady, predictable pace." He concluded, "This is not about branding. It's about driving volume and profit for Apple."

Questions and Answers

Is the company sending out flyers to notify nearby residents of new Apple stores? Johnson said they have no plans to do outbound selling, but have invested in VARs and others to go after potential customers. Rather, Apple will focus on the traffic in its stores, which will attract others customers by word of mouth. He noted that the stores receive 350,000 visitors to stores a week.

"We don't see any reason to invest money to drive more traffic to the stores," Johnson said. "We have growing traffic. We've got to figure out to sell and convert better. But we're not going to waste money on the stores on an advertising campaign."

Are there stores that are lagging? What are you doing about them? Johnson said they were concentrating on all its stores, not individual ones. However, he did say that the lowest volume store last year has currently almost doubled its year-over-year sales. "You never give up on a store that has potential," he said. He added that there are no stores that are not covering their variable costs. "We are very happy with the portfolio mix."

What's driving the reduction in costs? He said there was a 10% reduction in build-out costs per store because all the materials and equipment are supplied by the same companies--economies of scale. The company is also opening mostly smaller stores.

You said you'd be opening 11 stores by next back-to-school... are all of those domestic? Yes.

Is the relatively low CPU conversion rate a disappointment? Johnson noted that Charlie Wolf has written very detailed studies about our conversion rate, and that, "He's pretty close," with the 1.5% figure for a single day. But he noted that 20% of store visitors are coming back to the Genius Bar, and most visitors come back three to four times before they buy a computer. He said there are five "pretty standard" objections to converting users (he didn't list them), and the company is working hard to come up with sales methods to overcome those objections.

Steve's Remarks

During the one-hour question and answer session, Steve Jobs joined the other speakers, and responded to a question about the marketing effort to small business. He asked, what do small businesses not have that large businesses do have? "An IT department," he answered himself. He said that small businesses want someone to help them get their computer system running, and keep it running-- and the Apple store Genius Bar is the resource for that. He said the Genius Bars would be the company's entré into the small business market.

Read bullet points on Tim Cooks's (v-p, worldwide sales & operations) presentation and Ron Johnson's presentation as compiled by MacNewsNetwork.


Here are some definitions of the terms used during the analysts' presentation:

beyond the box - items other than computers, including iPods, headsets, printers, scanners, cameras, etc.

cannibalization - the process of losing sales at existing Apple retailers, in exchange for increased sales at Apple's own retail stores

comp stores - comparable stores, or the stores (or number of stores) you can compare from quarter-to-quarter (or year-to-year) for financial results

conversion - the process of changing a store visitor into a buying customer

conversion rate - the ratio of customers coming into the store to the number who actually buy a product. Apple says it's about 14% now, but they intend to increase it.

manufacturing profit - the amount of profit earned by Apple on products it "sells" to its own retail stores, and which is attributed to the company itself, rather than the Retail segment.

margin - rate of profit on products, taking into account all expenses; usually expressed as a percentage

metrics - measurable activity used for evaluating store performance or success. Apple has 11 "key" metrics--see the list in the above story.

prototype - a standard set of store features that are copied throughout the chain. Apple has three prototypes: small, large and high-profile.

same store sales - a comparison of sales figures using the same number of store, not accounting for the increased sales due to additional store opened during the quarter.

third party products - any product not manufactured or developed by Apple. For example, in an Apple store, they sell third-party products from Belkin, Adobe, H-P and Nikon.

VARs - value-added reseller; a non-Apple company that sells Apple products with some added features or services. For example, a video equipment company would provide customers with G5 computer, Final Cut Pro, along with full installation, set-up and training.



page updated 2/4/07 at 2:48 PM