With Apple increasing Mac market share and enjoying leadership (for now) of the smartphone and tablet market, you might presume that resellers of Apple products are seeing similar successes to Apple’s own retail operation. Unfortunately it would appear that UK resellers are struggling, with news emerging that one of the company’s longest standing channel partners has seen its turnover and profits drop.
A Channel Register report suggested that Square had been “punched in the wallet”, blaming the loss of a major customer and the “sick economy”. The report quoted Square Group MD Darren King who said that Square intends to move away from the retail space in favour of its enterprise business.
We spoke to King about the report, his comments can be found below. In summary the bigger picture is not as drastic as that report suggests, however, the news that another Apple reseller could be struggling, is concerning, but by no means surprising.
While the recession could be blamed for the decline in Square’s retail business over the past twelve months, another factor may be at play. Since Apple opened its first retail store in the UK - Regent Street on 20 November 2004 - UK resellers have expressed concerns about what the competition with Apple will do to their business.
Apple is approaching 400 stores worldwide, with 35 in the UK. As one reseller pointed out: “This is more than any other country in Europe”.
It’s not only the increased competition that is causing problems for UK resellers either; Apple has its own set of demands for those resellers who wish to be considered for Apple Premium Reseller (APR) status. A new APR2 scheme is soon to be introduced.
Becoming an APR (as opposed to an Apple Authorized Reseller) brings with it a number of benefits, but the criteria are tough. Benefits include product discounts, authorization to act as an Apple Service Provider, the ability to easily order custom Mac configurations for customers; access to sales and marketing materials and specialized training. But to qualify there are requirements detailing how much the reseller must spend purchasing Apple products, and forbidding them from selling products that aren’t authorized. In addition they must comply with Apple’s trademarks and signage policy, and be located in what Apple considers to be the right location. The real issues arise when a reseller requires a complete, and often expensive, refit in order to qualify for, or remain in, the program.
Apple has demands covering minimum ceiling height, the installation of custom-built furniture (priced at approx £70,000) and specific oak flooring (around £30,000). According to a report on Channel Register: "The flooring is paid for by Apple following a successful inspection by its officials, and it also coughs up half for the furniture if the premium reseller meets the minimum guidelines and hits its sales targets in the subsequent 12 months."
Refit or die
According to one reseller: “A typical refit to Apple spec, could cost £300,000 plus per store”. Another noted that a refit for an APR to APR2 is under £100k, but added that "A fresh store could be up to £220k on the top side, but normally around £150k".
Nevertheless, many UK resellers take on on this challenge, refitting themselves and sourcing retail frontage and, as one of our contacts put it: “Paying through the nose for Apple approved fittings.”
“This seemed OK when Apple had four or five stores in the UK,” he said. However, while these resellers spent money bringing their stores into line with Apple’s expensive requirements, Apple was busily opening its own stores.”
“Over the last three or for years Apple's presence has grown,” said one reseller, adding that is seems that “as Apple corporate expands it's retail presence, Apple's channel teams keep pushing more and more demands on APR's - a strategy that seems to be contradictory, certainly not in the best interests of the channel.”
“It feels as if Apple holds all the cards and it's a pay to play game,” said one source, speculating that Apple has allowed resellers to open stores “knowing their own plans to be in that location”.
It’s not only Apple that the resellers are competing with. “From an 'i' perspective the growth in the UK is coming from mobile phone stores, and they are everywhere. If you don't sell the accessory at the point of purchase of the iPad or i device then it will be bought online,” said one reseller.
The point is that Apple’s big successes - the iPad and iPhone aren’t only being sold by Apple resellers, or Apple: “Most APR's are being forced to focus on high volume products like iPad and iMac and their accessories, which to be fair any Tom, Dick or Harry can sell,” noted one source.
“One-off consumer sales are being done everywhere else and better than any APR could hope,” he told Macworld.
Another of our contacts in the reseller world, who is turned out had recently been made redundant, had this to say about the challenges he believes resellers are facing from the increased competition on the High Street: “The biggest challenge for resellers now is giving each of their stores a unique selling proposition.”
He echoed the earlier observation noting: “Customer can purchase Apple goods from many other places on the High Street and online without the worry about going into a store and being hassled by sales staff about what they have on offer, or any offers they might have. This makes its very hard for them to be competitive.”
He added: “It’s a big challenge to find third party products that fit well in your store, and aren’t available in HMV, John Lewis, Currys, PC World and the supermarket. There are plenty of products out there, but it’s taking a leap of faith with those brands, and hoping that customers will understand the purpose of the products and why they should pay a little more for a better premium product.”
It’s not only iPads and iPhones that the competition is selling. Our contact explained: “When the APR program first started there were very little places you could buy a iPod or even a Mac from, but as soon as the iPod nano came out this increased its popularity and other retailers wondered why they were not stocking Apple products as well. HMV, John Lewis and DSG all started with iPods, some of them even had a few Macs to look at as well, now you can go into everyone of these stores and see iPads, iPods, Macs and accessories.”
So what happened to Square?
Is this what happened to Square - was Apple’s price too high and the competition too much? It turns out that the Register report only looked at a small part of the picture; we contacted King to gain some clarity about the situation.
King pointed to the annual filing with Companies House, from which the information used in the Channel Register report had been extracted, explaining that the source was “a very small section” of the report, not “a detailed briefing on the business”.
According to King, Square’s revenue leapt from £14m to £28m during FY10/11. That increase was due to the iPad launch, he noted, as well as the company’s moves into hospitality technology and the start of their enterprise efforts.
Regarding the iPad launch, King notes that as an Apple Premium Reseller Square had better access to stock than other resellers, something he said benefited the company greatly. He also notes that if the spike in growth that is attributed to the iPad is discarded, the company has still seen a growth in revenue (71%, he says) over the past two years.
In addition, King points out that the filing shows that the companies gross profit hardly moved, even with the revenue reduction.
He notes that Square’s decision to stop working with “one high volume, but very low margin client” is related to this factor. King also admitted to being “naturally disappointed with the net profit,” but adds that FY11/12 is “roughly in line with 90% of our 18 year history”, suggesting that “FY10/11 was an exceptional year”.
The success Square attributed to the iPad in FY10/11 demonstrates the advantages of the premium relationship a reseller can have with Apple - access to high-demand products that others cannot enjoy. But have these benefits continued?
It would appear not, resellers have gone from “being one of the few lucky places with the best products in the market to sell”, to being one of many places where consumers can shop for Apple products. “That is what is hurting them most,” said one reseller.
Also damaging Apple’s channel is the move to selling software via the Mac App Store and the lack of attention to the Pro market.
It used to be that Apple’s resellers could offer customers enhanced service, namely a software bundle that met their specific needs, in addition to their new Mac. The launch of the Mac App Store changed that. One source told Macworld: “A recent example is the Mac App Store, it’s good for Apple customers: they can buy their software from their desktop, great... or is it. If Apple is the only reseller of software on it's own platform - how can that be good for consumers. It's a monopoly in any language.”
Since the Mac App Store launch many APR's, and Apple itself, have dropped the majority of software from their retails outlets, both in store and online.
“Apple has removed a revenue stream from the channel and thus hurt the channel and the consumer, no longer can they get good advice as to which software should they buy to solve a problem. They are all stuck with googling for a solution and keeping their fingers crossed, because they will get no pre or post sales support,” said one source.
Another reseller noted Apple’s more towards software downloads: “Making it online only, and not having the complete library off loops and tools available, is frustrating for customers, and also for resellers, as this is lost revenue.”
“The margin was always in the software,” he added.
Serving the pro
Many resellers focus on the creative markets, with client bases in production or publishing. While Apple is focused on the consumer market, specifically the iPad and iPhone, are resellers struggling? We imagine that they haven’t sold many Mac Pro workstations in recent years (Apple last issued a significant update to that model in 2010, although Apple CEO Tim Cook has promised that the Mac Pro will be updated this year).
One source suggested that Apple's lack of focus on the Pro market makes sense on one level: “The PC is dead in the water, it's just a matter of time. Windows 8 is a dog with no legs.”
However, he adds: “Apple should not ignore this market for too long. They should never forget that one of the reasons they grew so quickly the massive usage of the platform by the creative markets - markets which trickle down influence in everything we do. I hope the powers that be recognise that while Jobs had extraordinary vision, the desktop market (including laptops) is here to stay.”
“Open the OS X up encourage developers, invest in the pro market and maintain your edge well into the future across all markets - remembering Microsoft can't remain hopeless forever,” he advised.
Another source pointed to Apple’s neglect of the professional Mac user saying: “The lack of supportive hardware for the demanding pro market has meant a lot of customers who were loyal users have switched to a PC to find the power that they require”.
Survival of the fittest
To survive in this market, resellers have changed their focus from consumer focused retail to more profitable b2b and enterprise solutions.
For example, Square has a number of broader projects that it has been investing in. The Square MD pointed to a number of new projects including the launch of Square International (www.square-i.net), which, he says, provides fulfilment, device staging and management across the globe for Fortune 500 businesses.
“This business now has offices in Singapore and North America, and partnerships in Canada, Thailand, China, Latin America, Australia, New Zealand and beyond,” he revealed.
Square also provides sales and support for its Apple based guest room entertainment solutions around the world.
“Every business goes through periods of investment, growth, changes and sometimes the profits suffer for a year or so, whilst the investment takes hold, the product/market matures and then the profits grow again,” said King.
How could Apple help?
Changing business strategy may be one solution, but what could Apple do to help its channel partners?
One of our sources suggested that Apple could help “by spending more dollars pushing customers to APR's stores, and encouraging APR's to value add sell.”
“Apple themselves can't sell a network, they can't support a network, they can't sell software licenses etc etc,” he added. “There are so many areas the APR's add value to Apple especially in business, and of course it's not part of Apple's future, or is it?”
Another contact noted that the best thing Apple could do to help its channel partners would be to up the supply. “Supply is and always will be the biggest problem, Apple will give stock to their own retail stores and online, and then Apple UK will pick up the rest of the stock and have to divide over the APR's and then all the major electrical retailers, supermarkets and online companies,” he explained.
“Improve supply to match demand and release products much more gradually over the year rather than releasing 20 products in a space of two months,” he added.