The retail swagger of tech icon Apple

Apple Inc posted jaw-dropping profits of US$4.3 billion for the three months to September, up 70% on a year ago.

In little more than a decade, the company has gone from virtual bankruptcy to becoming the second largest corporation in the US by market value, tearing up the rulebook on retail strategy in the process. Euromonitor International assesses the unrivalled trajectory of a tech icon.

Implications for Apple Inc

By balancing direct selling with audacious resale contracts, exaggeratedly tight supply, distribution secrecy and a hefty dose of rumour, Apple has stolen a game-changing march on its competitors. But, the company will need to continue raising the bar, both in terms of products and retail strategy, in light of a fiercer challenge from Google’s Android innovation as well as from BlackBerry.

Implications for specialist retailers

In the late 1990s, many specialist electronics and appliance retailers shunned Apple products. Today, they are desperate to get their hands on a lucrative Apple distribution deal because it virtually guarantees a big upturn in footfall. Such is the power of Apple over route to market that third parties will have to be tolerant of idiosyncratic, pricey and at times quirky short-term contracts.

The longer the wait, the sweeter the Apple

If you have been shopping around for an iPad or new iPhone 4, the chances are you might have been frustrated by lack of availability, especially in the first few months of launch. In my own local O2 retailer, for example, replenished stocks of iPhone 4s normally arrive on a Thursday, but are sold out by Saturday.

If you call the outlet in advance, staff will be vague about how many units are due to arrive on the next delivery date, or whether they will arrive at all. I have personally been trying to buy an iPhone 4 for around two months, but betwixt and between have missed my retail window. Does this steer me towards buying another type of phone?

Absolutely not, because, like millions of consumers around the world, Apple has snared me into its world of handsome consumer electronics. The harder an Apple product is to buy, the more I want it. I admit it. I am an Appleholic.

Of course, tight supply, or the illusion of tight supply, is central to Apple’s tantalising retail strategy. It is the catalyst to the long queues outside Apple stores whenever a new product comes on stream.

In those early days of iFrenzy, there were legitimate constraints on supply. But, let us be clear, Apple has an uncanny knack of sustaining the drama of retail scarcity long after launch dates have passed, driving a sense of urgency, if not anxiety, among its increasingly loyal consumer base. No other fast moving consumer goods brand comes even close to generating the same level of retail speculation, uncertainty and expectation.

It is at the core (no pun intended) of what has turned Apple into the biggest technology company in the world, dethroning archrival Microsoft in terms of market capitalisation this year.

It is remarkable to think that Apple almost went out of business in the late 1990s and that large numbers of retailers were losing interest in selling its products. It is often assumed that the iPod single-handedly changed the fortunes of Apple. However, the iPod phenomenon is unlikely to have happened in the same way had Apple not made a game-changing decision to take direct control of its own retail destiny.

It was a bold and risky strategy to move towards direct sales, as it was almost certain to antagonise erstwhile channel partners and dealers who had, for better or worse, been the company’s retail bread and butter. The bottom line, however, is that many third-party resellers had been happy to leave Apple high and dry, focusing instead on promoting their own in-house consumer electronics. It would be fair to say that Apple’s arm was irrevocably forced. It was a case of do or die.

The idiosyncrasy of genius

The idea of standalone Apple stores was touted as early as 1997, but nothing came of it. It was only after Steve Jobs hired high flyers from the likes of Gap and J Crew, as well as from leading real estate firms, that a radical retail strategy started to take shape towards the end of the 1990s. By 2001, the first two Apple stores opened in the US and today there are upwards of 310 worldwide, from New York to Tokyo to Sydney to London.

They are also among the most profitable retail outlets in the world. The UK’s London Regent Street store, for example, is estimated to generate around £2,000 per square foot. And London’s newest Apple store, in Covent Garden, is the biggest in the world and has potential to raise the profitability bar higher still.

Apple’s latest innovation to grace its flagship stores, a portable touch screen electronic reading device known as the iPad, sold more than one million units in its first month on the US market, with demand inevitably outstripping supply.

The iPad was launched in the UK and Germany at the end of May, followed by rollout in France, Spain, Italy, Switzerland, Japan, Australia and Canada. Apple’s control over the route to market and distribution process is total, but also shrouded in mystery.

In the UK, for example, which is tipped to be the biggest iPad market outside the US, details of iPad store availability beyond the country’s 27 Apple outlets was deliberately sketchy until moments before the launch.

As things transpired, 139 PC World and Curry’s outlets, which are both owned by DSG International, were named as third-party sellers in a deal leaked to the media via a memo to sales staff. In an added twist, rumourmongers audaciously circulated that PC World and Curry’s would only be allowed 60 days to sell the iPad.

Under the terms of its deal with Apple, DSG International was unable to promote the iPad before the launch day itself. It was not even able to confirm or deny that it would be stocking the iPad. DSGi is the biggest electronics and appliance specialist retailer in the UK, with a market share of 29% in 2009, according to Euromonitor International.

It is hard to think of any other brand for which DSGi would tolerate such a controlling, not to say quirky, distribution contract, but it is a measure of the Apple factor that retailers will, to put it bluntly, roll over and accept almost any conditions Apple applies.

And why wouldn’t they? The kudos, not to mention the floor traffic and market share upsides, are simply too big to turn down. In Germany, Metro played the same role as DSGi, while in France it was FNAC.

By handpicking only a small number of retailers for the early stages of distribution, Apple is able to fashion an aura of scarcity for its new products. There are other advantages, too. It can drive up the price retailers are prepared to pay for the honour of launching an Apple product, while also reducing the difficulty factor of its own logistics.

There is an audacity, almost a swagger, to Apple’s retail strategy, but who could argue that it doesn’t work. It is a bit like a bankable artist who might scale back output in a given year to bump up the price of the paintings already completed and propagate a sense of rareness.

For the hundreds of thousands of Apple aficionados who (like myself) have been unable to lay their hands on the latest innovation, Apple probably couldn’t care less. The company sold 4.2 million iPads in the last quarter, and a whopping 14.1 million iPhones, up 90% on last year.

Not even bad press about signal problems for the iPhone 4 appears to have dampened demand. There is no room for complacency with Android breathing down its neck, but for now the Apple retail model is on an unstoppable upward trajectory.