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It's been a decade since Apple rewrote rules of retailing

| Sunday, May 22, 2011

The retail industry has a hard case of Apple envy.

For good reason. The maker of fashionable gadgets today celebrates 10 years since the opening of its first Apple Stores, marking a record run of sales and a new world order in retailing.

"They grew faster than any other retailer in history" in the first three years, says Robin Lewis, co-author of The New Rules of Retail, who points to their numbers.

Take last quarter's results. Apple Stores' sales shot up $1.5 billion, or 90 percent, to $3.2 billion in its fiscal second quarter, compared with the same period a year earlier. It didn't hurt that the maker of must-have iPhones, iPods and Mac computers cranked out another hot seller, the iPad. Apple sold nearly 4.7 million iPads in the quarter, and industry tracker iSuppli expects it to sell almost 44 million for the year. The attraction helped bring in 33 percent more store visitors during the quarter vs. a year ago. What other retailer has a following that will camp overnight in front of stores to be the first on the block with an iPad?

The Apple Stores' debut defied logic at the time. Conventional wisdom was that computer retailing was a cut-throat and risky business. That was made clear when Gateway, now owned by Acer of Taiwan, rolled the dice to expand from online sales to its ill-fated Gateway Country Stores, only to shutter its remaining 188 stores in 2004.

Despite the odds, Apple is now the case study for the retail industry of today.

"They basically took the old book of retail and threw it out and started over," says Apple analyst Gene Munster of Piper Jaffray. "The irony of the whole Apple retail story is that nobody believed it could work. Nobody believed a computer maker would make a good computer retailer."

Industry watchers are closely monitoring Apple amid widespread speculation that it's secretly planning a splashy in-store update to begin soon at Apple Stores.

Apple CEO Steve Jobs tapped one person widely credited for the stores' success: Ron Johnson. Now an industry icon, Johnson had just performed a makeover for Target before joining Apple as senior vice president of retail in 2000. His admirers say Johnson is humble and imaginative, and has a knack for bringing in the right people. But most of all, they say, he's always looking for ways to improve the customer experience.

One person close to Johnson says that while at Target, he asked designers to create clocks, chandeliers and tea kettles that would get a special showing at the Whitney Museum in New York. That person, Michael Graves, an architect known as one of the New York Five, a group of influential modern architects, was behind many of Target's design hits. Graves says Johnson's curiosity and focus on design were way ahead of their time in retailing. Johnson told Graves that design would drive the retail world in the next 20 years. "Now it's design, design, design," Graves says. "He knew that was coming."

Design has set Apple Stores apart. Under Johnson, the company opened 323 retail stores, employing 30,200 worldwide. The company has 16 high-profile stores with design flair meant to promote the brand, such as its glass cube store on Fifth Avenue in New York City, which is open 24 hours, seven days a week, 365 days a year. That store alone is a big moneymaker, estimated to haul in $400 million to $500 million a year, according to Lewis.

"It seems that anything Ron Johnson touches just turns to gold. He's a mastermind. He understands retail in a way that I've never met in anyone," says Graves.

Store mojo

Modern glass-and-steel designs aren't the only touches that set Apple Stores apart. A look under the hood reveals in-store innovation. Johnson and Apple set out to change retailing in everything from the product displays to the wireless point-of-sale devices and its Genius Bar tech support.

"I do know that Ron Johnson came up with the idea of the Genius Bar, and Jobs wasn't crazy about it at first," Lewis says.

Smart retailers out there are beginning to understand it's really all about the experience, he says. That experience is one that makes it easier for people to understand the products they are buying -- and part with their money efficiently. That's helped by the Apple Store employees. For example, employees have an informal rule to speak with customers within two minutes. These employees, analysts say, are better trained and better compensated than elsewhere.

Genius Bar employees may be sent to Cupertino, Calif., headquarters for two weeks or more of training, analysts say. And, managers are able to get stock-based compensation, a potentially huge carrot, given Apple's stock market trajectory.

In the decade since the stores were introduced, Apple stock has risen roughly 34 times its split-adjusted price of $9.98 back then. Shares closed at $339.87 on Wednesday.

On top of that, Apple seems to hire retail people, more than anything, for how they fit into the team. "You've got to be totally wedded to the culture (at Apple). You've got to love the product and what it is. They love the product," says Jay Elliot, who worked closely with Jobs at Apple and wrote The Steve Jobs Way: iLeadership for a New Generation.

The level of product evangelism from within at Apple is largely unheard of in other companies. So it shouldn't be a surprise that Advertising Age last year named Apple "Marketer of the Decade."

All of these consumer touch-points that Apple nails translated into sales per square foot of $4,406 in 2010, blowing past rivals, says Apple analyst Charles Wolf of Needham & Co.

It doesn't hurt that Apple sells one-of-a-kind products that people desire. "The products that Apple sells are very lustful," says Wolf.

The computer retail industry is littered with unwanted products and store failures. Gateway isn't the only retailer to flame out miserably.

Electronics retailer Circuit City shuttered the last of its more than 500 stores in 2009. One of the final lessons in that story, experts say, is that the retail chain cut back where it hurts the most. "They tried to cut costs and let go of their most experienced people," says Michael Dart, co-author of The New Rules of Retail. That move accelerated the demise of Circuit City, he says, and runs counter to Apple's focus on salespeople.

Other retailing flameouts

CompUSA was another that closed. The computer retailer formerly owned by Mexican telecommunications mogul Carlos Slim announced in 2007 it would close its 103 stores amid stiff competition from Best Buy. Under a new buyer, CompUSA has resurfaced with 35 stores. CompUSA, like Circuit City, sold a lot of PCs and peripherals without much panache by Apple standards.

Now even Best Buy is struggling. The big-box retailer recently announced plans to trim its footprint by making a 10 percent reduction in square footage across its U.S. stores. That came as the company had a particularly difficult quarter selling netbooks in the face of Apple's hot-selling iPads. Best Buy's sales losses contributed to a 2 percent decline in fourth-quarter revenue for the company compared with a year ago. While Best Buy may have stolen a page from Apple's playbook to add its GeekSquad tech support, the salespeople, or "blue shirts," haven't impressed industry watchers. "The service component there leaves something to be desired," says Wolf.

Some retailers are revamping to be more like Apple. Sony has been closing and opening stores as it tries to become more Apple-esque. Sony has a lot of products in the mix, but none inspire gadget envy the way Apple does. "The challenge has been that, No. 1, they may have some problems on the product and price side," says Forrester Research analyst J.P. Gownder.

Meanwhile, Microsoft has a handful of stores, but there is a lack of compelling shiny objects to cast spells on consumers. People aren't exactly clamoring to get the latest Windows Phone 7 device or newest Zune media player. "Half their products are screwed up, and then they go down the tubes," says Elliot. "I don't see it."

Apple shows no signs of slowing. The company plans to open 40 new retail stores, three-fourths of them outside the United States, in 2011.

While Apple Stores are intended as showrooms to test stuff out and take classes in various things, Apple patrons have used the stores in unusual ways over the years. Some stay for hours using e-mail, at least one person has written a novel at a store, and some have gotten married there, according to Gary Allen, who runs the website ifoAppleStore.com , which tracks Apple Store openings.

Allen says it is by design that people are left alone to do things in the store, part of store chief Johnson's vision. "His first take on the products was that they were so good they would sell themselves," Allen says.

Apple declined to comment for this report.

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