What's in store for the Apple Store? Photographer: Jessica Hromas/Bloomberg

Apple Stores Aren't So Genius Anymore

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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Amid all the momentous news from Apple Inc. -- the stock split, the record nonholiday quarter, the $30 billion increase in the stock buyback program -- there's a trend that speaks more eloquently about the company's future: the trouble with its stores.

The Apple Store, the physical manifestation of the company Steve Jobs built, hasn't been doing very well lately. By one estimate, sales per square foot used for selling declined to $4,410 in the first half of this fiscal year, from $4,650 in 2013 and $5,230 in 2012. In fiscal 2013, the retail segment's operating income dropped to $4 billion from $4.6 billion the previous year, despite the opening of 26 new stores.

Jobs started the stores with Ron Johnson, whom he poached from Target Corp. On long walks through malls, they discussed how retail locations could project Apple's values. Back in 2000, Apple's board hated the idea of stores in expensive downtown locations that Jobs pushed but approved a small-scale trial. Jobs and Johnson built a prototype of the first store in a warehouse in Cupertino, California, then started from scratch again after Johnson suggested organizing the space around activities, such as playing music or making movies, rather than product lines. Jobs and Johnson agonized about every detail of the design until the Apple founder's friends told him they no longer wanted to come and see the mock-ups.

In the summer of 2011, just before Tim Cook became chief executive officer, Johnson was tapped to run JC Penney Co. Inc. He took over the retail giant in November of that year only to preside over a remarkably unsuccessful turnaround attempt, which saw him ousted 18 months later and actually replaced by his predecessor.

Cook's choice of a replacement for Johnson did not work out. John Browett, recruited from U.K. electronics retailer Dixons Retail Plc, lasted for all of six months. He tried a new approach to staffing, cutting staffers' hours and letting some of them go. That smacked of traditional electronic retailing, too far removed from Apple's idea of creating a luxury customer experience. Cook reversed the changes -- Apple actually apologized for them -- and fired Browett, who is now chief executive officer of Monsoon Accessorize Ltd., a tightly run network of small fashion and cheap accessory stores.

The subsequent search for a new Apple senior vice president for retail lasted until October 2013, when Burberry Group Plc Chief Executive Officer Angela Ahrendts agreed to take the job. In her nine-year tenure at the U.K.-based fashion company, she broadened its scope from signature raincoats and scarves to all kinds of elegant clothes and accessories, and she aggressively expanded Burberry's store network in China, where Cook has wanted to expand from the start. Being too slow in China was one of his complaints about Browett.

Now, Cook is promising to triple the number of Apple stores in China (it has 13), and said during Wednesday's earnings call that Ahrendts -- who was supposed to start in June after picking up a stock bonus at Burberry's -- would start next week. Cook is clearly tired of the leadership vacuum at Apple's retail arm and is pushing Ahrendts to come over quickly. Apple can be generous when it really wants somebody: It offered Browett a $56 million golden hello, which he only partially collected because his tenure turned out to be so brief.

The whole story of the store's management difficulties shows just how hard it still is to step into Steve Jobs's shoes. Apple stores -- airy, luxurious, equipped with Jobs' trademark see-through staircases and full of helpful, fashionably geeky staffers -- were extensions of his personality. That's exactly what Johnson told Walter Isaacson, the Jobs biographer, about the flagship store in Manhattan: "It was really Steve's store." No wonder Johnson failed to repeat the success of Apple's retail operation elsewhere despite helping the Apple founder build and run it.

Now, the stores are a metaphor for Apple as a whole: They are crowded, they are profitable, but they are getting old and boring. Customers are by now familiar with the concept and are no longer blown away by the novelty of "genius bars" and movie areas. It's the same with Apple's products. They are still well-designed and fun to use, but conceptually, they are the same ones Jobs presented in his last years. Expansion to the developing world, Cook's greatest pride and joy, is the only way for the company to show meaningful growth.

Only if Ahrendts is able to reinvent the Apple Stores, and only if Cook manages to come up with a breakthrough product to equal the iPod, the iPhone and the iPad, will Apple cease to be a company running on Jobs-generated inertia. So far, that's what it is, and no amount of triumphant reports about sales growth in China is going to change it.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor on this story:
Mark Whitehouse at mwhitehouse1@bloomberg.net