APPLE INC IN RETAILING (WORLD)

June 2014

SCOPE OF THE REPORT
Scope

All values expressed in this report are in US dollar terms, using a fixed exchange rate (2013).
2013 figures are based on part-year estimates.
All forecast data are expressed in constant terms; inflationary effects are discounted. Conversely, all historical data are expressed in current terms; inflationary effects are taken into account.

Retailing

Disclaimer
Much of the information in this briefing is of a statistical nature and, while every attempt has been made to ensure accuracy and reliability, Euromonitor International cannot be held responsible for omissions or errors.
Figures in tables and analyses are calculated from unrounded data and may not sum. Analyses found in the briefings may not totally reflect the companies‟ opinions, reader discretion is advised.

Non-Store Retailing

Internet Retailing

Non-Grocery
Retailers

Electronics and Appliance Specialist Retailers

Apple Inc, goes from strength to strength thanks to unparalleled consumer loyalty and brand equity, superlative store experiences, a strong portfolio of products and a customer service strategy that sets it apart from its rivals. Lacking strong leadership store sales have struggled - sales per store in 2013 were flat. Appointment of ex Burberry CEO as new VP of Retail and Online is expected to provide much needed boost to Apple retail operations – both in store and online.

STRATEGIC EVALUATION

COMPETITIVE POSITIONING

GEOGRAPHIC STRATEGY AND OPPORTUNITY

CHANNEL STRATEGY AND OPPORTUNITY BRAND AND PRIVATE LABEL STRATEGIES OPERATIONS
RECOMMENDATIONS

Apple Inc
Headquarters
:
Regional

Cupertino, California, USA

Apple Inc, the consumer electronics giant, is also the operator of a substantial retail division. This includes 416 (and rising) stores in the US and 13 other markets, as well as the online Apple Store and iTunes, the world's largest music retailer. The company plans to open
30 new stores in 2014, with two thirds of them outside the US.

involvement: Global
Electronics and

Apple achieved 17% growth in 2013; while this appears impressive, it actually achieved a 24% CAGR over 2008-2013; managerial

Category involvement: World retailing value share 2013: World retailing value growth 2012-
2013:

appliance specialist retailers, internet retailing

0.3%

17.0%

upheaval in the wake of the death of charismatic company founder and CEO Steve Jobs at the end of 2011 was a factor in this dip.
Growth is driven by a mixture of relentless product innovation, hard retail control and a level of premium brand equity beyond its competitors‟ reach. This strategy allows Apple to hold high price positions with no compromise, and the premium status of the brand is reflected in its stores; all located in desirable high-traffic locations.
As a result, Apple significantly outperformed the global retail market in 2013. Many of the mature markets where Apple is strongest were characterised by extreme price pressure, but the company‟s rigorous control of how its products are sold has allowed it to sidestep this.
Apple consumers tend to be price-insensitive, and as a result there is little pressure for the company to push into emerging markets, where its sales model might be difficult to operate anyway. North America and Western Europe generated 84% of 2013 sales - nonetheless, it is seeking to build outside these regions, especially in China.

Apple saw sales growth of 355% between 2008 and 2013, driven by a stream of new products and the company‟s cast-iron consumer loyalty.
However, sales growth slowed in 2013. A comparative lack of product development in FY
2013, as well as stronger competition from other smartphone brands such as Samsung were probably more important, however.
Net sales (US$ billion)
Profits were hit by rising costs, including a 32% increase in R&D and US$499 million for new retail stores. Apple opened 26 retail sites in FY 2013. This helped boost reported retail sales from US$18.8 billion to US$20.2 billion.
However, the company is still in very good health, and holds vast cash reserves. Profits for 2014 are likely to be hit by further investment in stores, but Apple plans to roll out new product categories in
2014, which may include the long-rumoured iWatch and iTV. These products should help recover margins and continue to drive growth over the forecast period.

180

160

140

120

100

80

60

40

20

0

Apple Inc: Net Sales and Net Income
2008-2013
45

40

35

Net income (US$ billion)
30

25

20

15

10

5

- 2008 2009 2010 2011 2012 2013

Net Sales Net Income

Source: 2013 company annual report

Apple Inc: Net Sales and Net Income Q2
2013 vs Q2 2014 46 10.4

| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

46 10.2

Net sales (US$ billion)
Net income (US$ billion)
45 10

45 9.8

44 9.6

44 9.4

43 9.2

43 9 Q2 2013 Q2 2014 Net Sales Net Income

The latest available data for Apple shows the company going from strength to strength. Sales in
Q2 2014 grew by 5% year-on-year to reach US$45.6 billion. Despite ongoing investment and cost increases, profits grew by 7% to US$10.2 billion.
Growth was driven by booming volume sales, with higher than expected iPhone sales of 44 million units in the quarter driving growth. iPad sales reached over 16 million tablets, slightly lower than estimated.

Price development was difficult, given the lack of significant product development (at least in comparison to Apple's previous track record). Nonetheless, gross margin was 39.3% compared to
37.5% year-on-year. International sales accounted for 66% of revenues.

International sales are becoming more important to the company, up from 63% in Q1 2014 on a quarterly basis.
The company is very well positioned for the future, and the anticipated launch of new product categories later in 2014 will only strengthen this.

Note: Q2 ended 30 March 2014

STRENGTHS
The brand

The Apple brand enjoys very high consumer loyalty, and has become a byword for quality and innovation. This is the company‟s main strength and makes retail operations easier.

Service culture

Apple strives to offer a premium service, with many free in-store services and generous warranty and commission-free store staff that help shape a unique retail experience.

WEAKNESSES
Too pricey for emerging markets
High price positions underpin Apple‟s retail strategy, but this makes it harder to develop share in markets with lower disposable incomes.

Speed

Apple‟s focus on top- end locations and fully- trained staff underpins much of its success, but makes the sales model slower to roll out.

OPPORTUNITIES
Product development

New markets

THREATS
China cools

Cheaper Android devices

New Apple product launches typically build volumes at great speed, and the possibility of the launch of new categories in 2014 could be another big step for the company.

International sales are a priority for Apple, and rising consumer incomes in many emerging markets offer opportunity.

China, which generated
16% of FY 2013 sales, is looking problematic for Apple. Take-up of iPhones following a deal with China Mobile is slow, and outlet growth has been scaled back.

Apple is still viewed as the aspirational electronics brand, but Android mobile devices, made by rivals such as Samsung that are far cheaper, are closing the feature and quality gap

Regaining momentum in China Store expansion

The company has prioritised sales development in China. Rivals such as Samsung and Lenovo built share in smartphones and tablets rapidly over the review period, while Apple struggled with its limited distribution. Chinese consumers, who are still price-sensitive, appear to be buying into the Android operating system. Partnership with China Mobile, the country‟s largest wireless operator, is helping to reverse this trend.

Apple plans to spend another US$550 million in
2014 to build 30 new retail locations, two thirds of them outside the US, as well as remodel 20 existing sites. This strategy will drive sales growth, but will also strengthen consumer ties to the brand by widening the availability of Apple‟s unique service offer. Getting consumers to buy direct from Apple strengthens brand equity.

Maintaining must-have status Binding the consumer tighter

The company‟s spectacular growth has been built on releasing product after product that consumers were bowled over by and felt they had to have - the iPod, iPhone and iPad in their various iterations are the best known. However, the company failed to release a “killer” product in 2013, and faces the challenge of producing one to retain its image as the market‟s number one innovator. The mooted iWatch or iTV for 2014 may not do it.

Everything about Apple‟s product strategy is aimed at tightening its relationship with its consumers, even to the smallest detail - its portable products. For example, use a proprietary charger, rather than the micro USB that is now industry standard in other brands. Expansion of its store network, with its high service offer, is part of this. Maintaining innovation in retail is as much of a challenge for Apple as it is in product development.

STRATEGIC EVALUATION

COMPETITIVE POSITIONING

GEOGRAPHIC STRATEGY AND OPPORTUNITY

CHANNEL STRATEGY AND OPPORTUNITY BRAND AND PRIVATE LABEL STRATEGIES OPERATIONS
RECOMMENDATIONS

Apple outperformed the global online retailing market over the review period, but is starting to lose pace. Sales via its online media site iTunes are being impacted by the success of streaming media sites such as Spotify that provide free content.

Apple Inc: Competitive Performance by Value vs Amazon.com vs Global Internet
Retailing Market 2008-2013

40%
35%
Y-o-y growth
30% A
25%
20% B C
15%
10%
5%
0% 2009 2010 2011 2012 2013

World - Internet Retailing Apple Inc Amazon.com Inc

A: 2010: The launch of the iPad helps online hardware sales grow, but also boosts sales for iTunes as the company creates a new consumer base.

B: 2011-2012: The iPhone 4s and new iPad help increase growth, as do rapidly expanding international hardware sales - Apple‟s proprietary operating system binds new consumers to its media offer.

C: 2012-2013: Slowdown for digital sales as demand for purchases of MP3 slows as consumers shift to streaming services.

Apple outperformed the global electronics and appliance specialist retailers market over the review period, as its product development, store network expansion and ability to avoid discounting supported value strength. Peers such as Best Buy proved to be far more vulnerable to price pressure.

Apple Inc: Competitive Performance by Value vs Best Buy vs Metro vs Electronics and Appliance Specialist Retailers Market 2009-2013
60%

50%

Y-o-y growth
40%

30% A 20% B C
10%

0%

-10%

-20% 2009 2010 2011 2012 2013

Electronics and Appliance Specialist Retailers Best Buy Co Inc Metro AG Apple Inc

A: 2010: Network growth, macroeconomic recovery increased focus on bringing retail in-house and the launch of the iPad help Apple achieve growth of 48%, compared to 7% for the total global market.

B: 2011-2012: Ongoing network expansion of stores, which sees Apple lead the US retail market in terms of sales per unit area, underpins above-market growth.

C: 2012-2013: The growth gap narrows, as expansion slows, but new stores opened in 2013 and more for 2014 should continue to see Apple outpace the market.

Global Electronics and Appliance Specialist Retailers
2008

2009

2010

2011

2012

2013
Market Share by GBO 2008-2013

The global market for electronics and appliance specialist retailers is fragmented and immature.

Company

6- year 2013 market Share evolves at speed, largely due to the high speed of product development in recent years and

Best Buy Co Inc  1 1 1 1 1 1 4.6% Metro AG  2 2 2 2 2 2 3.4% Apple Inc  12 10 7 5 4 3 2.7%
Yamada Denki Co
Ltd  3 3 3 3 3 4 2.6%
Suning Appliance
Co Ltd  9 7 5 6 5 5 1.5%
Dixons Retail Plc  6 6 8 8 8 6 1.4% GOME Electrical

numbers of middle-class consumers are booming.
Acquisition also played a part in this change. French operator Casino Guichard-Perrachon SA dropped out of the market in 2010, then bought itself a 1% share of the market with the 2011 acquisition of Brazilian chain Casas Bahia.
Almost all of the leading players are multi-brand operators, subject to high levels of price competition. The exception is Apple, a vertically integrated retailer, whose retail offer consists only of its own high-priced products. Apple products

Appliances
Holding Ltd
Euronics

 4 5 4 4 6 7 1.4%

sold via third party retailers are sold at the same price points. For this reason, many consumers choose Apple Stores where the retail experience

International Ltd  5 4 6 7 7 8 1.2% Expert Global Inc  8 8 9 9 9 9 1.1% Casino Guichard-
Perrachon SA  95 86 - 92 10 10 1.1%

and level of service is excellent.
This has supported value growth over the review period, and Apple‟s growth in store numbers has also helped. The company opened approximately
200 new stores between 2008 and 2013.

Apple‟s premium, almost luxury, competitive positioning sets it wholly apart from the rest of the electronics and appliance specialist retailers market. Its retail stores generated US$57 million per „000 sq m in 2014, compared to US$8 million for its nearest rival.
Unsurprisingly, the company does not perceive itself to have retail competition. These values are underpinned by the very high levels of service and unit prices of Apple products, as well as a consumer base that appears to be wholly insensitive to pricing.
In fact, the idea of offering consumers the best value for money solution to fit their needs, rather than very expensive, very high margin products, is anathema

Leading 10 Electronics and Appliance Specialist
Retailers 2013

Apple Inc Yamada Denki Co Ltd Best Buy Co Inc Dixons Retail Plc Metro AG
Casino Guichard-Perrachon SA Expert Global Inc Euronics International Ltd
GOME Electrical Appliances Holding Ltd

Suning Appliance Co Ltd

to Apple‟s competitive strategy. 0 20 40 60 80
Sales (US$ million) per '000 sq m

STRATEGIC EVALUATION

COMPETITIVE POSITIONING

GEOGRAPHIC STRATEGY AND OPPORTUNITY

CHANNEL STRATEGY AND OPPORTUNITY BRAND AND PRIVATE LABEL STRATEGIES OPERATIONS
RECOMMENDATIONS

Third party

• Apple hardware products are sold via resellers, “store in store” concepts and third party partner stores.

iTunes and
App Store

• Apple launches iTunes and App Store availability in a market with language and content specific media.
• iTunes was available in 119 markets in 2013.
• App Store was available in 155 markets in 2013.
• iBook Store was available in 51 markets in 2013.

Apple online store

• Apple adds hardware to retail offering.
• Apple online store was available in 39 markets in 2013.

Full retail presence • Store-based entry typically marked by flagship stores with smaller “regular” Apple Stores following, subject to demand.
• Apple operated 416 retail stores in 13 markets in 2013.

Retailing Presence by Type
Store-based and internet retail operations
New store-based presence for 2014
Full internet retail (hardware and software)
Limited internet retail (App Store)
No presence

100%

Value sales
80%

60%

40%

20%

0%

Apple Inc: US - Internet Retailing vs | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

Store-Based Retailing 2008-2013

2008 2009 2010 2011 2012 2013 Store-based Retailing Internet Retailing

Apple‟s focus on its stores, rather than its online retail model, is most clearly visible in its domestic market. US sales via stores generated 57% of 2013 retail value.
However, the share generated by stores in the company‟s international markets is growing rapidly. Store sales generated 39% of sales in the rest of the world in 2013, up from 18% in 2008. The reasons for focusing on stores are obvious - they allow the company to tightly control product availability, brand

Source: LVMH Annual Report 2012

Apple Inc: Rest of World - Internet
Retailing vs Store-Based Retailing
2008-2013

equity and add value to its offer in the form of service.
The importance of the stores as income generators (let alone marketing tools and consumer playgrounds) cannot be overstated. Apple held 15% of the US electronics and appliance specialist retailers market in

| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

100%

Value sales
80%

60%

40%

20%

0%

2008 2009 2010 2011 2012 2013 Store-based Retailing Internet Retailing

2013, with a network with 259 stores. Market leader
Best Buy‟s 31% is based on a network of 1,535.

The strategic aim, therefore, is to bring the global sales model in line with the US as quickly as possible. This is a challenge - identifying suitable markets, retail sites and recruiting for the stores is difficult - but the potential gains are enormous.

Source: LVMH Annual Report 2012

Of the 10 markets forecast the strongest growth in absolute value terms over 2013-2018, Apple is present only in China, where it held just 0.3% of market value in 2013.
The forecast dynamism of these markets is based upon their immaturity, weak online retail models and in several cases extremely large populations. As such they do not yet fit the model of Apple‟s target consumer bases, but they are set to see rising levels of disposable income. Apple opened stores in Brazil and Turkey in 2014, and Saudi Arabia and Russia would appear to be suitable targets. However, in the long term demand in these markets is likely to allow Apple to push into previously unthinkable markets.

Apple Inc: Electronics and Appliance Specialist Retailers Absolute Value Growth vs
CAGR 2013-2018 and Company Share 2013

Absolute value growth (US$ million) 2013/2018
50,000

14%

45,000

40,000

35,000

30,000

25,000

20,000

15,000

10,000

5,000

CAGR 2013-2018 & company share 2013
12%

10%

8%

6%

4%

2%

0 0% China India Nigeria Saudi Arabia Brazil Russia Algeria Iran Turkey Indonesia Absolute Value Growth (US$ million) 2013/2018 Apple Inc % Company Share 2013 „% CAGR 2013-2018

The US remain the company‟s core market, generating 55% of 2013 sales. However, this is down from
65% in 2008, and over the review period its international retailing business outperformed its domestic one.

The US remains an extremely important market for Apple. The company generated a CAGR of 20% in the US over 2008-2013, compared to less than 2% for the overall national market. There have been suggestions that the US market is saturated and still uncertain in macroeconomic terms, but demand for Apple‟s products and services remains high and the company continues to open new stores there.
However, building international sales is a strategic priority. This has been driven by the opening of physical stores across the world, as well as the expansion of the number of countries its online media products store, the iTunes Store, is available in. This trend will strengthen over the review period, with emerging markets in particular coming to the fore. China, for example, saw Apple open its 10th store in January 2014, and Apple plans to double outlets to 22 to meet demand in the world‟s most populous country.
Apple Inc: US and International Sales Value and % Y-o-Y Growth 2008-2013 50 50%

Sales (US$ billion)
40 40%

Y-o-y growth
30 30%

20 20%

10 10%

0 0% 2008 2009 2010 2011 2012 2013 US Rest of World US - % growth Y-o-Y Rest of World - % growth Y-o-Y

According to the company‟s 2013 annual report, sales in Greater China (China, Hong Kong and Taiwan) generated 15% of value sales, up from 14% in 2012, and grew by 13%. This appears healthy, and like many international retailers, the company is prioritising sales growth there, and opened its 10th store in mainland China in 2014.
However, Apple is facing an uncertain market environment. In 2014, the company finally rolled out iPhones on China Mobile, the world‟s largest network operator. Previously, iPhone availability was limited to China Unicorn and China Telecom, the country‟s second and third largest networks, respectively.
In the meantime, the company has lost ground to the market leader in smartphones, Samsung Electronics, and lower-end domestic rivals. The Android operating system, which offers a far larger number of apps, as well as more free content, is more in tune with the Chinese mass market.
Price is a major barrier to widening Apple‟s consumer base in China. The RRP of RMB5,288 (around US$870) for an iPhone in China is more than many monthly salaries, especially outside major cities.

Above Apple’s Pudong store

Obviously, mass-market sales are not Apple‟s strategy, but if consumers are automatically dismissing the brand, then the development of “must-have” products will be meaningless in China.
More alarming is the way that foreign brands have been subjected to intense media scrutiny, especially the state-run CCTV, prompting consumers to reconsider domestic alternatives. As China gradually shifts to a more consumer-driven economy, there is massive opportunity, and Apple must adapt more quickly.

Although the company is trying to convert the business to bricks and mortar sites, it is required to take market-specific approaches. Biggest store expansion has been in the US where the company added almost 70 new stores over 2008-2013.
In Japan, for example, Apple only operated seven stores 2013 and there has only one new store since 2006.
This is despite the fact that Japan is Apple‟s second largest market. High labour and rental costs make store-based retailing an expensive channel in Japan.
Network evolution has been far quicker in markets with cheaper operational costs and more liberal planning laws. Canada, for example, saw numbers rise from 9 to 27 over the review period. Huge amounts of suitable space, rapid urban development and population growth underpinned this.
France was the market where Apple grew from no stores to 15 in 2013.

Turkey and Brazil stores were opened in 2014.

Number of New Stores 2008-2013

USA Canada Australia
United Kingdom France Italy Spain Germany China
Hong Kong, China Sweden Netherlands Switzerland Japan Turkey
Brazil

0 10 20 30 40 50 60 70 80
Number of new stores 2008-2013
Note: grey bars – show countries markets where Apple did not have store presence in 2008, and orange bars show those opened in 2014

Apple opened its first store in Brazil in January
2014. The market is forecast to be one of the world's fastest-growing smartphone markets,

Smartphones: Forecast Growth in Absolute Value and % CAGR 2013-2018 in Brazil, Latin America and the World

generating a CAGR of 24% through 2018 compared to a global average of 11%. Tablets and other portable computers are set to post a CAGR of 40% over the same period, compared to 6% for the global market. Brazil is crucially important to the company, as it seeks to strengthen share in
Latin America.

The opening is Apple‟s first in the region, and comes just as Brazil prepares to host the 2014
FIFA World Cup and the Summer Olympics in
2016. These are convenient marketing

160
Absolute value growth
(US$ billion) 2013/2018
140
120
100
80
60
40
20
0

World Latin America Brazil

Smartphones - Absolute Value Growth (US$ billion) Smartphones - % CAGR 2013-2018

30%

CAGR 2013-2018
25%

20%

15%

10%

5%

0%

opportunities for any major brand operator and
Apple is no exception.

The Apple brand is popular in Brazil, but as in China the company has seen Samsung rapidly build market leading share. Apple faces serious challenges to expansion, and again these are linked to price. There are steep import tariffs on products made outside Brazil, making Apple's already expensive products even more so.

Apple has cut the price of some phones and started producing some iPhones and iPads in Brazil in 2013, but prices remain high - a 16GB, contract-free iPhone 5s costs US$1,174 in Brazil, compared to US$649 in the US and US$872 in China.
Apple needs to find ways to make its products more appealing in emerging markets, without compromising the brand.

STRATEGIC EVALUATION

COMPETITIVE POSITIONING

GEOGRAPHIC STRATEGY AND OPPORTUNITY

CHANNEL STRATEGY AND OPPORTUNITY BRAND AND PRIVATE LABEL STRATEGIES OPERATIONS
RECOMMENDATIONS

60%

Y-o-y growth
40%

20%

0%

Apple Inc: Store-Based Retailing vs Non- Store Retailing % Y-o-Y Growth
2008-2013

2009 2010 2011 2012 2013 Store-based Retailing Non-Store Retailing

Apple‟s store-based business outgrew its non- store retail business between 2008 and 2012, generating a CAGR of 25% compared to 23%.
This is unusual. Global retail sales via non-store channels generated a CAGR of 9% through 2013 compared to 4% for store-based. Booming internet sales, very much a core competence of Apple, are one of the main drivers of this.
However, Apple‟s store model is part of what has bound its consumers so tightly to the brand over the review period. Stores are typically attractively designed and are located in the very best sites. All stores have a Genius Bar for technical support, workshops for the public, and some larger stores have auditoriums, workshops or studios for training with Apple products. Consumers are encouraged to take a hands-on attitude to new products, in contrast to many other electronic specialists.
Store network expansion is therefore central to Apple‟s retail strategy, and international growth will be driven by this. In 2014, Apple opened its first store in Brazil and Turkey, and emerging markets

Above - Apple’s Istanbul store

are becoming more important to the company.

Apple is unapologetically a premium brand and retailer, investing huge amounts of money in product development, store design and customer service. Its strict control over how its products are sold allows it to maintain strong prices and high margins.
However, it is likely that the company is going to have to find new ways to add value to its offer. This is because it faces ongoing price drops in the global market for its key products.
China, the world‟s largest smartphone market, is a good example. The market is seeing smartphones and tablets produced by new domestic players who are churning out low cost products. Chinese price-sensitivity is a factor here, as is the head start that Android has in the market and growing suspicion of foreign brands.
Increasingly, producers require little more than a free operating system from Google (GOOG) to build, and in future will operate on very thin profit margins. The market therefore appears to be polarising into premium and the rest.
Obviously, what is important for Apple is to put as much distance between itself and these new players. The retail experience of its stores is key to this, as none of its competitors are able to offer anything remotely similar. More new stores (at considerable investment cost to the company) are likely in the long term.

Apple Inc: Key Product Categories - Price Evolution 2007-2017
1,200

Price per unit (US$)
1,000 iPad launch 800

600

400

200

2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
-

Desktops Laptops Netbooks
Tablets/Portable Computers

Peripherals

Smartphones

The relative slowdown in retail sales that Apple saw in 2013, with global growth of 17% compared to 27% in 2012, came in the wake of the death of Steve Jobs at the end of 2011.
His successor was Tim Cook, who had served as acting CEO of Apple after Jobs began medical leave in January 2011, and whose first appointment was John Browett as senior vice president of the retail division.
Browett was the former CEO of UK electronics chain Dixons, whose mass-market, multi-brand, promotion- led strategy is a very different proposition to the sleek retail operations of Apple.
The new SVP immediately looked to cut operating costs in retail, replacing full-time staff with part- timers and reputedly leaving shops understaffed.
This put the company‟s reputation for exceptional customer service and a superlative retail experience in jeopardy. As a result, Browett lasted seven months in the job before being ousted at the end of 2012, followed out of the company in January 2013 by Jerry
McDougal, VP of Retail at Apple since 2000.

Apple Store, Italy

In operational terms, Browett did well, supervising an increase in outlet numbers as well as seeing a rise in per store sales during his tenure.
However, any threat to Apple‟s retail brand cannot be countenanced. The episode underlines to what extent the company‟s service offer is part of its whole brand position. Its hardware is certainly attractive, but without the backing of the stores, this is less relevant to many consumers.

As the company expands its store network and seeks to add more value to its retail experience, it will be looking to add innovation to the actual shopping experience.
Anything that makes transactions easier or more pleasurable for the consumer, or highlights the company‟s technological capabilities can help Apple differentiate itself from other players in any global market.
The company has already removed many dedicated point of sale stations within its stores to push the EasyPay system, an app that lets consumers scan the barcode of, and pay for, items that are boxed and ready to go on the shop floor. This means no queues and not having to talk to anyone, although big ticket items such as MacBooks that are not kept on the floor still require human interaction.
The company is also rolling out the iBeacon, a low-powered, low-cost transmitter that is in all 254 Apple Stores in the US, though not yet in other markets. On entering a store, consumers can then be sent notifications of items nearby that are on sale or that they may be looking for, and it can enable payments at the point of sale where customers do not need their cards to make payments.
Other technical developments that the company has in place could be used to heighten this competitive edge - the fingerprint scanner in the iPhone 5s could be used in conjunction with consumers‟ payment details that Apple holds to accelerate transactions.

Above - the iBeacon alerts in-store shoppers to the location of offers and other products, using the Siri voice app or texts

Speeding up transactions may not be a priority for many consumers, but the fact that Apple can do it and make shopping effortless all adds to the brand equity. Again, these developments are likely to spread to international markets over the forecast period, and will strengthen consumers‟ ties to the company.

Apple Inc

Internet retailing
B2C
Store-based sales
Apple
Wholesale

(sales through third party stores)
Institutional
Sales
B2B sales (non-retail)
Apple Retail

store.apple.com Apple Retail Stores

B2B2C
Hardware Sold to End User (consumer)
Connected Devices - Mac, iPhone, iPad, iPod, Apple TV

iTunes and App Store - Marketplace for digital products such as music, movies, books games and apps, vast majority of which are sold by third parties, with Apple earning a commission on sales
Vertical integration proves to be the key to success for Apple

Apple started as a manufacturer of hardware and software. However, over the years, the company extended its vertical links through retail stores and its connected devices. All of Apple‟s main products are retail platforms for media content. This concept started with the development of iTunes, which sold music to be played through the iPod. This business model means that although the majority of its products are sold through third parties, Apple can make further retail revenue from media through its connected devices.

In comparison to many online retailers Apple online success lies in the marketplace it has built. Similar to Amazon, eBay and Tmall, which have built marketplaces through which third party sellers can reach consumers, Apple has built a very successful marketplace for digital products. Every Apple device sold (with the exception of Apple TV) comes with access to Apple digital marketplaces.
App Store is available on iPhones, iPads, iPods, and is expected to come to Apple TV in the near future. There are more than one million apps in the store, many of which must be paid for. App Store revolutionised software development for smartphones by creating a standard environment for developers and by setting low initial prices of US$0.99 and many free apps. Hassle-free installation and one-click purchasing have made sales of apps very straightforward, easy and accessible to the general public. As a result, in 2013 App Store is estimated to have generated over US$30 billion in retail sales and is available in 155 markets. Apple generates 30% of all sales through the store, thus its growth becomes an important revenue source. Apple extended the App Store concept to its Mac platform in 2011 as a way to distribute software for Macs.

iTunes Store is the only Apple digital store which is available on both PCs and Macs. This is the original company digital store which was launched after the introduction of the iPod in 2003 and revolutionised sales of digital music, introducing sales of singles for as little as US$0.99 to become the biggest music store globally. In 2013, the company reported almost US$7 billion in retail sales. The store is available in 119 markets.

iBooks Store was first launched with the introduction of the iPad in 2010. While both iTunes Store and App Store had little competition at launch, iBooks faced heavy competition from Amazon‟s Kindle platform. The company has been involved in lengthy litigation process. In 2013, the store was launched on Macs which could expand its popularity. iBooks Store is available within 51 markets.

Expansion imperative

Apple needs to maintain its strategy of retail expansion if it hopes to build share in emerging markets. Simply building share is not that important. Android products are far more popular in Asia Pacific and Latin America. However, developers tend to make apps for iOS before they make Android versions. If Android becomes the default system in these new markets, this priority could switch, and Apple could face even more of a struggle.
Apple is clearly not a mass- market retailer. However, opening new stores in Brazil and Turkey in 2014, as well as new ones in China show that it is serious about new markets.

Getting product development right
There is widespread speculation that the company is planning the launch of another game-changing product category in 2014. This may be overstated - current theories suggest that this might be a TV, a smart watch, a bigger iPhone, or a bigger iPad.

None of these are particularly ground-breaking; getting development right rather than launching a new product for the sake of it is more important to the company.
Although the company is doubtlessly working on something, product release is unlikely unless it fits the Apple ecosystem. The retail business appears to be, for now, the most dynamic part of operations.

Retail innovation

Rolling out retailing innovations such as the iBeacon across the company‟s global store network will greatly sharpen the company‟s competitive edge, although in many respects, Apple is the leader in a field of one. No other electronics specialist comes close to matching the level of service and retail sophistication of the company.
Nonetheless, Apple is aiming to add more. iBeacon, which allows even more direct consumer contact, could be a powerful tool.

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“There’s always a large junk part of the market. We’re not in the junk business.”
Apple CEO Tim Cook, 2013

Apple‟s entire retail strategy is aimed at protecting the premium position of its products, as well as characteristically high product margins. Apple regards itself as a class apart, and although the company understands the importance of building retail and product share in the mass market, it is emphatically not a mass brand.
This has led to expansion problems. In 2013, Apple launched the iPhone 5c in China. Market analysts expected Apple to price it more competitively, perhaps inexpensive enough to make it attractive to the booming numbers of urban middle-class consumers. In the end, it cost US$550 unsubsidised, only US$100 less than the top-of-the-line 5s.
However, rigid adherence to these prices reflects the work and quality of the products that Apple believes make it a stand-alone product, and lowering price or quality risks compromising brand equity in the long term.

Bringing retail in-house, as the company appears to be doing, cements control of the brand. There is little price difference between products sold via third party retailers and by Apple itself, and the retail experience in Apple Stores means that consumers choose, where possible, to buy direct from the company.
In stores, consumers can be directed to new releases, best buys and the company can show its product capabilities in a way that is impossible in the wholesale part of its business or even online.
Apple‟s product strategy appears to be non- reactive - that is, it appears to be wholly-focused on its customers. Product strategy decisions are not based around what its competition is doing but around what is best for its customers. New products need to fit perfectly into the overall Apple ecosystem.

Price control is a key part of the company‟s product and retail strategy. The minimal difference between the company‟s own sales price and those of wholesale retailers has always led consumers to choose Apple Stores, where service and retail experience can be had with no marked pricing disadvantage.
Apple has traditionally been able to maintain this strategy by setting a minimum “suggested” price with retailers, and incentivising them to keep to this by promising money for marketing if the retailer keeps its prices at the agreed level or above. There have been reports of Apple cutting off supplies to stores that strayed below the RRP.
The system ensures that smaller retailers will not be undercut by large chains that are able to operate on small margins or sell as a loss leader, as well as ensuring that every retailer is on a par with the prices in Apple‟s own stores.
However, at the end of 2013, the world‟s largest retailer Wal-Mart announced plans to sell the newest iPhones at a discount.

The cheaper iPhone 5c will be sold for US$79 along with a 2-year contract, 20% less than anywhere else in the US, and the iPhone 5s will sell for US$189, US$10 below its normal price.
Apple has accepted this, but it is unclear how much persuasion was involved. Certainly, Wal-Mart‟s massive scale means that the company may feel it has little to fear from Apple in terms of supply (it is the largest mobile phone seller in the US) or that it can take the hit of losing price-agreement sweeteners.
This may not be a bad thing for Apple. Although it positions itself as being above the mass market, the company needs more low-income buyers to expand in the US and globally. The price difference is not so great as to discourage its core consumers from using the Apple Stores, and selling via Wal-Mart helps create a mass-market consumer base that may trade up to Apple‟s own retail division.

Apple has transformed itself from being primarily known as a computer brand to a retailer manufacturer of more media-aligned devices, and iPhones and iPads are now its core products.
According to the company‟s 2013 annual report, only these two products showed growth in volume and value terms between FY 2011 and FY 2013. They are versatile products that inspire deep consumer loyalty, but the hardware is only a part of the product offer.
iPhones and iPads allow for far easier vertical integration for the company as a retailer of software and media, as they are directly linked to the company‟s app and media stores. Consequently, growing hardware sales, whether sold by Apple or through a third party, inevitably result in Apple‟s growth as an internet retailer.
These products also make it easier for the company to prompt or push the consumer to look at new products, updates and marketing - they are portable and looked at more regularly by consumers.

100

Sales (US$ billion)
80

60

40

20

0

200

Million units
150

100

50

0

Apple Inc: Product Sales by Net Value
FY 2011-2013

iPhone iPad Mac iPod

FY 2011 FY 2012 FY 2013

Apple Inc: Product Sales by Units FY
2011-2013

iPhone iPad Mac iPod

FY 2011 FY 2012 FY 2013

Source: Apple Inc 2013 Annual Report

At the end of 2013, the company announced the appointment of UK luxury fashion brand Burberry CEO Angela Ahrendts as its SVP of Retail. This appointment gives a strong indication of the direction that the company wants to take its retail business in.
The appointment of someone from a fashion background may seem odd, but Burberry is a success story, in part because it managed to operate a brand and retail network that combines accessibility and aspiration, mass market and luxury. These are facets of the business that Apple needs to take on board if it is to try and expand its consumer base beyond the very loyal middle classes that are the backbone of its offer.
Overhauling the stores, or at least rethinking how they operate, may be part of this. Store sales fell into relative stasis in 2013. Although per sq ft sales are still very high, and net sales rose 7% in FY 2013, per- store numbers were flatter as Apple opened 26 new stores during the year.
At Burberry, Ahrendts pioneered a system that allows staff in all 330 Burberry stores to have access via iPads to all relevant customer information gathered from their activities at Burberry.com as well as in-store. This is in line with Apple‟s own strategy of developing the best possible consumer experience in-store. Again, Apple appears to be focusing for the moment on building superlative service in its retail business to justify pricing, as much as it is rolling out new products. The line between product and service is blurring.
Apple is expected to release a wearable electronic device, dubbed iWatch, with its emphasis on health monitoring and positioned as a fashionable, even luxury accessory. Given Ahrendts‟s background in fashion and luxury retail, Apple Stores will be key in creating the right environment to sell a hybrid device spanning hi-tech, fashion and luxury.

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OPERATIONS
Limited number of manufacturing partners

Manufacturing

Apple outsources “substantially all” of its hardware products to carefully selected third party producers. Most of these are in China and Vietnam, cheap labour markets that support Apple‟s profit margins. These include Hon Hai Precision Industry Co Ltd and Quanta Computer Inc.
However, the company also performs the final assembly of certain products at its manufacturing facility in Cork, Ireland. The supply and manufacture of a number of components is performed by sole-sourced outsourcing partners in the US, Asia and Europe. Other outsourced assembly operations are located in the US, China, the Czech Republic and South Korea. The company also manufactures some products in Brazil with the help of Hon Hai/Foxconn; this is in order to bypass the country‟s stringent tariffs on foreign- produced products.
Warehousing, distribution and other operations

Apple owns one warehousing facility in California, US, and outsources warehousing operations in the rest of the world.
Company headquarters and R&D are located in Cupertino, California. Its Irish site also houses a customer support call centre.
Its site in Elk Grove, California includes warehousing and distribution operations, as well as a customer support call centre, and it is building office space and a customer support call centre in Austin, Texas.
Apple also operates data centres in Newark, California, Maiden, North Carolina, Prineville, Oregon and
Reno, Nevada.

© Euromonitor International

RETAILING: APPLE INC

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Expansion and improving the retail experience

Expanding footprint without compromising brand
Apple needs to build share in emerging markets as well as try to capture larger numbers of lower-income consumers in its core developed markets. Doing this without compromising the Apple brand, making less than highest quality products or slackening its grip on retail will be difficult, but the scale of markets such as China is simply too great to ignore. Even semi- affordable products for aspiring middle-class consumers in these countries might be an idea, but not addressing the issues means that Android- operating devices will come to dominate the global market.

More stores

Although rolling out new stores is difficult, given the very high investment required for sites, fit out and recruitment, this is an essential part of long-term retail strategy. Not only does it improve Apple‟s footprint and drive sales, but it tightens consumer relationships with the brand, allows Apple to show off new products and its super premium retail experience underlines Apple‟s superiority to the consumer. Apple appears to be reducing wholesale as much as possible, and there is plenty of room to go - only 20% of US iPhone sales were via Apple Stores in 2013. It is completely in the right to do so.

Revive shopping experience

Apple has made a number of recent tweaks to its store proposition, including the introduction of the iBeacon in the US, wider use of EasyPay and extensive remodelling. However, the appointment of ex-Burberry
CEO Angela Ahrendts may suggest that the company is looking for new ways to take the brand upmarket and sell more cleverly. Ahrendts‟s marketing strategy at Burberry was based on customer empathy. This is something that many consumers feel is lacking at Apple Stores, where overstretched staff and a certain amount of cost cutting have compromised the experience. Addressing this is a sensible move.

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