Microsoft began opening its own retail stores in 2009 and recently began a push into more US cities. A recent post by George Anderson on about Microsoft’s new store format prompted me into some late-night analysis. It appears Microsoft’s store format strategy is to ride in the draft of Apple by building larger-format stores very near, if not adjacent to, Apple’s own stores. As a retail analyst and both an Apple and Microsoft customer for over 25 years, I feel compelled to weigh Microsoft’s retail strategy against Apple’s (and since I cover retail strategy from a CIO perspective, it feels appropriate to publish here).

Comparing eight success factors

Location: I’ll start here, as it was the subject of the original post. Across from Apple may be the only sensible choice for MS, but the challenge MS has is that Apple is a destination store, i.e. people plan to go there for the experience. This makes it less likely they will decide to browse the MS store because it is close. On the other hand, assuming MS does some promotions to attract traffic to its stores, they are likely to also drive additional traffic to Apple. Predicted winner = Apple.

Store architecture: Size isn’t everything! Sure Microsoft can copy Apple and go for outstanding store designs and even build them bigger, but Apple architecture is designed to reinforce a consistent brand image: minimalist, clean lines, designer. Microsoft’s designs can reinforce many things about its brand, but it’s hard to see the consistency in a way that’s possible with Apple. Predicted winner = Apple.

Assortment: There is a huge difference between running outstanding retail concept stores (stores that test new merchandising and customer engagement models) and running a traditional retail model — not least in assortment planning. A concept store, such as Nike’s, is designed to reinforce the brand image and enhance sales through traditional retail channels. Microsoft has a challenge with defining a product assortment that uniquely reinforces its brand image in the same way Apple can. Almost all of the products in an Apple store are Apple brand products — Apple is a product company, and retailing is a product business. Even though it is reportedly re-boxing everything it sells into Microsoft branded boxes at point of sale, Microsoft dilutes its brand identity by merchandising non-Microsoft brand products running Microsoft software. Predicted winner = Apple.

Pricing strategy: Apple tightly controls its retail channel pricing, allowing it to operate at full retail and not be undercut by other retailers nearby — nor is it discounting and undercutting other retailers. This also means customers can shop at Apple without fear of paying more than they need to; by shopping at Apple, they pay the same (or very near) as they would elsewhere and they get the Apple experience. Microsoft has less control across its product range, and shoppers are likely to shop around for price after visiting a Microsoft store. Predicted winner = Apple.

In-store merchandising: Everything about the design of the Apple store layout and merchandising is engineered to reinforce the image of Apple as a designer brand. Given the broad assortment of Microsoft’s product range, it’s hard to see how the MS store can compete in brand identity (even if they are re-boxing everything into a Microsoft box, it still has another brand on the PC). Predicted winner = Apple.

Customer service & experience: Apple is considered by many to be an industry leader in retail customer service (see this BusinessWeek ranking placing Apple third in customer service rankings). Retailers would love to emulate their success. My guess is that Microsoft will have a long learning curve and find it difficult to compete at Apple’s level given Microsoft’s product diversity. Another factor at play here is staffing: Apple is a highly desirable place to work — as such, they can take the best and the brightest to work in the store and have low staff churn. I’m not convinced the Microsoft stores will have the same cachet, but I’ll wait to experience the stores myself to give a judgment. Apple stores have an energy that creates excitement in visitors — even after the early buzz in a new location wears off; I wonder if Microsoft will be able to maintain the energy level. The larger store format may also work against Microsoft on this one. Predicted winner = Apple.

Tech support: Apple has built much of its reputation on service from the Genius Bar where customers go to get their problems solved. Microsoft is offering a similar option, and it will be interesting to see if they can deliver the same kind of experience as Apple. I wonder if I could take my 20-year-old PC into the Microsoft store and have them help me with it in the same way I can take an old Apple to the Apple store. Of even more relevance to me, perhaps I could have them explain why Internet Explorer shut down of its own accord while drafting this post, then on my second draft Microsoft Word simply shut down with no auto-save, leaving me to resort to using OneNote for the third draft. Ironically this could be the one area where Microsoft can beat Apple — my guess is they have more frustrated customers looking for help, which could well attract many customers to the store — I wonder what percentage will leave happy? Predicted winner = Apple.

Strategic imperative: Apple’s retail strategy reinforces its brand strategy. Since it does not compete on price, having Apple products sold in traditional retail outlets alongside a myriad of Microsoft-based PCs is challenging. In the traditional channel, it must rely upon staff with minimal expertise in the products to guide shoppers – in this scenario, many shoppers may well opt to shop for price/performance over user experience. Opening its own retail channel allowed Apple to differentiate its products from commodity PCs and to reinforce the Apple experience, which is core to its UVP. As such, Apple can use its own retail channel as a significant source of revenue for the company and drive increased market share (Apple store sales per square foot are among the best in retail), while continually reinforcing the brand UVP.

For Microsoft, the answer is not as clear. In 2009 the company was quoted in the WSJ as saying, “The purpose of opening these stores is to create deeper engagement with consumers and continue to learn firsthand about what they want and how they buy.” If this is true, then Microsoft is following a well-trodden path in developing a number of retail concept stores in major cities such as those developed by Nike. This would place emphasis on the retail experience and testing new merchandising to help drive sales through Microsoft’s traditional retail channel partners. However, a question remains whether or not a push into consumer retail will help or hurt Microsoft’s brand image in corporate sales. And Microsoft’s retail strategy isn’t quite as clear-cut as it might seem: Mika Krammer, general manager of merchandising and marketing for Microsoft’s retail group was recently quoted as suggesting, “Our strategy is actually to generate revenues and contribute to the (profit) margins of Microsoft…. Our primary goal is to generate revenue and margins for Microsoft.” Such a goal is likely to put Microsoft on a collision course with its traditional retail channel partners — a path that has deeper implications for its broader business strategy. Predicted winner = Apple.

Conclusion: Overall, I’m not seeing Apple feeling very threatened by Microsoft’s further push into the retail space. Does that mean this is a bad move by Microsoft? No, I don’t think so — by developing retail concept stores, Microsoft can potentially learn a great deal about the art of merchandising its own products — something that will be enormously valuable to the company in helping drive sell-through in traditional retail outlets. It will also expand the company’s ability to engage customers in a new way, potentially winning-over key influencers and bloggers in the new consumer-driven, empowered era. This can have a powerful positive impact on its brand if executed well. To succeed, Microsoft doesn’t have to beat Apple, but in pursuing its retail strategy it will expose the company to an endless stream of comparisons that could firmly position its brand as #2 behind Apple in the tech sector. Predicted winner = Apple.

What about technology and IT strategy?

What about the technology I hear you ask — after all, isn’t this blog for CIOs? What has this to do with IT strategy? Everything because technology strategy must be part of, and integral to, business strategy — CIOs start by thoroughly understanding the business goals and engineer the business strategy and technology strategy by focusing on business capabilities (more on this in upcoming research). As I’ve not seen under the covers (yet), I can only hope Microsoft has indeed engineered its retail business and technology strategy as one.

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