In 2021, most of Apple’s sales (64%) 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 a larger number of people). While the direct channel represented 36% of the total revenues. Stores are critical for customer experience, to enable to provide the service business, and for branding at scale.
Breaking down Apple’s distribution strategy
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, or 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 distribution strategy in a nutshell
When it comes to distribution channels companies, usually use a direct or indirect approach. In many other cases, a mixture of direct and indirect channels makes more sense.
For instance, the Apple business model leverages both direct and indirect channels. Apple sells its products directly via its Apple Stores.
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.
With this approach, Apple can employ experienced and knowledgeable personnel able to offer a wide selection of third-party hardware, software, and other accessories that complement Apple’s products.
Thus, the Apple’s store, and direct channel, play a key role for the following reasons:
- Brand exposure at scale, as the owned Apple’s 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 there.
- Ability to sell on a B2B basis (business and enterprise customers might want
Indeed, you can see how a good chunk of Apple’s revenues also comprise services and other products. This means that the Apple stores are an essential driver of sales.
And it makes sense given how much the company spends on running them. To have a bit of context, in the next ten years Apple will spend over ten billion dollars in operating leases as reported on its financial statements.
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 would, when slowing down, it would easily create trouble for Apple’s long-term business success.
Apple’s indirect distribution strategy explained
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 distribution strategy 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 distribution strategy.
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.
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:
- Third-party cellular network carriers.
- wholesalers, retailers.
- and resellers.
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 2021, according to Apple Annual Report, the company’s net sales through its direct channels accounted for 34% of its revenues. Compared to 64% of net sales coming from its indirect distribution channels.
Over time, as Apple tests new products, we might see an increase in sales from direct channels. Yet, at this stage, indirect channels have helped Apple scale.
Stores as Marketing and cognitive gaps
The main takeaway is that often companies 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, and those stores often are architectural masterpieces, which want to capture the collective imagination of people around the world, even though most of its sales happen via indirect distribution channels.
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