Apple Retail and the Innovator’s Dilemma

Angela Ahrendts officially took over as head of Apple Retail last week, and just in time. Same store sales were down five percent last quarter, and have been hovering around zero for several quarters prior. To be fair, that decline is mostly due to Apple’s slowed growth; more concerning is the declining rate of store openings: 37 in 2011, 40 in 2012, but only 24 in 2013. Most concerning is the paucity of locations in Asia, the fastest growing region in the world; Apple only has 19 stores in Japan, China, and Hong Kong.

It’s easy enough to dismiss the importance of the Apple Stores; after all, if sales move largely in line with Apple’s top-line revenue, surely they are simply another channel, no? Sure, Apple’s relative share for all of its products roughly corresponds to the number of Apple Stores in a particular region, but again, might that not be a trailing indicator?

I would argue no. In fact, as much as people have come to appreciate Apple Stores, I believe that they are not only still undervalued, but actually increasing in importance; moreover, Ahrendts is a potentially valuable addition not just because of her experience opening stores in Asia, but because of the type of company whence she came.

Over the last few years, as Apple has retained its dominance of the high end in all the sectors it competes in, some (not all) former doomsayers have come to begrudgingly accept that perhaps not all consumers are focused solely on price (how said doomsayers manage to ignore nearly every other consumer product category is beyond me). Instead they have seized upon tech’s favorite word “disruption” as the cause of Apple’s certainly impending slide. The argument goes something like this:

“OK, I will grant you that Apple has locked up the premium end of the market. However, even basic smartphones are increasingly ‘good enough’; Apple will soon be over-serving the market. No one will want to pay $650 for a smart phone, no matter the brand, especially if operator subsidies go away.”

Leaving aside the operator subsidy question (I’m of the opinion operators like them more than they let on), this criticism of Apple is sound in theory but mistaken in reality; the truth is that Apple doesn’t sell phones (or computers or tablets); they sell iPhones. And iPhones are not just hardware, but also the software that runs on them. But even that is missing the whole picture. To buy an iPhone is to buy into an experience that includes everything from advertising to following the news to visiting a store to buying a phone to unboxing to downloading apps to visiting a genius and so on and so forth.

It’s no accident that the Apple Store appears twice in that sequence. It’s a critical part of the Apple experience that increases the value of an iPhone (and Mac and iPad) and works in a very specific way to counteract over-serving and help prevent disruption.

In the “Innovator’s Solution,” the follow-on to “The Innovator’s Dilemma,” Clay Christensen diagrammed the process of low-end disruption:

The incumbent product is originally not good enough, but over time it improves and eventually over-serves consumer needs. This leaves room for the good-enough lower-prices new entrant.

The incumbent product is originally not good enough, but over time it improves and eventually over-serves consumer needs. This leaves room for the good-enough lower-prices new entrant.

The market leader (in this case, the iPhone) starts out not good enough, but better than anything else. Over time it improves, until it perfectly meets consumers needs. However, driven by the need to maintain profit margins and the demands of high-end consumers, the product continues to improve beyond what most consumers value. Meanwhile, new entrants are not as good, but also cheaper; they begin to peel off the lower end of the market, and as they improve, eventually take it all.

Certainly low-cost phones powered by the various flavors of Android have been very successful in the low-end market, and there’s no question that a great many consumers are first and foremost driven by price. However, the iPhone has stubbornly held on to the high end, even increasing its share. As I wrote in What Clayton Christensen Got Wrong:

Not all consumers value – or can afford – what Apple has to offer. A large majority, in fact. But the idea that Apple is going to start losing consumers because Android is “good enough” and cheaper to boot flies in the face of consumer behavior in every other market. Moreover, in absolute terms, the iPhone is significantly less expensive relative to a good-enough Android phone than BMW is to Toyota, or a high-end bag to one you’d find in a department store.

It’s that last example that resonates when talking about retail especially. To buy a designer bag is an event: you’re greeted at the door, given a drink, have an attendant on hand at all times (who will model the bag for you, if need be); if you purchase it’s almost like a ceremony, complete with special packaging, congratulations (for them taking your money!), and perhaps a follow-up call a day or two later. Obviously given its scale an Apple Store isn’t quite the same, but it’s in the ballpark, especially relative to the buying experience for most electronics. Moreover, it’s the after-sale experience that is arguably the best part: you’re given help setting up your new device, transferring files, invited to classes to learn how to use your purchase, and assured that a genius is ready-and-waiting to take care of any problems that arise.

All of this activity surrounding the Apple Store has a direct effect on all three disruption curves:

The “try-before-you-buy” accessibility of the Apple Store raises the customer needs curve

By being able to experience new features in the Apple Store, consumers come to demand those features, effectively increasing consumer needs

By being able to experience new features in the Apple Store, consumers come to demand those features, effectively increasing consumer needs

My favorite example of this is Facetime when it first launched: Apple actually set up a special 1-800 number that you could call to try out Facetime from any Apple Store. Instantly Facetime moved from being something abstract to being something real, and something you just had to have.

This is an area where Apple Stores are going to be increasingly critical. Our computing devices are becoming more and more personal, particularly the (alleged) iWatch, and making that experience real to potential customers at scale will be a big challenge (this was one of the many reasons why the Facebook First was a failure). This is also an area where the Apple Store has slipped; the TouchID in-store demonstration is pretty weak, in my opinion, especially compared to the Facetime example. Still, thanks to its stores Apple is alone in its ability to make these kinds of features must-haves.

In-Store education lowers the Apple products’ feature curve

Workshops and Apple Store employees enable consumers to use more features; previously unused features (that would have been over-serving) now are consumer needs

Workshops and Apple Store employees enable consumers to use more features; previously unused features (that would have been over-serving) now are consumer needs

Although Apple is famous for its focus on simplicity, the reality is computers are complicated, and that includes iOS devices. It’s very easy for less tech-savvy consumers to never really use a large percentage of their device’s capabilities, increasing the risk that they see the price premium as not being worth it (leaving aside the fact the cheaper products are usually more complex).

Enter Apple Store Workshops. One-to-many classes are available for free, and one-to-one for $99/year. I’m sure few of you reading this have even given these classes a second-thought, but my dad sure has; they completely changed his relationship with the iPad I gave him, and became something he really looked forward to. He told me, and I quote, “It’s the first time in my life I haven’t felt like an idiot [with a computing device].” And, ever since, he’s been counting the days until he can get what-he-previously-considered-to-be-an-overpriced iPhone. It’s worth it, because he knows he can learn how to use everything it has to offer.

The Genius Bar “safety-net” lowers the relative value of low-end products

The lack of something similar to the Genius Bar makes low-end products a much less attractive alternative

The lack of something similar to the Genius Bar makes low-end products a much less attractive alternative

I don’t know about you, but one thing I’ve realized as I’ve gotten older is that the non-technical dislike calling you for support just as much as you dislike being called. That’s one of the biggest reasons why it’s hard to overstate the impact of the Genius Bar. Even if you never visit, the knowledge that you can if you buy an Apple product, but that you can’t if you buy another, significantly diminishes the relative value of the competing product. Numerous industries have been built on the premise that people will pay for peace of mind, and the Genius Bar is no different. The lack of something similar means that competing products may be good enough from a feature perspective, but in the full calculus of the overall ownership experience never can be.

What is particularly compelling about each of these factors is that they work to Apple’s advantage even if you don’t buy your Apple product from an Apple Store. You can try out a product there, then order it online. You can take a class with a second-hand device, and you can visit the genius bar no matter what. Thus, I don’t think looking at direct Apple Store sales fully captures the impact they have on Apple’s business.

That said, anecdotally speaking (albeit echoed in numerous places), visiting an Apple Store is not quite the experience it once was. Many are crowded, it’s confusing to check out, and the product presentation is feeling a bit tired. There is significant room for improvement in current stores, improvements that makes them feel even more like the premium retailers they are. Enter Ahrendts, recently-departed CEO of Burberry, purveyor of the sort of experience the Apple Store has long emulated.

I actually agree with the consensus that Ahrendts success in Asia broadly and China in particular were major factors in her hiring, but don’t discount what she might improve in the stores that already exist. While I disagree with those that say Apple’s disruption is imminent, I’m not one to ignore the possibility; I do think, though, that even these more nuanced doomsayer serially underestimate the totality of the Apple experience, of which Retail is and will continue to be a major part.

Note: I first introduced many of these ideas in a 2010 paper called Apple and the Innovator’s Dilemma

12 thoughts on “Apple Retail and the Innovator’s Dilemma

  1. Wonderful writing! This may be one of your finest in some time, which is a testament to this piece, because they’ve all been aces.

    I’m curious about the disparity in this piece and the older one you link to titled “Will We Blame Tim Cook?”. Here you say Apple being disrupted by “good enough” devices flies in the face of consumer behavior in many other industries. But that older piece you say you’d be surprised if Apple were NOT disrupted within the next 10 years. In fact, even gloomier, you used the phrase “if Apple is still iconic in 10 years…”. Quite a number of high end consumer brands have stood the test of time.

    To the extent Apple is so weak in services that they will be disrupted thru that angle seems like tech-literati groupthink to me. I understand services isn’t Apple’s forte, but every day my family and I derive a lot of joy from services such as iCloud photo sharing, iTunes Match, iMessage, Find My Friends, FaceTime, Siri, iBooks, and even iCloud backup has proven a lifesaver for us many times. I think Apple’s collection of services and general quality is gravely overstated by the tech community. I think this is partially a fact of a post-Steve Apple’s mistakes being analyzed and amplified beyond any reasonable measure. Frankly, if Apple’s services are bad, then so too are most of Google’s (several of which are truly dreadful).

    Having said that, as a long time Applephile, I’ve very vividly witnessed the slow, subtle decline of Apple’s retail chain. While some stores are still fabulous, many of the flagships are falling into a sort of monstrous profit-printing blob. They’re hideously overcrowded, wait-times are long, and those poor employees, some of whom I call my friends, are everywhere demoralized. Worse still, the decline has accelerated following the resignation of Ron Johnson. You’re absolutely spot-on, Apple retail has suffered from a lack of leadership, and hopefully Tim Cook’s patience in correcting this will pay off. Angela Ahrendts arrives not a moment too soon.

  2. ” it’s confusing to check out”

    No kidding! I really don’t like the experience of chasing down an employee, who are scattered about the store, most of whom are busy dealing with someone else. As neat as it is to be able to checkout anywhere, standing in line for a clearly demarcated checkout is much better.

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