In 2022, most of Apple’s sales (62%) came from indirect channels (comprising third-party cellular networks, wholesalers/retailers, and resellers). These channels are critical for sales amplification, scale, and subsidies (to enable the iPhone to be purchased by many people). In comparison, the direct channel represented 38% of the total revenues. Stores are critical for customer experience, enabling the service business and branding at scale.
When you walk through the urban streets of cities around the world in crowded and selected locations, you’ll find an Apple Store.
From Piazza Liberty in Milan, Cotai Central in Macau, and Grand Central Terminal in New York, the Apple brand leaves a strong impression in the mind of its consumers.
Those impressions might also create a cognitive gap. In short, people might assume that those Apple Stores are also the primary driver of Apple’s revenues.
While Apple Stores are a crucial driver of its revenues, they are not a primary driver. Yet, why, then the company keeps such expensive stores? And what’s their primary function?
Apple’s distribution strategy in a nutshell
When it comes to distribution channels, companies usually use a direct or indirect approach.
A mixture of direct and indirect channels makes more sense in many cases.
For instance, the Apple business model leverages both direct and indirect channels. Apple sells its products directly via its Apple Stores.
Now, when you look at Apple’s businessmodel, its main product is still the iPhone.
Apple has a business model that is divided into products and services. Apple generated over $394 billion in revenues in 2022, of which $205.5 came from iPhone sales, $40 billion came from Mac sales, over $41 billion came from accessories and wearables (AirPods, Apple TV, Apple Watch, Beats products, HomePod, iPod touch, and accessories), $29.3 billion came from iPad sales, and $78.13 billion came from services.
This means that when Apple makes a judgment call for its business strategy, it does that through the lenses of its iPhone sales.
And there is no better place to showcase Apple’s technology than its owned stores.
Apple’s direct distribution strategy explained
Those are critical to Apple’s success as they enable Apple to deliver a high-quality buying experience for its products in which service and education are emphasized.
That is also why Apple keeps expanding its stores worldwide. While this is a critical part of Apple’s distributionstrategy, it is also quite expensive.
Yet Apple has full control over the customer experience, and control over a distributionstrategy requires massive resources.
With this approach, Apple can employ experienced and knowledgeable personnel to offer a wide selection of third-party hardware, software, and other accessories that complement Apple’s products.
Thus, Apple’s store, and direct channel, play a key role for the following reasons:
Brand exposure at scale, as the owned Apple stores are placed in the most iconic locations across the world and often showcasing also incredible architecture, in line with the fact that Apple considers itself a design/UX company.
Development of the service business. As consumers can be educated in the stores, pre and post-sales support can be provided.
Ability to sell on a B2B basis (business and enterprise customers might want
Apple is a product-based company fuelled by platform business models (like Apple Store), in which sales still primarily come from the iPhone. However, the company has also transitioned toward a service company (with Apple Store, iTunes, now called Apple Music, and advertising services) and a wearable product company, which is the fastest-growing segment.
Indeed, you can see how a good chunk of Apple’s revenues also comprise services and other products.
This means that Apple stores are an essential driver of sales.
And it makes sense, given how much the company spends on running them.
In context, in the next ten years, Apple will spend over ten billion dollars in operating leases, as reported on its financialstatements.
Yet if Apple were relying solely on its retail operations, this would be too risky.
Indeed, those retail stores are subject to financial risks, and if sales were to rely exclusively on them when slowing down, it would easily create trouble for Apple’s long-term business success.
Apple’s indirect distribution strategy explained
At the same time, Apple Stores have a high impact on the company’s brand.
Indeed they create visibility for the brand and the company’s products. How? Let’s do this simple exercise.
if I were to ask you, “where do you think Apple sells most of its products?” I’d bet you would probably answer via its Apple Stores. However, if I were to ask you, “where did you buy your iPhone?” (which is the primary driver of Apple sales), chances are you’ll answer, “not at the Apple Store!”
In short, I like to define Apple’s distributionstrategy as creating a “positive cognitive gap in perception” for its consumers.
Consumers might associate Apple with the image they get primarily via its Apple Stores. Those stores are just one smaller part of the overall Apple distributionstrategy.
Not by chance, Apple’s retail stores are typically located at high-traffic locations in quality shopping malls and urban shopping districts. The aim is to create as much visibility independently from sales.
I’m not saying sales are not significant. The main point is that Apple can leverage its stores to have control of its brandingstrategy. Thus, the way consumers perceive the overall company.
Yet that is not where most of the sales happen! In short, the Apple Store isn’t just a retail store. As highlighted, an Apple Store is a branding and marketing effort to create a controlled experience and imagination in the mind of its consumers.
If it is easy to assume that most of Apple’s revenues are coming from its direct channels, Apple employs a variety of indirect distribution channels that comprise:
Besides the Apple Store, you will find Apple products also at Best Buy, Walmart, Target, Radio Shack, and Sam’s. And chances are you bought an Apple product there.
Why?
In 2022, Apple’s net sales through its direct channels accounted for 38% of its revenues. Compared to 62% of net sales coming from its indirect distribution channels.
Over time, as Apple tests new products, we might see increased sales from direct channels. Yet, at this stage, indirect channels have helped Apple scale.
The main takeaway is that companies often engage in direct distribution strategies, which are quite expensive and not necessarily tied to just revenue generation.
A store where Apple can sell its products directly to consumers has a massive branding advantage.
Apple can open up those stores in high-traffic locations in urban areas.
Those stores often are architectural masterpieces that want to capture the collective imagination of people worldwide, even though most of its sales happen via indirect distribution channels.
Apple has a business model that is divided into products and services. Apple generated over $394 billion in revenues in 2022, of which $205.5 came from iPhone sales, $40 billion came from Mac sales, over $41 billion came from accessories and wearables (AirPods, Apple TV, Apple Watch, Beats products, HomePod, iPod touch, and accessories), $29.3 billion came from iPad sales, and $78.13 billion came from services.
Apple is a tech giant, and as such, it encompasses a set of value propositions that make Apple’s brand recognized among consumers. The three fundamental value propositions of Apple’s brand leverage the “Think Different” motto; reliable tech devices for mass markets; starting in 2019, Apple also emphasized more privacy to differentiate itself from other tech giants.
In 2022, Apple is worth two and a half trillion dollars. Apple generated over $205 billion from iPhone sales in 2022, which accounted for over 52% of its net sales—followed by services revenues at over $78 billion, wearables and accessories at over $41 billion, Mac sales at $40 billion, and iPad sales at over $29 billion.
Apple’s mission is “to bring the best user experience to its customers through innovative hardware, software, and services.” And in a manifesto dated 2019, Tim Cook set the vision as “We believe that we are on the face of the earth to make great products, and that’s not changing.”
It costs Apple $501 to make an iPhone 14 Pro Max, and the company sells it at a base price of $1099. This makes Apple’s base markup on the latest iPhone model at 119% Apple is the only tech company able to sell its tech products at such a premium, thanks to a combination of hardware, software, and marketplace.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
