China: Apple Does the Math, 2010 = 25 Stores

Always moving slowly to ensure perfection, Apple is now prepared to accelerate the expansion of its retail stores in China, opening up to 25 stores over the next two years to serve a country of over 1.3 billion citizens. The rapid expansion is in line with Apple’s overall emphasis on international store expansion, but also signals increased experience and confidence in China retailing, which can be complicated by national politics and local regulations. Apparently Apple has gained sufficient insights from the operation of its first China store that opened in August 2008, and feels it’s ready to tap the potential of the country’s growing economy. The China plans were announced by Sr. V-P Ron Johnson during this week’s stockholders meeting in Cupertino, in response to an audience question about expanding international sales. Johnson didn’t provide any location or timing details, leaving company followers to speculate where Apple might locate 25 stores.

After opening its first-ever store in the U.S., Apple waited seven years before opening its first China store, in Beijing in August 2008. In fact, the Sanlitun location was the company’s second choice, after state-funded work to completely renovate Qianmen Street close to Tiananmen Square could not be completed in time.

Now, 18 months after the Sanlitun opening, the Qianmen Street location is still delayed for some reason, and apparently won’t’ open in the near future. Instead, Apple has confirmed that a store in Shanghai will open this summer, one of two stores that Johnson has confirmed will open in the city.

In this history of Apple international retail, China was not Apple’s first Asia priority. Ironically, that honor was given to Japan, when the Ginza (Tokyo) store opened in 2003, also the company’s first international store. Seven more Japan stores followed over the next three years. But then the lesson, and irony, became obvious—Japan was a very difficult market to crack for Apple.

Apple hasn’t opened a new store in Japan since June 2006 in Sapporo, leaving the conspicuous impression that the company isn’t afraid of pulling back in the face of slow-growth sales. Financial reports show that Japan is Apple’s smallest market, although it did show 32 percent revenue growth from fiscal 2008 to 2009. But the company says this growth was partially due to iPhone sales and the change in the value of the yen, not the conversion of loyal computer users from Japanese brands.

So instead of expanding in Japan, Apple focused its international efforts on the UK, opening 26 stores to date for a population of 61.4 million. Italy, Germany, Switzerland and Australia have followed, but still with no additional Japan stores, or a move to expand in China.

Where to Go?

Now, with a green light for expansion, the challenge for Apple is selecting which China cities in which to open, and how many to open in a certain region. The choice is dependent not only upon population, but also economic and cultural conditions.

China is a country of extremely large cities, and it continues to convert from an historically rural, agricultural country to one with dense urban areas populated with offices and factories. The largest cities are huge population centers, but also tend to be focal points for even large population regions. The countries 10 largest cities are in the eastern half of the country, and most are along the coast. Their populations range from 6.8 million to 17 million in these cities.

Economically, China is progressing through a dramatic change—the creation of a middle class with disposable income. While statistics about the country are notoriously difficult to obtain, it’s clear that coastal cities tend to be more prosperous, and that some of the wealthiest cities are not the largest, expanding the number of cities where Apple might locate.

Apple has been the beneficiary of the economic changes. Apple’s COO Tim Cook has noted that “greater China” revenues have tripled year-over-year, which he called “phenomenal,” and the reason the company is now focusing on the region.

Even so, the wealth of China’s middle class is less when compared to other Asian countries or western European. China’s personal income ranking is more in line with South America’s economy, raising the question of how many China shoppers will be able to afford Apple’s products.

Next, like all countries, China’s cities have their own culture—some are more traditional, some are more artistic, and some are more techno-savvy. Shanghai is considered to be among the latter category, while Beijing is considered to be among the first. Selecting a city for Apple stores will have to take culture into consideration.

Lastly, Apple’s real estate team will be challenged to find what it always seeks—the perfect location. The concept of shopping centers is fairly new to China, reducing the number of locations where Apple might quickly install retail stores. Where malls do exist, they are huge, sometimes up to six million square feet (Mall of America is 4.2 million s.f.).

With a lack of malls, Apple may focus its energy on street-level locations, which would increase construction time and cost. However, these locations could be the most valuable, since the storefronts and back-lit Apple logos would become instant beacons for Apple’s brand.

The Locations

China’s largest cities could easily support more than one Apple store. Cities like Beijing and Shanghai not only have the population to create revenue, but the huge geographic size of the cities means additional stores would shorten travel times for shoppers.

Hong Kong and the region area it provides many opportunities for stores, including Guangzhou, Dongguan, Shenzhen, and more than one store in Hong Kong itself.

The coastal cities of Tianjin, Xiamen and Dalian are population centers, but also centers of wealth.

Inland, the cities of Wuhan, Chongqing, Nanjing and Chendu would provide opportunities to access huge populations.

Spread out over these cities, 25 stores seems to be just a start. Beijing, Shanghai and the Hong Kong region alone could support 15 to 20 stores.

What will be the result of the expansion? Apple has never been interested in becoming larger just for the sake of size. Instead, they’re interested in feeding the existing interest and the shopping power of the growing middle class in China, those who are already aware of the brand and those who might convert. Eventually, trade with China will become an integral part of international companies, unrestricted by today’s tarrifs and regulations. At that point, Apple will be very well positioned to continue building new stores in China.

Read more:

Up-and-coming cities

Understaning China’s wealthy (pdf)

The map below shows China’s largest cities and those whose economy is increasing rapidly.

View China Apple Store Possibilities in a larger map