The big criticism that Apple(AAPL) critics like to level against the company at the moment - aside from its lack of "innovation" - is that
Apple Store, North Michigan Avenue, Chicago, IL (Photo credit: Wikipedia)
its margins are going down.
In the latest quarter, Apple's margins came in at 38%.
"Unacceptable!" Wall Street analysts barked - and promptly cut their price targets on the stock. Last year, Apple's gross margins had reached 44%.
Why are the critics upset? Because Apple is selling new products like the iPad Mini which is at a lower price point that the regular iPad. That means that Apple doesn't make as much money from them and, therefore, the profit to Apple overall decreases as they sell more of the Minis.
So, what does this suggest the critics think Apple should do? Obviously, not sell any lower priced products. The logic would suggest that Apple should only sell high priced products to a small elite group of customers that can afford it, right? Even if they saturate that market and have no one else to sell to, right?
But, wait. That's exactly what they argued Apple shouldn't do 12 years ago on the day Appleopened its first retail store in this exquisite BusinessWeek article titled "Sorry Steve: Here's Why Apple Stores Won't Work":
The way Jobs sees it, the stores look to be a sure thing. But even if they attain a measure of success, few outsiders think new stores, no matter how well-conceived, will get Apple back on the hot-growth path. Jobs's focus on selling just a few consumer Macs has helped boost profits, but it is keeping Apple from exploring potential new markets. And his perfectionist attention to aesthetics has resulted in beautiful but pricey products with limited appeal outside the faithful: Apple's market share is a measly 2.8%. "Apple's problem is it still believes the way to grow is serving caviar in a world that seems pretty content with cheese and crackers," gripes former Chief Financial Officer Joseph Graziano.
Rather than unveil a Velveeta Mac, Jobs thinks he can do a better job than experienced retailers at moving the beluga. Problem is, the numbers don't add up. Given the decision to set up shop in high-rent districts in Manhattan, Boston, Chicago, and Jobs's hometown of Palo Alto, Calif., the leases for Apple's stores could cost $1.2 million a year each, says David A. Goldstein, president of researcher Channel Marketing Corp. Since PC retailing gross margins are normally 10% or less, Apple would have to sell $12 million a year per store to pay for the space. Gateway does about $8 million annually at each of its Country Stores. Then there's the cost of construction, hiring experienced staff. "I give them two years before they're turning out the lights on a very painful and expensive mistake," says Goldstein.
Harsh words. Still, Job's instinct that Apple has to take some dramatic steps is on target. In recent years, Apple has succeeded mainly by getting its 25 million-strong customer base to upgrade to pricier machines with higher margins. But only 12 million of them are due for upgrades in the next couple of years, analysts estimate. Meantime, Dell Computer Corp. and Compaq Computer Corp. have been stealing share from Apple in the key education market....
Indeed, rather than taking on the retailers who ought to be its partners, Apple would do better improving how it works with them. A good step would be to end the "think secret" approach that shrouds every new-product announcement. Covert operations worked beautifully when Jobs first arrived on the scene; his charismatic stage presence and Apple's eye-popping designs created priceless buzz. Now, retailers complain that the secrecy prevents them from doing advance advertising to hype sales and clear out inventory. "They are the most secretive company I've ever done business with," says one top retailer. "They should let the news leak out, to convince the world how exciting their stuff is. That's how everyone else does it." Maybe it's time Steve Jobs stopped thinking quite so differently.
Thankfully, Steve and Apple never stopped thinking differently.
The critics will always be right and self-congratulatory. If they're wrong, no one ever goes back and calls them out for it.
No accountability! If only Apple or any other public company had that luxury.
[Long AAPL]
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