Microsoft (NASDAQ: MSFT) It recently announced that it will permanently close all of its physical Microsoft stores worldwide. It will also convert its four stores in New York City, London, Sydney and Redmond, Washington into “Experience Centers” that display their products rather than sell them.
The closings were reportedly planned last year, according to The Verge, but the COVID-19 pandemic sped it up significantly. The company already closed all of its “Specialty Stores” shopping center kiosks last year. In a press release, Microsoft Vice President David Porter noted that the “technology giant’s product portfolio has evolved into largely digital offerings, and our talented team has proven successful in serving customers beyond any location. physical”.
Image source: Microsoft.
Microsoft stated that it would not fire any staff as part of the reorganization, and that it would continue to pay its retail employees as they transferred to remote sales, training and support positions. He also said he would “continue to invest in its digital storefronts” to reach more than 1.2 billion people monthly in 190 markets.
Let’s see how this strategic change will affect Microsoft and why it could not be replicated Apple‘s (NASDAQ: AAPL) Success in traditional retail in the last decade.
Will these closings affect Microsoft’s profits?
Before the pandemic, Microsoft operated 72 stores in the United States, seven stores in Canada, and one in Puerto Rico, the United Kingdom, and Australia. Microsoft does not separately disclose its sales from those retail stores.
However, Microsoft expects its store closings to result in a pre-tax charge of $ 450 million, or $ 0.05 per share, in its fourth fiscal quarter, which ends June 30. Those charges will primarily include asset amortizations and impairments.
In April, Microsoft guided revenue growth from 6% to 9% year-over-year in the fourth quarter, but did not provide any earnings guidance. Analysts expect their earnings to rise 8% to $ 36.5 billion, but their non-GAAP earnings to grow less than 1% to $ 1.38 per share.
The writedowns and deficiencies of Microsoft will be excluded from its non-GAAP earnings, so closing the stores alone would not cause analyst expectations to fall. However, they will continue to bite their GAAP earnings, which reached $ 1.71 per share in the prior year quarter.
Why couldn’t Microsoft follow Apple’s example?
Microsoft opened its first retail stores in 2009, eight years after Apple launched its first Apple stores.
Image source: Microsoft.
The brand’s appeal of Apple’s products over the past decade, including the iMac, iPod, iPhone, and iPad, made Apple retail stores major attractions in malls that would otherwise be struggling. Apple has also consistently generated higher sales per square foot than any other American retailer in recent years.
Apple stores were so popular that malls gave them special offers to move in. In 2015, Green Street Advisors claimed that Apple paid less than 2% of its sales to shopping malls, compared to an average cut of 15% for other typical tenants. Microsoft, whose stores lacked the appeal of the Apple brand, likely could not generate comparable sales or secure similar deals with shopping malls.
Microsoft’s hardware business has improved significantly in recent years under CEO Satya Nadella, with new Surface devices and Xbox consoles attracting new buyers. However, these products were also widely available at other retailers, and Microsoft’s store-based community events might not consolidate their stores as “hangouts” as Apple did with its Genius Bar and free classes.
The right decision, but a missed opportunity
Microsoft’s decision was the right decision, as there was no reason to keep losing money in physical stores during the retail apocalypse and the COVID-19 crisis when it sold all of its products online.
The closings won’t significantly affect Microsoft’s long-term growth, but mark a missed opportunity to follow Apple’s lead in strengthening its brand with retail hangouts. They will also reduce the number of places where Microsoft can showcase its new and future hardware products.
