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The iPhone Stores

Here are the latest performance figures for the Apple stores:

Stores Open and Visitors

Screen Shot 2013-07-30 at 7-30-2.17.25 PM

Visitors per employee,Visitors per store, Revenues per store and Employees correlated with Visitors.

Screen Shot 2013-07-30 at 7-30-2.15.23 PM

Employment and Profitability (per Employee and per Visitor)

Screen Shot 2013-07-30 at 7-30-2.17.48 PM

The pattern that seems to appear is one of a plateau or peaking of sales, especially when values are seen on a per-store basis. Revenues, employment and visitors per store are all flat or slightly down when seen on a seasonally adjusted basis (trailing four period average).

Profitability has been more steady over a long period, though more volatile in a short-term window.

Seen in isolation, Apple Stores would appear to be coming to a point of quiescence.  But they should not be seen in isolation. Apple Stores mainly sell Apple products, so if Apple products slow then retail sales should also slow.

Indeed, in 2007 Steve Jobs told Fortune that the Apple stores had been built to sell the iPhone and in 2010 Ron Johnson said the Apple stores had been built to sell the iPad. These statements were meant metaphorically but they are literally true when looking at what is actually sold. The following graph shows the relationship between iOS device sales and Retail revenues.

Screen Shot 2013-07-30 at 7-30-2.17.56 PM

The first chart shows the relationship plainly enough and the r-squared coefficient of 0.96 puts a finer point on it.

So at the end of the day, the performance of the Apple stores depends on the performance of Apple’s portfolio of products. It stands to reason that as iOS units slow, Apple stores should as well.

This is something Apple management should be well aware of. Therefore, if Apple were confident in the future of iOS it would be investing in retail (as it would in other capital projects like manufacturing.)

And that answer would be here:

Screen Shot 2013-07-30 at 7-30-2.47.21 PM

  • Harry Hirsch

    Meaning: Apple is confident in its product portfolio or asset prices for retail have increased ;-)

    • David V.

      Doesn’t the graph suggest the opposite? I.e., Q1 retail asset investment is below that of the two-years-ago Q1, perhaps implying that Apple isn’t as confident in the growth power of its upcoming products?

      • Sacto_Joe

        There is an obvious “spikiness” to that chart that suggests we need to take a wait-and-see attitude. Also, there is positive growth the last two quarters.

      • David V.

        Maybe, but I was taking the spikiness into account with my comment: I’m comparing YoY, not sequentially. (The labels in the graph are hard to align, and I may have been wrong about “Q1″, but I was comparing YoY anyway.)
        I don’t worry about sequential dips or peaks. The three “low” quarters have different patterns in different years (as you note, this year it’s sequential growth), but I suspect that doesn’t matter much. However, as a whole these three “low quarters” are noticeably lower this year than last year (and about the same as two years ago).
        We’ll see what happens next quarter (which should be a peak), but wrt. Horace’s premise, Apple’s confidence in iOS sales growth for the next year doesn’t necessarily look great.

      • M

        My take is that there is something else going on driving the spikes. Perhaps the new stores in more different countries takes more money initially or they start with very expensive stores. The number of stores added per year has been roughly linear from the start,.. More about maintaining the culture than cost.

        I seriously doubt Apple feels constrained by capital spending.

        Maintaining the culture is a much tougher restraint,.. At least for Apple.

      • David V.

        I don’t think they feel constrained by capital spending either. However, I do think they are careful how they spend their capital. Horace’s point (or conjecture?), if I understood it right, is that perhaps their spending on retail expansion is correlated with their confidence in being able to grow their sales in the next quarter (or next few quarters). If that’s true (a big “if”), then Apple would presumably not be especially confident about near-term growth.

  • obarthelemy

    I’m always amazed – AMAZED !- when I read stuff like : “r-squared is 0.96 so x depends on y”.

    Obligatory: http://xkcd.com/552/

    • causation

      Maybe you should go to wherever you read that, since it doesn’t appear in the article, and comment there.

    • Walt French

      That’s one of xkcd’s best cartoons ever. But it really doesn’t bear on the claims here. Nobody is saying that iOS sales cause Apple retail sales.

      I’d say more that retail sales and iOS units are both driven by a well-thought-out retail model that presented the devices in an effective way. We econometricians would quibble about not actually measuring that overall push—that’s a missing data problem that calls for an instrumental variable approach.

      But the high association clearly shows a relatively constant percentage of iOS sales going thru Apple stores, a fact that’s not subject to any quibbling. If you put in Apple’s Mac and iPod revenues as explanatories, you might also see the relative importance of the stores for moving/supporting those products, too, and be able to infer even more insight.

      • obarthelemy

        There are 2 issues:

        1- do stores drive iOS demand, or does iOS demand drive traffic to stores ? It’s probably a bit of both, and working out of they inter-work is probably impossible, because local differences probably have a major impact (“excellent” vs only “good” store design or location, staff, customer trust in mail-order/carriers, customer protection laws, practices, satisfaction w/ other carriers/resellers…all impact how effective a store is in generating sales). Recently I’ve been go into stores just for the A/C :-p
        Even taking out regional and local diffreences, it’s very hard to even make sense of data over time: sales evolution may also reflect changing market conditions. I could make a graph of iPad market share vs stores and conclude “iStores kill iPad share !”

        2- Apple Stores are probably here mostly to make money. Apple have a tendency to open stores once they are strong in a market, not as a beach head. One could argue that iStores mostly divert sales from the rest of the channel. That would contribute to the partners’ disaffection we’ve been seeing recently. If Apple not only take a huge share of the money for each sale, but also try and grab the customer relationship, resellers/carriers are bound to feel even more sidelined than they already were by the “no custom software” rule.

      • def4

        Well, duh.
        Apple opens stores whenever and wherever they are sure they have customers. The stores are fancy and expensive so they must be needed before they are considered.

        Why would anyone reasonably expect Apple to allow third parties to rake in significant and easy retail profits from selling Apple products in areas with high concentration of Apple customers?
        If they want profits they should work for them and even take some risks.

    • tufte

      “Correlation may not imply causation, but it is a damn good hint” -Tufte

  • Walt French

    @Horace wrote, “Therefore, if Apple were confident in the future of iOS it would be investing in retail…”

    In 2007, iPhones were radical devices. I’d personally looked at Nokia communicator/pocket PCs and come away unimpressed that they could help me; it took a while before I could understand how the new iPhone technology — especially, pinch-to-zoom and related focusing talents — could be usable on a tiny screen.

    And I am a technophile.

    In 2013, you can’t go out in public without seeing people making use of their smartphones in all sorts of ways. You can’t sit down in a coffee shop or meeting room without somebody checking a calendar, texting their spouse, etc.

    Apple does NOT need retail stores to explain the iPhone; the job has shifted to communicating why they are enough easier/nicer/more complete/… than the alternatives. Ex-Apple UX guru Bruce Tognazzini recently reminded us on his blog, of the old in-house joke that Jobs cared passionately about Apple’s customers, right up until the check cleared; to him, and to me, iOS7 is designed for sound-byte-quick sales appeal: “you can do X easily and it looks great.” It’ll stand out just fine from the competition in the Verizon store. Hand over the plastic and start using it!

    Cook’s efforts to move sales to Apple’s few hundred stores is strategically sound. But iOS7 is designed to be 500 million points of presence.

    • obarthelemy

      I think the issue has moved from showing off the tech to proving the product’s value. It’s no longer about “hey, my iPhone can do those cool things”, but about “the iPhone cost 2x 3x as much as that other smartphone that does the same things because…”. That’s arguably more difficult.
      iStores are so-so for that, because this takes more time, unless it’s all about superficial look and feel.

  • Christopher McManus

    The last chart is a point of concern. Retail openings have been relatively “constant”, so the trend would point to a dramatic slowing of manufacturing capital spending. Do I have that right?

    One possible explanation is the 5S can largely be built using equipment and investments made in 2012. In summary, this reduction could be per Apple’s long term plan and not a reaction to lower than expected sales. If so, it would also point to a potential margin expansion opportunity.

    • capex

      No, that chart does not show manufacturing capex. The numbers are nowhere near large enough.

  • macbrewer

    My takeaway would be:

    1.) They are continuing to build out stores at a steady pace. (Fig 1 Stores Open)
    2.) They continue to pull in more visitors. (Fig 2 Customers per store) Also, Fig 6 (employees by –not vs!- visitors)
    3.) Customer service has improved or at least more workers have been hired to reduce the employer/customer ratio. (Fig. 3)
    4.) Visits to store are seasonal. (Fig. 4)
    5.) Unit sales drive store revenues almost perfectly. (iOS units by retail revenue)

    All of this has a great deal of face validity if you have visited the store over the years as most of us have.

    I’m not concerned about the last graph. Stores are probably not their major capital asset purchases, especially as they are rolling out their new HQ.

  • http://fahrenheit98.wordpress.com/ VrDrew

    The drop-off in Capital Spending over the last four quarters suggests that Apple’s existing product portfolio is indeed reaching a point where growth has slowed.

    However it is important to recognize that over the preceding decade, most of the growth in revenues and profits came from products that literally did not exist as little as two or three years previously.

    And there is nothing to suggest that this pattern may not repeat itself. Apple’s management has referred frequently to the “amazing” products in development. But even if Apple’s top execs do believe in the potential of these as-yet unseen products – they would be foolish to invest massive amounts in CapEx to support a product that may – or may not – be a hit with consumers.

    Apple could easily have invested a billion or two in tooling for iWatch or iTV or iBicycle. If the new product is successful, history shows Apple’s ability to scale production to meet demand. But if it flops – then the sunk costs in tooling will not be so great as to sink the rest of the company.

    • Mayson

      Note that this is only retail capex: it does not include manufacturing capex. It will be interesting to see if next quarter’s (pre-holiday) retail capex will be as spiky as the past two years.

  • mieswall

    Great analysis Horace, as ever.
    Is it possible to plot the visitors per sq ft?

    Another interesting metric would be:
    - Average visitor / employee: 2200/Q. Considering 90 days (stores usually in 7days/week locations), 10working hours: 2,44 visitor/employee. More or less, 25 minutes of dedicated attention to each potential customer.
    - Average revenue / store: $12,000,000 =>
    $12,000,000/90days/10hours: $13,333 / hour
    - Visitor/store per Q: 240,000 =>267 / hour.

    So, 33,333/267= Apple makes a mean of $50 per each visitor trespassing the door. But each employee sells just over $120 per hour.
    I think sales are impressive (any retailer would kill for those numbers), but efficiency, not that much. A significant squeeze of the margins are taking by employees salaries at those ratios. This would reinforce the idea of the stores as a showcase of products, more important than as a sales point.

    • obarthelemy

      I think retailers all around the world would jump for joy if their employees worked 10 hours a day, 7d a week, with no breaks, no holidays, no training, and nothing to do but customer interactions. You’re probably 100%.over.

      • mieswall

        Yes, you are right. Still, double it, for a mean of 35hr/wk. So, $240/employee.
        Apple makes a net 20% of earnings, so would profit $48 / store employee. To be honest, I don’t know the rates paid to them, but I guess still the store margin is quite low, measured by people.
        Apple earns nearly 2.5m / global employee, meaning “productivity” of stores is much lower (240*35*52=436,800, about 1/6 of the mean profit/employee).
        Anyway, my point is that stores are not managed strictly as profit centers, but mainly as a showcase of products.

      • Mayson

        2000 visitors per employee per quarter. $8 profit per visitor. That means 16,000 profit per employee per quarter. Most retailers would kill for a tenth of that.

  • Sander van der Wal

    This is probably me being a bit thick (or more than a bit), but doesn’t the retail store revenue graph imply that stores in some quarters do not sell Macbooks or iMacs at all?

    • mieswall

      Nope. The superimposed graph of store sales and IOS (global shipments) is for correlation visualization. Not meaning those IOS are ALL the sales of stores. In fact, they are at different scale and units (stores:$, IOS:units)

  • Jessica Darko

    There’s one issue with these graphs– the performance of a given store has a great deal to do with how long that store has been around, whether it was recently renovated and the size of the store.

    Stores that are brand new, or have been recently renovated to increase the size, will take some amount of time before they reach their capacity. (Not maximum possible sales, but sales capacity given location, market, etc.)

    I think this time is about 3 years in the USA.

    Further, stores in new territories probably take even longer to reach capacity, since, say, Germans are not culturally used to buying things at Apple stores, and so it takes time for them to change habits. How many regular berliners have visited the Apple store there? Many may not yet know it exists, and many are not yet in the habit of going, even though they may be apple customers generally.

    When Apple’s growth in new stores was all in the USA, the results were linear. The culture is all the same, etc.

    However, for the past 6+ years, the expansion has been focused to a great degree outside the USA. This means not just other countries but other territories and cultures. Even in Europe having an Apple store conveniently close by is not yet the case for many people and it’s still new. Retail has a big lag.

    China has an even larger difference in cultures and even lower percentage of the population have an Apple retail store close by.

    Thus the peaking or dropoff we see in retail store growth in recent years can simply be attributed to a shift from expansion in the USA where the culture is well understood to multiple other territories where people are not yet in the habit of going to the Apple store and may not really even know why they would do so, when their local electronics shop has iPhones too.

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  • François

    Hi, more than one issue with these graphs, it costs way more than what asym says to run an outlet. Way more :) If I follow Asym graph, Samsung dominated all eu and us countries years ago. But, nokia lost to all markets, right Asymco?

  • Guest

    Also, there is one parameter left out, Samsung is running for volume. This strategy is working out in Europe with 1€ mobile phones. Some providers are going sameway, but do where is Apple mainstream?

  • François

    Entry barriers are strong, and if i’m correct, now it’s Samsung, tomorrow it will be chinese maker to enter all competition through iphone…

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