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Apple Store Operational Economics

In a footnote to my last post on Apple Retail (The face and the brand) I used data on operating performance from Apple and an assumption about employee salaries (which turned out to be low) to estimate that about 7% of Apple store sales are spent on “cost of service” or the operational expenses, which consist of mostly employee salaries.

An updated view of this store income statement (on a per-visitor basis) is shown below:

To summarize the logic, during the last quarter Apple received $49.2 in store revenues per visitor. Knowing the retail profit ($10.46/visitor) and knowing the time spent per visitor (14 minutes, itself derived from the number of full time equivalent employees–41,000 or 112 per store) and assuming the cost of that time in employee salaries ($15/hr including benefits), gives us an estimate of the service cost ($3.55/visitor) and therefore the cost of goods sold ($35.2/visitor).

Now I want to focus on this ratio of service cost/sales which turns out to be about 7%[1] and ask whether this is significant or revealing.

In order to do this we have to understand that most stores, especially electronic goods retailers, don’t spend this much on salaries. They do spend quite a bit on commissions however. From a post on the subject, I gathered the following commission rates for various retailers:

  • Phone stores: $25 for activations, 10% of accessory sales
  • Beauty/handbags at department store counters: 3% to 5%
  • Shoes, appliances, electronics: 8 to 10%
  • Furniture: 2% to 6% (low rate includes salary)
  • Real estate: 2.5% to 3% (no salary)
  • Car salesmen: 30% after dealer costs

Now 7% to 10% that Apple spends on salaries starts to make some sense, economically. It’s roughly equivalent to what another retailer might spend out of their sales on the help.

The difference is that Apple does not pay commissions and that cost is spread over a far larger headcount of staff. Roughly speaking it implies that Apple hires five times as many employees (consider how many people you might see in an Apple store where the average is 112 and in a similarly sized Polo Ralph Lauren outlet) as would be needed to “just sell stuff.”

The trade-off seems to be that Apple will pay a modest wage to a hundred employees rather than a commission to a handful. The trade-off is pretty even since the profits would be the same.

But they wouldn’t be.

The difference is that what the customer buys is different. Or, put another way, a store bursting with staff is hired by the customer to do a different job than a store filled with a handful of “salesmen”.

Even though the economic ratios are similar, the result is that visitors at an Apple store are made to feel they’re getting a service rather than being sold a product.

And that’s the key to there being very many visitors. And, incidentally, they happen to buy more things. And also incidentally they come to value the brand more.

It also leads to a virtuous cycle. More visitors means more visibility for the store and that leads to more visitors still, and that leads to more employees.

So a simple decision to hire in proportion of a level of service rather than a level of sales leads to completely different bottom line results.

That’s not to say that this model is transplantable. The entire system depends on having the right goods to sell and the right brand image. But if Apple had all those things and imposed a commission structure in its stores, one can be fairly certain that sales would not be as spectacular and growth itself would suffer.

Note:

  1. Again, this is probably quite an under-estimate and the actual cost of service might range up to 10%.
  • Boupierre

    I think your Anjali’s should consider advertising costs which is a very significant cost

    • http://www.asymco.com Horace Dediu

      I may have missed some, but I am not aware of Apple stores being the subject or source of specific ad campaigns and therefore I assume the cost of advertising does not impact the accounting of Apple stores as a separate entity.

      • brookr

        The latest “Genius” ads were the closest we’ve seen to directly marketing the store experience. Perhaps the Apple Store App could be considered a minor marketing expense for the stores as well?

      • Canucker

        There is one AppleStore only cost and that relates to the employee benefits associated with deep discounting of Apple products. I forget where I saw this but employees are incentivized to buy Apple gear. The same is true in other retail businesses of course.

        Apple doesn’t need to advertise their stores. Their stores are the advert.

    • http://twitter.com/handleym99 Maynard Handley

      Contrary to popular myth, Apple does not spend huge amounts on advertising. iN 2011 they spent $933 million, against income of around $110 billion. They spend substantially less than eg, MS ($1.9 billion in 2011) and just over Dell ($860 million).

      The main difference appears to be that, like the rest of the company, advertising at Apple is run by people who know what they are doing and get massively more exposure for the buck than Dell or MS.

  • Roger

    We also don’t know the value of items then bought outside of the store. For example people may go out and buy iCloud as a result of a store visit, or buy additional software for the same reasons. And of course just knowing the store is there and not just for selling products will provide more reassurance to people buying the products in other ways. By contrast if you buy a Windows laptop, where do you take it to talk to someone over any issues you are encountering?

    • Jeff G

      I was a new purchaser of Apple device in May 2011. My first ever Apple product was an iPad. Although I looked other places first, I had it in my mind that I would buy at the Apple Store for various reasons, especially service and learning opportunities.

      Several times since then, I called the store with questions or stopped in. When I needed to speak to a local college class the store employees guided me on using Keynote Remote & which cable adapters to buy/use. Although I had given a half dozen presentations previously, the combination of Keynote on iPad, and Keynote Remote (on iPod touch then, and now on my iPhone) created a nice upsurge in the quality of my presentation. I don’t know if I would have gotten there, or gotten there as soon as I did if it wasn’t for the Apple employees, information and confidence they passed along.

      Far from being a “Fan Boy” I was starting to “get” what the Apple experience was all about. Really, the stores, the employees the devices, the software/apps all work seamlessly to create a sort of Vortex (A place or situation regarded as drawing to its center, all that surrounds it).

      Had a droid for 2 years and thought I loved it, although I had to keep getting it replaced because of software/hardware issues. Finally, on the last round, I got my free Droid replacement (A like new certified version that I was entitled to because of my insurance plan). It is still sitting here on my desk, unactivated because I opted to buy the iPhone 4S instead. I calculated accurately that if my experience on the iPad was even remotely a proxy for what my iPhone satisfaction would be…it was a no brainer. So a year after buying my first ever Apple product, i bought my 2nd. (To all those continually insulting Apple consumers and loyalists, does that make me a “Fan Boy”? Does posting this?”

      My experience is that the apps and use of the phone made my Motorola Droid II look like some kind of problematic beta device.

      I don’t need a new computer yet, although I know my next one will be a Mac (I use my wife’s from time to time and my daughter has one too…both were new to Apple in last 3 years). A big part of my wife’s decision was the store. She took the old computer in they transferred everything, taught her a lot and basically converted her in more ways than one!

      With killer products and services available for sale, the stores clearly end up acting like a keystone, or ironically a “Keynote”… something that ties everything together in a harmonious synthesis…a central supporting element without which the rest of the parts could not perform their purpose.

      MY iPad, iPhone, iCloud, apps and “my” Apple store experiences have all combined to sway my spending towards
      Apple devices and computing. The idea that these things get better AFTER I have paid for them, with free upgrades is enough to blow my mind. I can not ever remember buying something (Especially anything from Microsoft) that improved noticeably after it was paid for. My life, business, productivity, efficiency and enjoyment have all benefited from the Vortex that is Apple!

      • James Katt

        This is the Apple Way. Create a virtuous circle which encourages repeat sales because your life is clearly better because of the sale and after the sale.

        Others just cut you off after the sale. You are just an expense to Motorola after the sale, thus they don’t want to bother with you.

    • http://twitter.com/qka qka

      An anecdote to support the “Look in the store, order online” thought:

      My wife decided which iPad she wanted in the store, but ordered online to take advantage of the free engraving offer.

  • LRLee

    Your tweet “The result is that visitors are made to feel like they’re getting a service rather than being sold a product” really crystallized why I feel vaguely dissatisfied in most retail shops compared to Apple. The Apple Store employees serve me, they don’t sell me. And there’s always someone to help me. Even in the crazy busy Santa Monica store. I’m going to say something that’s a pretty much a “duh” statement but the reason is not entirely obvious: The more crowded the SM store gets, the more crowded it gets. I’ve observed that as more customers come into the store, the more employees appear out of the back. As the customer count increases, the employees are magically created and come stand around in the front with the customers. And perhaps others can confirm this experience (why did my font just turn red and how do I turn it off?) which is I am not approached with the ubiquitous “Can I help you?” Rather, all I have to do is catch someone’s eye and they are drawn to me. Only the greeter at the store entrance speaks with me initially.

  • Micromeme

    Horace,
    Since you are back on the stores with this post do you have a feel for why apple isn’t scaling the stores to keep up with their product (phone and pad) revenue? Iirc from the beginning of 2012 the expansion plans were to increase stores by around 10% in 2012. Even allowing for some internal increase in size, this is far behind the near doubling of product sales. I would have to conclude that apple is content to let the stores continue to play a smaller and smaller roll in their overall business every year (even though they would be amazing standalone) Is there a frame that keeps them playing an important strategic role? Or should we chalk the stores up to really playing a marketing roll having mostly a strategic marketing value rather than an important sales channel?

    • Canucker

      I think there are reasons not to massively expand. If you remember back to Horace (and Dirk’s) Ikea post (http://www.asymco.com/2012/05/04/measuring-retail-disruption-apple-vs-ikea/), there are careful considerations about geography, densities and demographics. In Apple’s case, it tries to stay in up-market locales, has to ‘play nice” with other channels, etc. I was visiting Dundee and saw an AppleStore lookalike in the Overgate Shopping Centre. Unlike the Chinese copies, this was an Apple Premium Reseller owned by a company called StormFront with multiple locations (http://www.stormfront.co.uk/dundee/). Interestingly, the layout of the store as well as other details are clearly modeled on Apple run stores and they only sold Apple gear (and accessories). Apple has, at least in the UK, decided that certain companies can meet their standards to the point of appearing to represent Apple. Hence, the official AppleStore numbers may significantly underestimate the high street presence. If the quality is high, there are many advantages (no need to lease, finance, etc).

    • http://www.asymco.com Horace Dediu

      Store growth cannot scale as sales growth because sales growth is happening mostly internationally and retail is a very difficult type of business to roll out globally. Consider the reasons why there are very few international retail chains and those that are international are by no means global. The biggest retailer, Wal-Mart could hardly manage to go into Mexico. Ikea, the most global of retailers is barely able to reach into the US and typically can only get one or two stores per country outside of Europe. Carrefour is also a global chain with 1395 hypermarket stores but they did not manage to touch US soil. Then there’s Amazon. Ever wonder why they are not in more than a handful of countries even though they have no physical stores? So although Apple has saturated the US, international expansion is a multi-decade process and that will never move as fast as their sales overall.

      • http://policydiary.com/ John S. Wilson

        Why is retail so difficult globally? And why does it seem as though fast food chains and soda distribution can scale much more quickly globally than anything else?

  • Oak

    Horace, the article below is a great first-hand account of the experience you are describing in this post.

    http://beta.fool.com/saulr80683/2012/08/02/apple-its-stores-stupid/8288/?ticker=GOOG&source=eogyholnk0000001

    Your numbers, articles like the above, friends anecdotes, and personal experiences make it clear to me that the stores provide Apple with a currently-unmatchable competitive advantage in the US, and perhaps Europe (though I have no personal insight there).
    However, I wonder about their ability to replicate this advantage elsewhere, despite their clear intent to do so in China, at least.

    • http://www.asymco.com Horace Dediu

      International expansion takes time, especially if you’re not willing to cut corners.

  • Oak

    Horace, the article below is a great first-hand account of the experience you are describing in this post.

    [can’t link. Google “It’s the Stores, Stupid!” by Saul Rosenthal]

    Your numbers, articles like the above, friends anecdotes, and personal experiences make it clear to me that the stores provide Apple with a currently-unmatchable competitive advantage in the US, and perhaps Europe (though I have no personal insight there).
    However, I wonder about their ability to replicate this advantage elsewhere, despite their clear intent to do so in China, at least.

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  • Benjy

    In comparing the Apple Store experience to even the idea of a Samsung store experience, even ignoring the head start — this is where Apple’s “controlling the whole widget” optimizes the jobs of employees at Apple Stores. This means many employees can help with simple walk in problems without even having to resort to a Genius — witness things like the prescreeners at the Genius bar when you come in, even with an appointment, who double check that your problem isn’t a 5 second job.

    Consider in contrast someone walking into a Microsoft Store with an Acer tablet or a Dell desktop, or variations on Carrier mucked Samsung or Nokia phones. “We only help with stock systems, sorry. Otherwise, get in line.”

    The store is part of controlling the whole widget.