Apple’s Radical Approach to Distribution

Distribution Strategy Case – Apple Computer by Rick Wilson

By the late-1990s, Apple had differentiated itself with a more user-friendly operating system and interface, and the company had a devote – but small – following of loyal customers. But Apple’s product differentiation came at a price, and were more expensive than commodity Windows-based machines, which became clear to consumers at big box retailers at that time like CircuitCity and CompUSA. How could Apple take a bigger market share bite while maintaining its product quality and healthy margins?

But even more important, how could Apple put a new distribution channel system in place that would successfully introduce an exciting new pipeline of consumer music, phone, and handheld products?

 

The Situation

Although Apple’s Macintosh computer made a memorable impression during the Super Bowl in 1984, the company had historically struggled for personal computer traction and share growth. Positioned as “revolutionary,” the Mac was more expensive than products from more conventional-thinking manufacturers.

Apple had managed to carve out a niche market in creative fields like advertising and design, and another market with a colleges and universities teacher/student discount program.

 But by the late 1990s, a few stores—Circuit City, BestBuy and CompUSA—had come to dominate the retail channel. These three were focused on providing their shoppers with a minimalist (read: uninspiring, low-information, minimally helpful) experience with a broad assortment and an overwhelming selection at low prices.

The in-store experience, in fact, was abysmal, featuring disinterested customer service, non-functional display product, unsupportive technical support, and confusing service. It was a “price war” mindset in a competition among big box stores for dollars. Apple, with premium pricing and a niche reputation, struggled in such a price-conscious environment.

Fixing the Downstream Customer Experience

For more than a decade, and into the late ‘90s, Apple tried to work with the big boxes to create a dedicated Mac retail environment, along with Mac-focused services. The company knew from its research that its innovative products required consumers interact with them at the point of sale to understand and appreciate the points of difference. As well, evangelistic, enthusiastic sales staff would also justify a higher price point.

But dyed-in-the-wool retailers of the day wouldn’t budge. In fact, one outlet, Circuit City, announced a round of senior store staff firings in 1997 to goose its stock price (which worked short term), and which had the effect of making the shopper experience even worse.

Apple needed to respond. The company had potentially game-changing products in the works, and realized it had to exercise more control over how consumers experienced them at retail. A last-ditch trial CompUSA “store within a store” concept failed.

Hitting the Escape Key

Out of time, patience and consumer channel options that made sense—for the company and its consumers—Apple, in the face of a tidal wave of criticism and cynicism, forged its own retail channel.

 How’d it go?

The first Apple Stores opened in Tysons Corner, Virginia, and Glendale, California, on May 19, 2001. A few months later, in October, Apple introduced the first of its game-changer products; and within three years, the iPod music player achieved 70%+ market share in its category. Apple had bet big on a dramatically new channel system and customer experience, and succeeded in spectacular fashion.

A Channel Success Story

Apple continues to set the gold standard for retail electronics showrooms. In fact, Apple owns the U.S. record for achieving $1 billion in revenue faster than any other retailer, and has outpaced all U.S. retailers (in any sector) in profit per square foot.

 As a comparison, Circuit City and CompUSA are footnotes, and BestBuy continues to threaten to join them in the desktop trashcan of history.

By understanding its consumers and its brand, Apple designed a channel that focuses exactly where it needs to at all times. After years of trying, the company came to understand that large volume channels didn’t share the same brand-driven, consumer-driven focus—that these channels relied too heavily on price wars and cost-cutting.

Apple’s channel strategy discipline is just one of the ways in which the company has become a juggernaut. It’s hard to imagine, though, what would have come after the iMac had the company never moved into owning its distribution.


Copyright ©2015 Chicago Strategy Associates

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