Is Apple's Retail Empire On The Rocks?

By Will Ashworth | August 27, 2012 AAA
The first crack in Apple's (Nasdaq:AAPL) retail empire reared its ugly head August 16 when it was forced to publicly acknowledge that the change to its staffing formula was a mistake, that it would return to the old policy and that understaffed stores would be returned to their proper staffing levels. However, the scuttlebutt according to website ifoAppleStore.com, is that some employees have had their hours seriously curtailed with no reversal in site. It seems CEO Tim Cook is eager to boost revenues and profitability of the retail stores. If true, Cook's decision ranks right up there with the decision by Time Warner (NYSE:TWX) to merge with AOL (NYSE:AOL) in January 2000. I'll explain why.

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Formula Change

Although I'm being facetious about the repercussions of Cook's actions, you really have to wonder why a man so bright would want to mess with a winning formula. In its third quarter ended Jun. 30, 2012, Apple's retail stores generated $4.1 billion in revenue and $868 million in operating income for an operating margin of 21.2%. There isn't a retail store alive that wouldn't kill for those kinds of numbers. But then again, this isn't just any retail store. This is the house that Steve Jobs built. Fanatical attention to growth is what's driven Apple to become the world's most valuable company. The problem for Cook and his new senior VP of Retail John Browett is that the operating margin seems to be flattening. In the most recent quarter, its retail stores saw operating margins shrink by 170 basis points year-over-year. Furthermore, in the last three fiscal years, it has seen operating margins drop from 25.2% in 2009 to 23.7% in 2011, while revenues increased by 112%. It's tempting to cut store expenses hoping no one will notice.

Increase or Decrease?

However, it's equally hard to comprehend putting the customer experience at risk for a bump of a mere 150 basis points in operating margins, especially when you consider that it doubled operating profits between 2009 and 2011. The retail stores make plenty. The stores have become giant showrooms in the best sense, unlike Best Buy (NYSE:BBY), where consumers go to be delighted and not to be sold. Browett, the man who replaced Ron Johnson who left last year to turnaround J.C. Penney (NYSE:JCP), is generally poorly regarded in the United Kingdom where he oversaw Dixons Retail before joining Apple. According to the company, 17,000 people on average visited each store on a weekly basis in the third quarter - a staggering amount. Frankly, Apple should be increasing staff rather than decreasing it. Even with a pay scale that's higher than most retail stores, the cost to the company would be peanuts. If it continues down a path of profit over passion, the word on the street will spread like weeds, and its business reputation will be severely tarnished, perhaps permanently. It's just not worth it.

The Bottom Line

The most troubling part of this fiasco is Apple's push to get employees to sell more accessories in addition to its wonderful products. That's just what I need after buying a $2,000 computer - a guy or girl trying to sell me some cheap accessory. To make matters worse, management are asking employees to get customers to buy these accessories using its EasyPay app. Unfortunately, any product bought through EasyPay go to the store's sales and not the employee, thereby defeating the purpose of the app, which is to make it easier for the customer to buy stuff while on the floor.

Why is it that smart, powerful people always feel the need to put their own thumb prints all over a business no matter how successful it already is? Has Tim Cook's huge multi-million payday gone to his head? I think it has.

At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

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