Innovation as a topic has sustained interest from business leaders, entrepreneurs, analysts, bloggers and academics for some time now. A company’s strategy provides the meta-picture of how that organization will unlock innovation and deliver on promises to their stakeholders and community. Innovation comes in many sizes and shapes, from the grand “I”nnovation of revolutionary products and technology to small “i”nnovations that continue to enhance, improve, or extend existing products lines, services, and solutions. Today, we’ll take a look at Apple’s foray into retail.
With the tenth anniversary of Apple launching their Apple Stores in May 2001, allow me some liberty to develop some key aspects about the company, its adventure into retail, and some potential takeaways. For audiences of SCN and BPX, you probably hold little doubt about the commercial success that Apple has enjoyed in the past several years. The company has been on a roar and its stock price and market valuation have reflected global demand and admiration: from the announcement of iPhone in January 2007 at MacWorld and subsequent release in the US in June of that year, to Steve Jobs’ iPad announcement and launch in January and April 2010, respectively. These along with the introduction of the ‘insanely great’ Macintosh in 1984 (a year and a half later Steve Jobs was relieved of his duties by then CEO Sculley) and the iPod in 2001 (five years after Steve Jobs returned to Apple when his company NeXT was acquired) represent some major product – even lifestyle- “I”nnovations that revolutionized the PC and music industries, reinvented the phone and have come to define consumer mobility with a broader societal impact.
But all this success was not linear or pre-ordained, in the mid 1990’s Apple had its own financial problems and its future was in jeopardy. Back in 1995/6, Apple was on the verge of collapse with heavy financial losses, product quality issues, laying off employees, and was considered a takeover target by a number of companies as its share price plummeted. Internal strife was high during that time and resulted in the ouster of then CFO Joseph Graziano (in late 1995) and shortly thereafter in February 1996, the departure of CEO Spindler. This was the time when Apple ventured into the ‘mobile’ market of the personal data assistant (PDA). Beginning in 1993, Apple pursued the Newton MessagePad before ending its life in 1998. A decade later, Apple entered and redefined the mobile market via the iPhone by delivering the value of a phone, an iPod, and a powerful Internet connection in a single sleek and easy-to-use package.
A Retail Strategy Under Fire:
Coming back to the Apple Retail Stores, and positioning ourselves in early 2001 (Apple had been working on the concept for several years in highly secretive project), one can understand why in some business quarters, Steve Jobs and Apple were laughed at for even considering entry into the retail segment under their own banner. This retail strategy made little rational sense at the time: adding own channel of distribution, butting heads with existing channels and partners, going against the trending disentermediating model that made Dell a success, and fighting the existing headwinds that were slowing down Gateway (who eventually exited all stores in 2004, as did CompUSA in 2007). A few years earlier in October 1997, Michael Dell had urged Apple to “shut it down and give the money back to the shareholders.” And with this store strategy, Apple didn’t fare any better this time around in the business press, BusinessWeek magazine challenged the strategy and at best called it “one step forward, two steps back”, advised that Apple ought to instead focus on working better with its retailer partners, and urged “maybe it’s time Steve Jobs stopped thinking quite so differently.” Economic comparisons to other retailers (such as Gateway and CompUSA) were made and given the high profile (high rent) locations that Apple planned to open, retail experts gave Apple at most two years before they fold and run for cover. Even former long-time Apple executives had their doubts, according to ex-Apple CFO Joseph Graziano “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.”
Clearly, what Apple was embarking on in 2001 (with planning started in late 1990s), was a high risk strategy with uncertain rewards. It went against expert analysts, business common sense, and was on the wrong side of the trend. It did not fit into a neat and rational cost/benefit analysis of x market, with y needs, delivered at z cost. That is the nature of “I”nnovations, they require great imagination, deep insights and conviction, they live outside of common business sense and the realm of the possible, they are industry disruptors and they have the potential to redefine the way we live. “I”nnovations are rare and borrowing a sports metaphor, one may consider them the equivalent of baseball’s grand slam or, perhaps even more appropriate, to pitching a perfect game (only 18 times since 1900). If we’re fortunate we get to be part of one of these grand “I”nnovations once in our career. On the other hand the smaller “i”nnovations are aplenty and do bring value to any organization, there is just more of these (consider these as home runs) as while they include novel ways of solving existing problems, they do not necessarily change existing industries, introduce whole new industries, or significantly impact the way we live and make meaning. These are incremental and steady changes.
Apple’s retail stores opened in May 2001 with two stores, on the west coast in a suburb of Los Angeles (Glendale) and on the east coast at Tyson’s Corner in Virginia. Steve Jobs was clearly excited in this YouTube video on the eve of the stores’ opening. According to one of the major retail architects at Apple, Ron Johnson, the retail philosophy was not a focus on the buying experience, but on the ownership experience, to “create a place that people will love… to look in the [customer’s] heart, not the pocket book”. He adds that whether you’re designing a product, a solution, or a store’s life experience, “Design works if it’s authentic, inspired, and has a clear point of view. It can’t be a collection of input.”
Apple Retail Stores Today:
So from the questionable start in 2001 with two stores, Apple reached the $1 billion mark in retail sales in a record three years (breaking the Gap’s earlier record). As of September, 2010, Apple had 317 stores (233 in US, 84 international) and 2.5 million square feet of retail space. Plans for 2011, include opening 40-50 stores and more than half of these outside the US. Most of the store leases have length of 10 years, although they range between 5 and 20 years. For fiscal 2010, Apple’s retail segment had sales of $9.8 billion (a 47% increase Year over Year), with 26,500 full time equivalent employees, and 24% operating margins. With an average of 288 stores open during 2010, the average sales per store hit $34.1 million; the retail segment represented 15% of overall company sales. Apple is budgeting $600 million for retail store facilities in 2011. Disruptors such as Apple upset the status quo, they make it difficult for established processes and KPIs, as well as vested experts to value the new products or categories (witness the troubles major analysts have had on where to track sales of the iPad). However, no matter how you slice it, it is remarkable to see how well the Apple stores have performed on multiple traditional KPIs, whether it’s sales/square foot or sales per employee.
And it has not been easy to ‘copy’ what Apple has achieved. Since their 2009 retail store strategy announcement, Microsoft continues an internal debate on future intentions. To date – some ten years after Apple’s move – Microsoft has eight stores open with two more planned. The motivation for Microsoft is different from what Apple experienced a decade ago. For Microsoft, their products are represented in most retail channels; their focus is on mass reach and lower price points than Apple. While Apple needed to get its products into the hands of more consumers in a relaxed setting with highly passionate and knowledgeable associates, Microsoft is presenting a high end setting for products that can be had at any mass merchant. In Microsoft’s case, this is a diversion from what it does well in managing the retail distribution channels; for Apple, retail is integral to their engagement and connection with their consumers and in focusing and bringing to life the entire Apple experience in a single setting across the globe.
So, what potential takeaways might we consider? I would suggest that we have four key ones (and you may have additional ones):
- Major Innovations are rare, they require imagination, deep insights, and very often go against ‘common sense’ – and therefore these are hard to come by and to execute
- Majority of effort is in smaller innovations that improve on existing products, processes, services, and solutions – they make for better operations, increased demand, and fall under more traditional cause/effect science
- Retail – as exercised by Apple – represents an overall philosophy on how that company engages with customers, the way it thinks of its products, the value and trust of its brand, and as the showcase and manifestation of the Apple lifestyle
- The enthusiasm that the company has for its products, their design, ease of use, integration into one’s lifestyle – these engender passionate and motivated store associates that are delighted to represent the brand which translates to high customer loyalty (important in up economies, critical in down ones)
Some doubters out there might say that Apple’s is a hybrid model and not relevant to most retailers. I suggest that Apple’s unique (innovative) ways have much to offer the retail industry: rather than viewing the business as a collection of transactions, we need to start with the brand and work to develop trust and meaning behind that. Rather than constantly competing on price, we ought to elevate the shopping experience, the ownership experience, and thereby changing the value relationship with the consumer. Even in the predictable, steady-state grocery industry, you see hints of innovative changes such as the smaller footprint urban stores that mimic the faded ‘neighborhood markets’ with their more intimate customer engagement.
Trader Joe’s, operating in the competitive low margin grocery segment, has delivered enviable strong growth by offering their customers a fun and unique shopping adventure, interesting international tastes, simplified assortments in a private label environment with passionate crew members. Their customers exhibit cult-like loyalty and passion for the brand.
In the higher margin industry of fashion retailing, we find Zara’s unique approach to fast fashion and short supply chain has received much accolades and a loyal following. Their ability to bring fast fashion to the store shelves and keep everything fresh while controlling quality and markdowns have been remarkable. Both retailers have placed the customer at the center of what they do so as they designed the experience and support necessary to deliver uniquely differentiated and sustainable value.