Costco Drops Apple
By Tom Ryan
Apparently ruffled over pricing policies and limited access to
product, Costco confirmed last week that the wholesale club is phasing out
all Apple products from its doors, per a mutual agreement between the companies.
Costco’s Chief
Financial Officer Richard Galanti told The Seattle Times, “In
the past couple months, we agreed to wind down.”
Mr. Galanti complained
to the Times that Costco had sold iPods and
pre-loaded iTunes cards for years, but was limited on how much it could discount.
Over a similar issue, Costco shocked many in November 2009 by pulling Coca-Cola
products from its doors because it wasn’t able to price the product competitively
enough. In explaining the missing Coke product, Costco posted signs in stores
and messages online that it wanted to “pass along the value our members
deserve.” The issue was resolved within three weeks.
Mr. Galanti also told
the Times that Apple never allowed Costco to sell
its products online like other retailers.
But
the news confirmed a rumor in mid-October from the technology website, iLounge,
that the warehouse club was already clearing its Apple merchandise because
it wasn’t gaining favorable enough access to the iPad. The item was launched
at Apple’s stores and Best Buy in April, began selling at Wal-Mart and Target
in October, and at Sam’s Club in November. Mr. Galanti did not discuss the
iPad availability issue to the Times.
Costco “is a huge advocate for its members, and is not afraid of making
big statements to big vendors that don’t provide them with the right motivation
to sell their product,” said Daniel Binder, a retail analyst at Jefferies,
in a report attained by the New York Post. The analyst also said Costco
is not as dependent on Apple as a traffic driver as its discount competitors.
Apple,
known for its highly-restrictive distribution and pricing policies, has not
commented on the report.
Discussion Questions: What do think of Costco’s move to phase out all Apple
products from its stores? Is product access or pricing restrictions a bigger
issue for a discounter such as Costco?
Good on Costco, others could very well follow suit. The problem with Apple’s distribution strategy is that it is a bit like Apple’s products themselves: elitist. Fine when you are only trying to appeal to the urban elite who walk to their nearest Apple store (and line up for hours in sub-degree weather to get the latest and greatest) but counterproductive if you are trying to become a mass market company. Apple is known to have industry leading margins and a following that will typically go where Apple products are sold. However, there is a (big) percentage of the population for whom a) price does matter and b) convenience, “buy it all under one roof” matters too. In order to widen its audience, Apple may very well need to get out of its comfort zone and accept lower margins at Clubs. Like I said, good on Costco and I hope other large retailers (like Walmart) follow suit.
Costco dropping Apple isn’t good for either company, though they are both large and established enough brands that they will not be materially impacted.
Costco is disciplined in its merchandising strategy and is large enough to say no to Apple, much as it did to The Coca-Cola Company earlier this year. Apple’s brand and strength of product line is such that with indirect distribution partners like WMT and Sam’s, along with Best Buy, they are easily accessed as well.
One thing to note re: Apple is that they do not provide the same level of support for goods purchased at indirect channels. Either way, this is unfortunate but not a calamity.
It’s great Apple is able to keep their tony brand away from discounters by holding the line on what they charge such resellers, so it becomes unprofitable for them to offer. Would that more brands could maintain that clarity of vision and not be commoditized.
Costco does not need to sell Apple products to be successful. Costco customers don’t expect to find every product from every manufacturer available in-store or online. That gives Costco great leverage when negotiating with suppliers. That being said, Apple is not an ordinary supplier. It’s doubtful that they will give preferential pricing to Costco. I don’t expect this to be resolved as quickly as Costco’s dispute with Coke. And while some Costco members will miss the Apple products, but they won’t miss them enough to stop shopping at Costco.
Apple offers sex appeal anywhere, but certainly at Costco, where shoppers come prepared to buy 48 rolls of toilet paper. In this context, Apple products provide a shopper’s delight.
However, I agree that the absence of these products is not a calamity. No doubt, there are other electronic manufacturers who are ready to play this role–such as flat screen TV brands, mobile phone brands, other computer brands. As a practical matter, with the growing popularity of the Android, this move may hurt Apple more than it hurts Costco.
In the long run, this will have little to no impact on either brand. I applaud Apple for not letting its products be commoditized by a retailer. I don’t see this as being elitist, but rather good business for the manufacturer and their retail network.
The impact on Apple will be minimal. The positive effect this will have on Costco will not be major. That said, Costco will come out the winner for some great PR on how it continues to fight to support its values even if it means not doing things just because they’re good for the bottom line.
As noted in the comments above, both companies will survive. However, I think both were better served when Apple products were available. It will be interesting to see if Apple will agree to make the requested changes as Coke did or will elect to really walk away from a retailer that has access to a loyal customer base. The difference may be Coke is a mass market item and to date, Apple has not been.
Both Costco and Apple have been very successful by developing and fine-tuning their respective operating models. Unfortunately these two models don’t mix well. Both will undoubtedly lose revenues, but will preserve the integrity of what has made them successful in the first place. This is much more important than the revenue lost.
These types of standoffs have been the death of brands who didn’t have the courage to walk away. Kudos to Apple.
In the short term it probably supports Apple’s strategy of maintaining their pricing structure consistent with a popular brand where demand is often greater than supply. Apple can, and should, maintain this strategy but will need to keep a watchful eye on the demand curve and competition.
Losing a distribution channel, in this case Costco, won’t impact their ability to sell product in the short term and can probably eliminate some of the headaches that go along with selling to warehouse outlets that typically want to sell at margins of 5 to 15%.
In the longer term, as competition amongst competing brands narrows the gap, Apple will want to expand its distribution channels and will be more willing to make “deals” to maintain market share.
A few bits of knowledge. As mentioned, Costco never sold anything but iPods and gift cards, no iPads, no Macs and no iPhones. So it was a minimally important product to Costco. As for margins, while Apple makes great margins retailers make nothing selling Apple. So Costco had no where to go to underprice their rivals in terms of reducing margins.
Apple pursues a dual distribution strategy with the channel depending on the product. To date they have been very limited in allowing sales of Apple notebook and desktops, keeping those only at retailers with sales forces or the ability to segregate Apple computers from the Windows products. Costco could never fit in there. The iSeries of products are more mass market and are generally found pretty much everywhere. iPods are available at TRU and Radio Shack, Walmart and Sams as well as a number of other outlets. They really don’t need additional distribution for them. And while I am sure iPads would be a great product for Costco, Apple has already expanded distribution and in its first wave of new retailers went with Walmart.
Neither company will be hurt or impacted in the least by this. Costco customers can get their Apple products at essentially the same prices almost anywhere and Apple already owns the world’s best retailer and doesn’t really need Costco to help increase sales.
All in all a non-story if ever I saw one.
That Apple (and other brands) should do everything possible to enhance and protect their brand image and value is unquestionably the right strategy. But this situation leaves me puzzled. Using a related channel as an analogy–Costco is perceived as the Club equivalent to Target, while Sam’s Club plays that role to Walmart. So, if Apple is going to be in the Club channel at all (a good question in and of itself) why give up Costco and stay in Sam’s Club? Bottom line, this strikes me as more of a pricing/personality snit than a strategic move.
They both win. There is no need for Apple to discount its products, and no need for Costco to carry them. The whole thing seems like a victory for common sense.
Costco is being consistent here while deploying “theater.” Costco has always tried to genuinely offer value for their members even if it means forcing a hand. I have been on the unwanted side of that personally, but I do respect the position. In this case, Apple granted Costco the selling rights to iPods which allowed them to bundle and offer complete solutions for some of the accessory items and docking speakers they offer. That’s OK as the other vendors offer enough margin and are willing to live with Costco’s price position. However, Apple offers neither as they do not offer enough retail margin to show significant discount on their items and frown upon discounting in general.
This move by Costco reflects the reality that their discount offering on the accessory items no longer looks like much of a deal when comparing to online pricing widely available. They wanted to discount the iPods themselves and also offer the iPad. While they may have gotten the latter item in time along with distribution expansion by Apple the former path is not one Apple chooses to enable.
That said, this piece of theater has pretty good optics for their members, but leaves them without a complete solution for the other items. I would expect they will drop or limit things like docking speakers and other accessory attachments due to this. Is that a win for their consumers? I am not sure. Meanwhile nothing is forever and if offered things like iPads or Macs in the future, I am sure Costco will find another piece of theater to justify this.
In the short term this means little for either party. Apple will get appreciation from those like Walmart or Best Buy who do not enjoy competing with Costco, and Costco will get good press for their members. Sounds like Costco is the only one leaving some money on the table though as Apple sales have shifted toward iPhone, Macs and now the iPad. With little to lose and every ability to change back in the future not much is changed. However, like the Amazon move to drop or limit Sony the retailer has traded some short term positioning for costs and lost sales.
Apple numbers meanwhile are still off the charts so one wonders what leverage Costco will have if they want Act Two to proceed. The reality is that both parties are trying to be consistent with their market positions so the “theater” is just a distraction. This was never a comfortable relation and since easing iPod sales limit the opportunity for Costco in the near term it does not hurt much. However, there are a lot of old saws about bridges so what actually happened in their meetings to end the relationship may or may not come back to haunt.
I don’t see either party here being “hurt.” Apple is perhaps the premier branding company in the world, just as Amazon is the premier selling company, and Walmart is the premier logistics company. Retailers have long been brand termites, eroding the value of brands with their unilateral, mindless focus on price as their premier tool for selling. This is very destructive to brands in general, since price pays for three values: intrinsic, added and brand.
That third value, brand, is based on reputation, consistency of performance and shoppers’ aspirations for an incremental edge over banality. This is the real source of brand profits, and retailers do everything they can to force them to give it away. When Sam Walton said to his brand suppliers, in effect, “I will not pay you one penny more for this merchandise than it is worth FOB–and I know what it is worth,” his conception of worth didn’t allow much for that third value.
Costco doesn’t follow the same formula, but rather says, if we can’t offer our customers a superior deal, we won’t offer it at all. Both Walmart’s and Costco’s strategies are obviously highly effective, and brands have surrendered billions from these focused retailer efforts.
Apple, on the other hand, has stood for the pinnacle of technical and user superiority, and has refused for a generation to surrender to the mass market demand for “good enough” at low cost. Now that they have developed innovative products like iPod, iPhone, iPad, MacBook Air, that have leapfrogged, as a class, the second rate mass market products, they can well afford showdowns with feisty retailers.
Given the growing convergence of online, mobile and bricks-and-mortar (COMB) retailing, this is no time for Apple to be surrendering to brand termite retailers. In fact, Apple is rising so fast in ownership of the mobile market device–the link between online and bricks-and-mortar, that they and Amazon could force the convergence, and ultimately muscle bricks-and-mortar retailers the way they have been wont to muscle their suppliers.
I have noted that after the American civil war 150 years ago, there was a belligerent/hopeful cry from some in the South, “Save your Confederate money boys. The South will rise again!” In ways not imagined, the South has risen in a new industrial, not Confederate, image. So I say today, “Don’t discount the brands folks, the brands will rise again!”–in relation to the realignment between brands and retailers over the past half century.
Does this make Costco the new Beatles?
A tempest in a tea pot, really. Costco and Apple will each sacrifice some marginal revenue over this little battle of wills, but shoppers will barely notice. Costco already carries the Samsung Galaxy Android-based tablet, a credible option at a competitive price. It won’t be long before it offers a slew of other much cheaper iPad alternatives. The iPod is already nearing retro status, since most smart phones deliver equivalent media player functionality (including Internet radio) for free.
As for the reporters who tried to draw a comparison between this standoff and the one Costco had with Coca-Cola some months back, methinks you have revealed your amateurism. Coke pursues an entirely different distribution strategy (saturation) as compared with Apple, and therefore Costco has an entirely different leverage.
Bottom line: Costco and Apple really don’t need each other that badly. Costco will capture most of the freed-up Apple product revenue in sales of other products (including items in unrelated categories). Apple will probably lose a few direct sales outright. Neither will show much evidence on their 10-Ks.
Brands with no profit? I wonder what margin Costco gets on the US first class stamp package. Ever check the discounted price on those? Not. Some items are primarily for consumer convenience. Evidently, iPod isn’t.
Interesting and BOLD move! I agree; good for Costco. Right now, Apple is hot and has the edge but wait till the blossom is off, they’ll go crawling back. Don’t think the decision negatively impacts either brand but it personally gives me more respect for Costco.
It is a miss for both Apple and Costco. Too bad for the consumer.
Costco strategy is to offer limited, but “best value” in the category to members, not to offer a broader range of products like Target and Walmart. They want more Apple or none at all. Since this isn’t going to happen with Apple right now, time to drop it and move on.
Apple retail experience stores differentiate the brand very well at many levels–products, stores, the customer service. It may change in time, or they may find a new way to work with Costco, but this makes sense for both companies today.
Opinion seems mixed on this–depending on whether or not you’re an “elitist” I guess–but it’s mostly interesting for its novelty: a retailer unwilling to grovel before the Apple god, and a supplier uncompromising toward a major seller; and though there may be no “winner” here, there certainly is a loser: the consumer (albeit a small loser).
Good for Costco. Their shelves will be cleared to make room for all the new Android tablets and phones coming down the pike, all with open systems for more user choice, unlike Apple’s closed system in which only Apple can decide what apps a user will have access to.
There’s always more margin and consumer goodwill that comes from freedom of choice.
Put it down to another ‘public spat’ and positive PR from Costco. Both Apple and Costco are stubborn mules with a strong brand identity and loyal customer following. Neither needs to compromise. Just like Costco patched it up with Coca Cola after a very public falling out earlier this year you’ll see Apple products back in the store in 2011.
This is exactly the right approach by Apple. They have an iconic brand, with tremendous equity, and margins to match. There is nothing mass-market about the way Apple has approached the marketplace, and they would do well to keep it that way.
I feel that Apple and Costco both did what they needed to do. While I’m sure that each company may feel a little a bit of pain, they both were true to their business models and their mission. Had I worked for either company, I would have done the same.
The result seems to be some lost sales for both and an inconvenience for Costco customers looking to buy more Apple products.
This cannot be a surprise to anyone who follows Apple and Costco. Apple has long been a strong advocate of having their products sold at or very near the established list price. Their own stores and web site sells at full or list price. The retailers they sell to which include Target and Walmart as well as many others are also expected to sell Apple products at or very near the full or list price.
Costco has always been on the opposite side of this type of pricing philosophy. Offering their merchandise at prices that are far below list or the manufacturer’s suggested price is one of the compelling reasons consumers shop in Costco warehouses. When you look at this basic difference it’s easy to see where a long-term relationship between Apple and Costco was probably doomed from the start.
Congratulations to both companies.
A clear vision and the fortitude to market within the discipline of that vision illustrates the strength of both organization’s management. Companies that compromise their values eventually lose.
I dropped an apple once. Got a big mushy spot on one side. But, I caught it on the first bounce, so no additional damage. I didn’t phase it out. I just ate the good spots.
Apple is famously constipated about product distribution. No big surprise. It has to do with notoriously poor sales predictions, limited manufacturing capacity, and the artificial creation of demand and high prices through limited supply. That doesn’t fly with Costco, a purchasing club that guarantees honesty and accessibility to its members.
There’s no single mushy side to the dropped Apples at Costco. None were caught on the first bounce. All sides are mushy and have been since the beginning of their relationship. There’s no middle ground here for Costco and Apple, and I applaud both of them for sticking to their marketing guns. It’s impossible to market Apple’s exclusivity and “non-negotiable-ness” successfully in a club store.
Lots of great comments overall–fascinating to see when two disciplined companies who aren’t afraid to stick to their strategies and who know they have a differentiated experience go head to head. I respect both companies for knowing who they are and for holding the line on that vision. It may mean they don’t do business in the future (I agree this isn’t Coke and I don’t think it’ll get resolved) but it’s nice to see two companies actually stick to their strategies in spite of market sales pressures.