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Apple "Store Within a Store" Bold But Risky Strategy

Companies / Tech Stocks May 17, 2012 - 07:45 AM GMT

By: Money_Morning

Companies

Best Financial Markets Analysis ArticleDavid Zeiler writes: Hoping to expand its reach, Apple Inc. (Nasdaq: AAPL) is testing a store-within-a-store concept with both Wal-Mart Stores Inc. (NYSE: WMT) and Target Corp. (NYSE: TGT).

Although both retailers have already been selling Apple merchandise, the new "micro-stores" will expand the current offerings (with the exception of Mac computers) and create a product experience more akin to an Apple Store.


Several dozen more micro-stores are planned, though the rollout will be gradual.

Piper Jaffray analyst Gene Munster said Apple's long-term goal isn't so much to stuff a micro-store into every Wal-Mart and Target, but to place them strategically in rural areas many miles from the mostly urban, wildly successful mall-based Apple Stores.

"We always talk about growth outside the U.S.," Munster said on CNBC recently. "The reality is, just look in our backyard. There's still a growth opportunity that no one's talking about, which is kind of outside the urban areas."

The allure for Wal-Mart and Target is the extraordinary foot traffic Apple products can generate. They're hoping that customers who come to shop for Apple products will stick around to buy other merchandise.

If the strategy works, both Apple and the big retailers win. But, as the saying goes, the devil is in the details.

In fact, Apple is no stranger to what can go wrong with the store-within-a-store concept.

Apple Micro-Stores at CompUSA and Best Buy
Apple's first experiment with the strategy goes all the way back to 1997, with CompUSA.

Apple was compelled to develop the store-within-a-store idea with CompUSA in response to issues with other retailers, such as Sears, Office Max, and Circuit City.

With the popularity of Apple's computers at their nadir, most outlets relegated Macs to a dusty shelf in the back, and staff routinely steered customers to Windows PCs.

CompUSA agreed to feature Macs in their own section with Apple-designed displays and knowledgeable staff on hand to help sell them.

But despite the lofty promises, CompUSA's store-within-a-store soon earned a dark reputation among Mac users. In most stores the displays were not well kept, and the staff often knew little or nothing about Apple's products.

While Mac sales at CompUSA were strong, the lack of commitment to the concept did not sit well with then Apple CEO Steve Jobs.

Jobs' frustration with the CompUSA experiment led directly to the creation of the Apple Store retail chain, which finally gave Apple the total control over the customer experience it wanted.

Apple also can glean some lessons from its long -- if checkered -- partnership with electronics retailing giant Best Buy Co. Inc. (NYSE: BBY).

Apple had cut off Best Buy in the late 1990s, but renewed the relationship in 2002 to sell iPods.

By the middle of the decade, Apple was again experimenting with micro-stores in Best Buy locations. Today, about 600 out of 1,000 Best Buys contain an Apple store-within-a-store.

Overall, Best Buy has done a better job than CompUSA. But as Apple's own retail chain has grown (it's up to 250 U.S. locations), many Best Buy micro-stores now compete for customers with the Apple Stores.

What's more, the micro-stores can't replicate the cachet of a real Apple Store - that all-important customer experience.

Aside from that, there are Best Buy's recent struggles.

The company lost $1.7 billion in the December quarter, is planning to close 50 stores, and announced $800 million in cost-cutting measures. If Best Buy is in crisis management-mode, keeping its Apple micro-stores up to snuff will hardly be a top priority.

Beyond Apple's Control
The biggest issue with the Apple micro-stores in Wal-Mart and Target will be the lack of control, particularly if many are in relatively remote areas.

Again, it comes back to the customer experience - a vital part of the Apple brand.

Figuring out how to maintain a proper "Apple experience" at far-flung Wal-Marts in Oklahoma or Montana presents a significant challenge. Apple won't be able to police its partners easily, as it discovered with CompUSA.

Adding to the challenge is the reputation both Target and Wal-Mart have as discount retailers.
Even if the micro-store concept is done well, Apple's elite brand is still going to look a bit out of place there. And can the employees possibly match the personalized attention you get at a bona fide Apple Store?

That's especially true of Wal-Mart. Its stores are often crowded and disheveled, and the staff isn't always the most knowledgeable.

And none of that takes into account other wild cards that could affect how well the big retailers pull off the store-within-a-store strategy.

That said, Apple does have some factors running in its favor.

For one thing, it sells a lot more than Macs these days. The extreme popularity of those iPods, iPhones and iPads are the main reason Target and Wal-Mart are so eager to partner with Apple in the first place, and it gives them incentive to do the micro-stores right.

Plus, Apple is not the also-ran of the tech world it was in the late 1990s. On the contrary, its tremendous size has endowed it with enormous power.

But even those advantages can't balance out the risks of what could become highly visible partnerships with Target and Wal-Mart.

"I have concerns about a strategy that expects products alone to draw traffic," Leslie Hand, research director atIDCRetail Insights, told MacNewsWorld. "The jury is still out for me, because I have not yet seen an implementation of an Apple store within a store that delivered Apple retail service."

Source :http://moneymorning.com/2012/05/17/apple-inc-s-nasdaq-aapl-store-within-a-store-strategy-bold-but-risky/

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