Tuesday, December 09, 2008

Apple Store Will Take Big Bite Out of Local Retailers

I got a lot of e-mails in response to my post last week about the Apple Store coming to State Street. Without exception just about everyone who wrote said, "don't forget about the Mac Mechanic!" Mac Mechanic has been one of the local Apple retailers in town (along with Mac Shac out in Goleta) and figures to take a big hit to its bottom line when the Apple Store opens for business.

I've known Mike Bishop, Mac Mechanic's owner, for a good 10 years. I bought my first laptop from him (a used Apple Powerbook 520) when he was running his business out of Richard's Imported Auto (which he also owns.) Back in 2003, I bought another laptop from Mac Mechanic, a 15 inch Powerbook G4 which I still have and which still runs great.

Mac Mechanic store manager Jeff Wilkey (L) with owner Mike Bishop, (R) as captured through the camera of my Apple iPhone.

So I decided to give Mike a call and find out first-hand, how the Apple Store on State Street will impact Mac Mechanic's business.

"I knew they were coming to town," Mike told me. "I'm shocked at the location and I'm shocked at the amount of money they're wasting when they didn't have to."

He estimates the amount of money they are spending to remodel the old Pier One Imports store at 928 State Street to be about $2 million. They've also signed a 10 year lease at a rent of $67,000 per month according to what Mike has heard.

That's a lot of money for retail space on State Street, but if you have $25 billion in the bank like Apple does, it's peanuts.

One would have thought that Apple could have set up shop in La Cumbre Plaza for a lot less. But Apple had their eye on the downtown State Street location while Pier One was still the tenant there. The landlord jacked up the rent on Pier One and forced them out, according to Bishop, clearing the way for Apple. Bishop added that Apple had also been eyeing the location at 915 State Street, formerly occupied by Boon Me and had paid $10,000 to hold it. But evidently, they liked the Pier One location more.

Right now, the roof has been removed from the structure to accommodate Apple's plans to add a third floor to what had been a two-story building. Because the building has been designated as a potential historic resource, the City's Historic Landmark's Commission won't let the owner tear down the masonry walls. So what Apple plans to do, according to Bishop, is to assemble a structure inside of the existing structure.

The rear of the future Apple Store, with it's roof removed.

Bishop has been monitoring what's been going on fairly closely and he reports that all of the vehicles belonging to construction contractors and subcontractors appear to come from outside the Santa Barbara area. "They're all from Camarillo and south," he told me.

So when the Apple Store on State opens next spring, what will it mean for Bishop's business?

"The future looks kind of bleak." Bishop went on to explain that in talking with other independent Apple retailers the consensus is that everyone who has had an Apple store move in on them has lost 20 to 30 percent of revenue in the first year. "They will kill me retail wise," Bishop said. "And, if they're going to do repair work in there, that will kill me."

Bishop has an 8% margin on the products he sells. In other words, his profit on a sale is approximately the same as what the customer pays in sales tax. He pointed out that if someone goes into an Apple Store and asks for the educational discount, typically 10%, Apple will usually give it to them no questions asked. Bishop pointed out that when that happens, Apple is selling products at the price that he pays to acquire the product. He can't compete with that.

"It's not fair!" But he acknowledged that a lot of things in business aren't fair. Apple doesn't care about guy who has been supporting them. "We kept Apple alive in Santa Barbara for 10 years. We poured a lot of our treasure and time into this community."

Bishop mentioned that he currently has several computers out on loan to victims of the Tea Fire. And if you are ever in need of a free WiFi hotspot to check your e-mail from, just pull into his parking lot at 216 E. Gutierrez. He keeps his open wireless Internet network turned on 24 hours a day.

A few years back Mike remodeled his store to emulate the look and feel of an Apple Store, in effect creating a miniature Apple Store. To do so he had to buy the property he was renting. The landlord wouldn't let him remodel.

Bishop doubts that the consumer base in Santa Barbara is large enough to support an Apple Store. But Apple selects store locations by looking at warranty registrations, and based on that information they know that Santa Barbara is an Apple stronghold.

And, by the way, Apple has yet to officially acknowledge that they are coming to Santa Barbara. Mike's information comes from well-placed friends who work for Apple.

Mike notes that when Best Buy moves into the old CompUSA location in Goleta across from Costco, that will be the secondary hit to local Apple retailers. Best Buy stores typically have a fully equipped Apple Store within every Best Buy location.

As we all know, times are tough. And for local business people like Bishop, they only figure to get tougher.