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Why did Microsoft retail stores die when Apple stores flourished?

Microsoft (NASDAQ: MSFT) has recently announced that it will permanently close all stationary Microsoft stores worldwide. In addition, the four stores in New York City, London, Sydney and Redmond, Washington, will be transformed into “Experience Centers”, where the products will be presented rather than sold.

The Verge reportedly was scheduled to close last year, but was significantly accelerated by the COVID-19 pandemic. The company closed all of the Specialty Store kiosks last year. In a press release, Microsoft Vice President David Porter stated that “the technology giant’s product portfolio has evolved into largely digital offerings and our talented team has been proven to successfully serve customers outside of any physical location.”


A Microsoft store in Sydney.

Image source: Microsoft.

Microsoft said it would not lay off employees as part of the restructuring and continue to pay its retail employees when they move to remote sales, training, and support positions. The company will “continue to invest in its digital businesses” to reach over 1.2 billion people a month in 190 markets.

Let us see how this strategic shift affects Microsoft and why replication has failed Apple‘s (NASDAQ: AAPL) Success in stationary retail in the past ten years.

Will these closures affect Microsoft’s profits?

Before the pandemic, Microsoft operated 72 stores in the United States, seven in Canada and one each in Puerto Rico, the United Kingdom and Australia. Microsoft does not separately disclose its sales from these retail stores.

However, Microsoft believes that closing its stores in the fourth quarter of the fiscal year ending June 30 will result in a pre-tax charge of $ 450 million, or $ 0.05 per share. These costs mainly include depreciation and impairment of assets.

In April, Microsoft had already expected sales growth of 6% to 9% in the fourth quarter compared to the previous year, but had not made a profit forecast. Analysts expect sales will increase 8% to $ 36.5 billion, but non-GAAP earnings will increase less than 1% to $ 1.38 per share.

Microsoft’s amortization and impairments are excluded from non-GAAP income, so closing the branches alone would not result in the analysts’ expectations being missed. However, they will still take a bite out of GAAP earnings, which reached $ 1.71 per share in the prior-year quarter.

Why couldn’t Microsoft follow Apple’s lead?

Microsoft opened its first retail stores in 2009, eight years after Apple launched its first Apple stores.

A community gaming event in a Microsoft store.

Image source: Microsoft.

The brand appeal of Apple products over the past decade – including the iMac, iPod, iPhone, and iPad – has made Apple retail stores a major attraction in otherwise difficult malls. Apple has consistently generated higher sales per square foot in recent years than any other American retailer.

Apple’s stores were so popular that the malls gave them the opportunity to move in. In 2015, Green Street Advisors stated that Apple paid less than 2% of its sales to shopping centers, compared to an average cut of 15% for other typical tenants. Microsoft, whose stores lacked Apple’s brand appeal, was unlikely to be able to generate comparable sales or do similar business with malls.

Microsoft’s hardware business has improved significantly under CEO Satya Nadella in recent years. New Surface devices and Xbox consoles are attracting new buyers. However, these products were also widely used by other retailers, and community events taking place in Microsoft stores may not have established the stores as “meeting places”, as Apple did with its Genius Bar and free classes.

The right decision, but a missed opportunity

Microsoft’s decision was the right one as there was no reason to continue losing money in brick-and-mortar stores during the retail apocalypse and COVID-19 crisis when the company sold all of its products online.

The closings don’t have a significant impact on Microsoft’s long-term growth, but it is a missed opportunity to follow Apple’s leadership in strengthening its brand with retail hangouts. They also reduce the number of places where Microsoft can present its new and upcoming hardware products.

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