Apple's Adventures in Retail

As the 90's closed, Apple began unlocking the same direct sales efficiencies Dell had pioneered in the 90’s. Direct sales to consumers using the web allowed Apple to defend itself from lost Mac sales through retailers who were increasingly disinterested in selling Apple’s products.

As noted in Apple's Retail Challenge, many computer retailers were seeking to sell their own store brand PCs in order to earn both retail and manufacturing profits. Without direct control over its own retail sales, Apple simply couldn't compete with instant eWaste PCs.

However, by selling direct like Dell, Apple could turn the tables on disinterested retailers and earn both manufacturing profits and retail profits.

Direct sales also gave Apple the opportunity to introduce a consistent and strong retail presence of its own, rather than being represented only by a loose collective of third party resellers.

The Art of Balance

Unlike Dell, Apple relied on existing channel partners to sell most of its computers; by shifting toward direct sales, Apple risked the ire of retailers and dealerships, who obviously didn't want to compete with Apple for Mac sales, particularly on the high end where the greatest retail profits were.

Apple had to balance a sensitive line. It couldn't afford to just helplessly watch while its various resellers casually sold the Mac haphazardly, as it suited them, without following any overall or consistent strategy. At the same time, Apple couldn't afford to jump into the role of Dell and abandon its retail partners, independent dealers, and other mail order operations.

The success of the online Apple Store proved that existing sales channels weren't aggressively selling as many Macs as Apple could itself. While maintaining its partnerships within other retail stores and with dealers, Apple increasingly found it needed to find a way to drive its own retail efforts.

Why Apple Bounced Back described Apple’s discovery of the need to deliver its own Mac software. Apple came to a similar conclusion, in a similar time period, that if it wanted its products to be promoted and featured in retail outlets, it would likewise have to figure out how to accomplish that itself.

Starting a Retail Strategy

In 1997, Apple announced plans to open a chain of posh, urban cybercafes with Landmark Entertainment. That effort to show off Macs in a glitzy environment failed to materialize. Instead, the company went to work building a direct retail strategy that would not only showcase Macs, but sell them as a well.

In 1999, Steve Jobs brought Millard 'Mickey' Drexler, CEO of the Gap and later J. Crew, to Apple's board, and the company began work to assemble its own team of retail, development, and real estate experts.

Apple hired Ron Johnson, a vice president of merchandising at Target, as its senior vice president of retail operations; George Blankenship from the Gap as its vice president of real estate; Kathie Calcidise as its vice president of retail operations; and Sony’s Allen Moyer as its vice president of development.

Two years later, Apple was ready to open up its first retail stores. In the meantime, the American retail climate had soured, dealers had registered their dissatisfaction with direct competition, and a battery of experts all chimed in to point out how Apple was poised to fail.

Things did not look good.

Averting Predicted Failure

When Apple first announced plans to open its own retail stores, there was no shortage of analysts offering to explain why its efforts were going to fail.

The May 2001 MacWorld article Apple Stores: Sale of the Century? provided a delicious quote from consultant David Goldstein of Channel Marketing Corp.:

"It makes absolutely no sense whatsoever for them to open retail stores."

Goldstein complained that Apple's retail strategy wasn't going to work because consumers 'haven't indicated that they're having trouble finding outlets that sell Macs,' stating that "It's another case of Apple being Jobs driven and not consumer driven."

Cliff Edwards, writing for BusinessWeek, managed to dig up further insight from Goldstein in his essay Sorry, Steve: Here's Why Apple Stores Won't Work. It also delivered another Goldstein gem:

"I give them two years before they're turning out the lights on a very painful and expensive mistake."

To be fair, Goldstein was an analyst with a Dallas-based “growth-strategy consulting firm.” Given the growth strategy available in Dallas, Texas, very little could be expected from him; he might as well have been a Manhattan barnyard analyst.

Still, how did a virtual nobody get to be the leading expert in providing the future outlook for Apple’s retail efforts? The answer to this secret is tied to the money made by journalists who chase Apple looking for stories.

They are all too eager to serve as the ready mouthpiece for any analyst, consultant, or other self appointed expert, without any regard for their credibility, background, or track record, as long as they’re able to contribute a quotable viewpoint.

Even worse, their opinions are rarely interesting or insightful, as the main goal is to offer sensationalist, but forgettable, opinions that generate them short term blips of notoriety, but which are forgotten about long before anyone can add up their track record of an inability to predict anything.

Weathering a Post-Dotcom Collapse

Goldstein's remarks were neither bold nor controversial in 2001. Retail was in decline and the economy in general was tanking. Goldstein, Edwards and others all likely thought they were shooting fish in a barrel by panning Apple’s retail efforts.

The dotcom euphoria that had driven tech sales, including Apple's, had been replaced with a morosely bleak outlook for the future. The American Supreme Court had just overturned a democratic election, and had instead installed a cokehead failure tied to war interests as the country’s chief executive.

Other computer retailers were already in deep trouble. Gateway was reeling, and had begun closing its worst performing stores; many department stores had begun to back out of PC sales entirely; Apple dealers were similarly struggling with slack demand for new machines after the bubble burst.

Still, there was also the realization--even among some of Apple's own dealers--that without direct retail orchestrated by Apple, the Mac platform was never going to grow.

Philip Michaels's Sale of the Century? article cited Mike McNeill, president of ClubMac, in agreeing that retail stores would be an important step for Apple to increase the number of Mac users: "If the retail stores are successful in this endeavor, I'm all for it."

The Myth of Too Many Stores

Conventional wisdom suggested that, given the finite demand for new Macs, direct retail sales by Apple would come entirely at the expense of its retail partners and dealer network.

This expectation was voiced by many of Apple's dealers, who sat on the constrained supply line between Apple and some of its most valuable customers. Groups of Apple dealers eventually launched lawsuits accusing Apple of fraud, breach of contract, false advertising, and unfair competition.

Two and a half years ago, I wrote about the contention between Apple's retail efforts and its dealers in Apple Bites the Hands that Picked It. But by 2004, it was becoming apparent the Apple's retail efforts would be a strong factor in saving the company. The company's retail stores have since rocketed past anyone's expectations.

It turned out that McNeill was right. While more Mac retail stores might initially divide up the existing demand, in the long term Apple's retail stores would expand the Mac market and like a rising tide, lift all boats.

Apple dealers and retailers who survived the shift found increased business from the growing Mac user base, and opportunities to partner with Apple’s new stores to handle overflow business that didn’t fit within Apple’s sights.

The Second Success Factor

Along with producing its own unique software, Apple's retail efforts are largely overlooked as a major component of the company's recent success. Its growth through retail has been nothing short of phenomenal.

Despite getting started during an unfavorable retail climate and the struggle to balance direct retail with its resale partners, Apple's efforts were richly rewarded and had a major impact on its subsequent growth, profitability, platform viability, and customer satisfaction.

Next Article: Why Apple's Retail Worked

This Series

Tech: Why Apple Bounced Back

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