Swallowing a bitter pill
Microsoft announced last week that it is going to permanently shutter its offline stores globally. And with that, the brief history of the Microsoft store has come to an abrupt end. The stores had been temporarily closed due to the coronavirus outbreak, but there is more than just the virus that explains this reversal in strategy.
In what started as a late attempt to catch-up with and emulate Apple’s retail concept, Microsoft began setting up a network of stores in 1997. These were designed to look just like its arch rival’s - similar in their use of sleek interiors and minimal aesthetics - and often located right next to each other. But the business outcomes for the two competitors have been anything but alike.
What made Apple’s retail stores tick is the product-heavy revenue segments - iPhone sales alone represent half of the company’s top line, with hardware making up over three-fourths of revenue. The stores are an essential channel for product discovery and have been rightly called temples of the brand, with their design and architecture mirroring the products within. With industry-leading standards for sales per unit area, Apple stores considerably influenced the electronics retail landscape, and many tech companies, including Microsoft, followed suit.
But for Microsoft, the Surface and Xbox (including content and services) lines represent just about 3% of revenues as per their last quarterly report. Cloud has been the fastest-growing segment, already making up over a third of the business and growing 27% YoY. Surface, on the other hand, has been the laggard, growing at just 1% while having the highest cost of revenue and possibly being the biggest contributor to the $1.6 billion worth of inventories sitting on the firm’s balance sheet. So even though Microsoft’s decision comes with a $450 million pre-tax charge, it is certainly better late than never.
Are physical retail stores here to stay?
As with anything, the answer is - it depends. But a more important question is - where should your customers meet your products? For any kind of aspirational goods or those that we personally identify with, physical experience stores will be the way to go. These are goods like phones, fashion, cars, and furniture - objects that are an extension of our personality. Even as e-commerce catches up quickly, the natural tendency to see and feel these things in person is likely to stay, especially for big-ticket purchases (see BBK electronics: offline sales make up 65% of smartphone sales in India).
More commoditized electronics such as headphones and peripherals may be best bought hyper-locally when needed urgently, or online where more efficient use of inventory and lower leasing and employee expenses allow for larger discounts. That said, physical stores have had to deal with their own host of challenges. With more customers buying electronics online, physical retailers have witnessed a drop in footfalls as well as revenue in the last few years. The recent lockdowns have made survival harder. Catalyzed by the impact of the virus, many are reassessing their strategy and adapting to an online-to-offline model where customers discover products online and orders can be created, paid for and fulfilled at a nearby retailer.
The typical experience store aims to achieve the opposite - helping customers discover and try products in-store and fulfilling through home deliveries or in-store pickups. Consolidating several offline stores into a few experience stores, just as Microsoft plans to do, or complementing online-first stores with a physical presence (think UrbanLadder) is expected to help boost customer acquisition, reduce choice fatigue, and enable product discovery. Armed with omnichannel logistics and retail analytics, the physical retail store is very much here to stay.
Imitation is not flattery, it is good business
The economic and psychological effects of the pandemic are expected to negatively impact consumer sentiment. As discretionary electronic durables take a hit, there are some items such as smartphones and PCs that consumers continue to find important. For example, Xiaomi reported that smartphone shipments in China rebounded quickly in late March 2020. If demand continues to be similarly resilient elsewhere, there could be some likely winners - brands like Xiaomi and Huawei with their low-cost products and those like Apple with a loyal fan base. And being on the opposite ends of the price spectrum does mean that a common retail strategy can’t be followed.
In fact, as Apple plans to intensify its retail presence, so do Xiaomi and Huawei. Xiaomi has 1,800 stores in China alone (which it manages through two dedicated subsidiaries) and over 10,000 in India across multiple formats (Mi Preferred Partner stores, Mi Homes on a franchise-based model, exclusive small-format Mi Stores). The firm has a physical presence in 600 Indian towns and cities and plans to expand further as it expects more than half of its device sales to come from offline stores. Huawei too has reported its interest in building brand-new premium retail and service models to improve the firm’s brand image and optimize its last-mile sales and service system. As per their last annual report, Huawei had over 65,000 retail stores, display zones, and display counters around the world, including more than 6,000 experience stores.
Given that 61% and 54% of Xiaomi and Huawei’s respective toplines are made up of smartphones, it makes sense to keep following in Apple’s footsteps - to meet their customers where they are.
About the Author: The post is written by our EZPP Partner Monika Chaudhary with relevant edits from our editorial team. Monika is a graduate from IIM Calcutta and has worked with Uber.
Disclaimer: All views expressed in the post are personal, and not related to any organization to which the writer belongs.