ThinkEquity Conference 2006 - Ron Johnson

During a session at the ThinkEquity Partners conference in San Francisco on Sept. 13, 2006, Sr. V-P Retail Ron Johnson talked about the success of Apple, and explained the origins of the company's retail initiative.

Johnson recalled the early planning of the retail initiative, and the early, primitive years of computer retailing: no hands-on, and no face-to-face repairs or training. Gateway had only 250 visitors a week to each of its stores, an amazingly small number.

He recapped Apple's retail success, noting that it's the fastest-growing retail chaing in history, and that a single store outsells the stores of six other major retailers combined. With just 10% of the square footage, a typical Apple store generate 67% of an average Best Buy store, he said.

When he came to Apple, he found that they already were experts in seven of the 10 necessary fields for retailing. Therefore, he was able to focus on the basic retailing tasks--locating stores in the right places, a clear vision, and innovation.

Johnson recalled his check-list for planning: great locations in high-traffic areas, hiring great people, hands-on computers connected to the Internet, face-to-face help and training, and events in the stores.

As in previous talks, he spoke of the stores as public places where people can come to check their e-mail, iChat with relatives and loved ones, and feel like they're part of a club.

During his speech he revealed several numbers for the first time: there are over 100,000 ProCare members, store employee turn-over is just 20%, and there were 20,000 participants in this summer's Apple Camp.

Lastly, Johnson talked at length about the goal of "enriching lives," a topic that companies rarely associate with retail sales. Perhaps it's a reflection of Johnson's background and Apple's influence on him that he makes such a rare link-up. Although revenue and profits are important, the human touch runs throughout every aspect of Apple's retail stores.

These notes and quotes on Johnson's talk provide the most recent and clearest view of the philosophy of retail according to Johnson and Apple.

A Look Back

Looking back from today, "It seems pretty obvious that a retail strategy would work for Apple," Johnson began. But, he added, "If you zoom back to May 19, 2001 when we opened our first store, the world was in a different place, and Apple was in a different place."

The NASDAQ had dropped 60% from the prior year, the winner in the computer industry was Dell, and Johnson said Dell had the preferred biz model. Gateway, the only PC strategy, was beginning to shutter their retail strategy because they couldn't compete with Dell.

At Apple, the company was in the process of losing $25 million on $5.4 billion in revenue, Johnson recalled.

"The world was really different, but in May of 2001 we opened our first store. Here, in an industry that was dominated by Dell, by falling prices, by low margins and we were a company losing money, where the only other retail strategy was going out of business, we said, 'Even though we have only 3 percent of the market, we're going to make this work. And here are the three words that everybody said...Are you crazy?"

Not a single analyst or reporter thought retailing was a good idea for Apple, he recalled.

He described the stores to the investment group as "extremely busy stores. They're perhaps the busiest retail stores on the planet," aside from restaurants and grocery stores, he said. An Apple stores opens on average every nine days. "And when we open an Apple retail store, it's not just like a store opening...it's like a public event."

"So for some reason, between Apple and our retail strategy, people are responding in a very different way than what was expected." Johnson then played a short video that gave the conference attendees a better look at the various stores in the chain. "It's been a busy five years," Johnson quipped after the video.

He recapped the chain's results, including being the fastest retail chain to reach $1 billion in annual revenues, and almost doubled that the next year.

Already through the first three quarters of fiscal 2006, the stores have exceeded last year's revenue, with the traditionally big back-to-school quarter still to be tallied. Store profit through the first nine months has also exceeded last year's figure, and the rate of profit has gone up, too.

"The interesting number, though, to me, is not the financial results, but it's the people who come to our stores. Because ultimately a store is about customers. And just as Peter Lynch (Fidelity Investments) used to say, you know, 'Where the people are, that's where the action will be.' That's the nature of our stores."

When the first stores opened, Apple was excited that 5,000 people a week were visiting. Now they're approaching 11,000 visitors a week. And to put that into perspective, Johnson noted that, "When Gateway was at the peak of their business model in '98 and '99, when everyone was going to the Internet, they had 250 visitors per week," with an emphasis on those last two words.

Now, with the Apple stores slightly smaller than the typical old Gateway store, Apple attracts 45 times the number of visitors than the only other direct computer retailing model. "The traffic in our stores is incredible," Johnson said. "And because we generate a lot of traffic, we also generate a lot of revenue."

The average store revenues have been increasing every year, "even this year, through the first nine months, when they were going the Intel transition on the Mac side...our average store revenues are growing."

He noted that the average annual per-store revenue is $22.5 million. For perspective, he compared that figure to results from other stores that typically found in the same shopping malls and districts as an Apple store.

He listed the per-store revenues for several chains: Ann Taylor ($2.7 million), American Eagle ($2.7 million), Abercrombie & Fitch ($3.4 million), Pottery Barn, Gap ($4.1 million) and Anthropologie. "And you take six great retailers, equals the volume of one Apple store. Pretty incredible thing when you think about it." Looking at it another way, Johnson said, the other stores use a total of 38,000 square-feet to generate the same revenue that Apple does in just 6,000 s.f.

But those stores only sell low-priced products, so Johnson then offered some comparison between Apple and electronics retailer Best Buy. An Apple store does 67% of the revenue of a typical Best Buy store, he said, in just 10 percent of the square-footage.

"So the point is, our stores are really...generate a lot of revenue, especially compared to what people expect. And we're amongst some veterans," such as 44 year-old Target.

Why Are They Successful?

"So the question I get asked, and the one I want to get to, is 'Why?'" Johnson told the group. Why has the retail strategy succeeded, when people thought it might not, he asked.

He recalled a quote from Steve Jobs 2005 commencement address at Stanford University. "You cannot connect the dots looking forward, you can only connect them looking back," Jobs told the graduates.

"As I look at Apple, I think of Steve's first three words when he hired me, and his first three words when he talked to analysts and press about retail. He said, 'Retailing is hard.'" Jobs also said that the company was always going to live by the perspective that retail isn't easy, "and we're going to operate with a little bit of fear, because retailing is a hard business."

But Jobs said the most important thing they were going to do is to leverage Apple. Johnson said that lots of companies hire someone to do retailing for them. He recalled that Gateway didn't hire their own people, or do their own real estate. "It was a strategy that didn't come out of the core of the company," he said.

"When we looked at launching Apple retail, the reality is, Apple is in its bones, had the structure to be a phenomenal retailer," Johnson recalled. He said he had spent 22 years in retailing, and knew 10 things you had to do to be a good retailer. "Apple had the first seven nailed," he said.

Johnson said Apple wasn't doing anything badly, but only needed to add some pieces in order to tackle retailing.

Apple had a "rock solid" financial position, with $4.1 billion in cash and very little debt--even though the company was losing money. "We could build out our stores."

Merchandise--"Retailers live and die by merchandise. Apple had great products, the were just under-marketed.

"Great retailers are great marketers," he said. "Apple has great marketing, among the best PR and marketing in the world."

Supply chain--You have to keep things in stock, Johnson said, recalling that just seven days of inventory at the end of a quarter, indicating "world-class logistics."

Financial controls--Apple, as a software company, could write its own programs that were Web-based, giving it a strategic advantage.

Human resources--"Apple had great HR," Johnson said.

"So when we looked at retail, we said, we just got to add new things to the business, which are things we haven't done before."

"We had to figure out how to locate stores in the right place," he said. "We had to figure out how to design a great store that would capture the imagination of customers. And then we had to learn how to hire, and train and serve customers in the store."

"But when you think about it, the job was a lot easier because we were being built out of Apple. And so we leveraged Apple at its core, beginning when we planned the strategy six years ago to the day."

"And so the retailer...I don't have to worry about the merchandise--that Steve's and (xxx)'s job. I don't have to worry about the supply chain--that's Tim Cook. I focus on the customer. It gives me a chance to do things that other retailers don't get to focus on in the same way."

Secondly, Johnson said, to succeed in any business, "You need a very, exceptionally clear vision. And to me, a vision is something that you can say in one sentence. The fewer the words the better. It's like 'A thousand songs in your pocket.' It's a clear vision...everyone understands for the iPod...driven the iPod."

When we started, "The commonly accepted thing retailers did was sold stuff." So if you put Gateway's vision into words, it was "sell boxes. They used to call it 'moving metal.' They sold computers. If that's your vision, you're going to lead to a certain set of conclusions. It will lead you to low cost and competing on price, locating in remote parking lots. Every three years when they want to buy a computer they'll come visit me. You'll lead to a certain set of decisions."

"When we envisioned Apple's model, we said it's got to connect with Apple. Very easy...enrich lives, enriching lives. That's what Apple has been doing for 30-plus years."

"Lastly, if we're going to win in retail, we're going to win in innovation. The core value that differentiates Apple is our ability to innovate."

Johnson said that, to him, "Innovation is this amazing intersection between someone's imagination and the reality in which they live. The problem is, many companies don't have great imagination, but their view of reality tells them that it's impossible to do what they imagine."

Johnson talked of his young son, and being out on a football field with him. His son wanted to kick a field goal while standing on the 40-yard line. Johnson suggested he move down to the goal line, thereby "ruining" his son's imagination for life, Johnson speculated. "I should have let him try it at the 40," he said.

He said that people are trained from birth that they can't do things. He recalled a lesson he learned while working at Target. The company had the same products as Wal-Mart, and Johnson went to designer Michael Graves to design something new. But that's when he encountered Target's "reality filters."

Target execs suggested that he put Graves' now-famous tea kettle on an end-cap to see how it would sell. They suggested cutting back on quality and selling the kettle for $20 instead of $40. Johnson persevered, and introduced an entire Graves line of merchandise, which continues to sell extremely well. "Eight years later, design is the cornerstone of their business strategy," Johnson noted.

Now, "I come to Apple. I'm off my Target experience. And now my boss has no reality filters." The audience laughed knowingly. He called Jobs "one of the great inventors," and a man with a great imagination.

The Vision

Knowing that they were going to launch a retail operation based on enriching lives and innovation, they had to find a place to start. "So first we made a list," Johnson said. "Enrich lives--how do you do it?"

"We're going to break the norm. We're going to be a store for everyone. PC owners, Mac owners. Small business, consumers. Eighty year-olds trying to connect with their grandkids. Grandkids trying to get on a computer for the first time. Forget the conventional wisdom of retail that it's all about specializing."

"Apple has to gain market share. Let's gain market share everywhere," Johnson told the conference audience.

Next, "If you want to enrich their lives, you can't be in a parking lot, off a highway. You gotta be where they live their life. You gotta be right where they work, where they play, where they live, where they shop. The only way to enrich their life is to be part of their life. They've got to walk 10 feet to your store, not drive the car 10 miles. That's what enriching lives would take."

"Retail has trouble with people," Johnson declared. "You can't retain good people. But in a great, enriching life environment, you'd have expert advice from everyone you talked to."

"Wouldn't it be great if the store only carried the right stuff?" he asked. "Why confuse customers with a lot of merchandise?" He recalled proud buyers at Target who were stocking and displaying 31 toaster models. He wondered who the expert store was on food preparation, and learned it was Williams Sonoma--which only stocked two toaster models. "Retail...It's not about broad assortment. It's about the right assortment."

"What if you could test drive everything before you bought?" Johnson asked the group. Looking back to 2000, people were living a dial-up world, he recalled. And no one in computer retailing was letting you load up software, connect digital cameras and actually try out the merchandise at their computer stores.

What if the store offered hands-on training? Companies seem to be interested in phone support now, he said. "In a high-tech world, wouldn't it be nice to have some high touch?"

What if you had face-to-face support? Troubleshooting over the phone isn't easy. What if you had next-day repairs? "I can go a couple of days with a wrinkly shirt...especially at Apple," Johnson said. "But how do I go eight to 10 days when my computer's down." Back in 2000, repairs sometimes took two weeks, he noted. "That's not enriching someone's life. What if we offered repair of computers faster than the dry cleaner could starch your shirt?"

Place to Belong

Johnson then returned to a consistent theme that explains the location and design of the stores.

"What if we built a retail strategy that was a place to belong? What if our store was really a part of the community...it's was a place to be, not just a place to buy?"

Now, he said, there are 161 stores. "And because we let the imagination win, I think we've been successful. If you ask customers what they love about the stores, they love the things we imagined".

Customers love the stores' design, Johnson said. "They're clean, they're uncluttered. All you do is put your hands on the product."

Johnson projected photos of several stores for the group, and noted that they vary in size, but all share the same fundamentals. "Materials that make you welcome, they're uncluttered, they're public places. They're architecturally beautiful, and they're places that people like to gather."

"Customers tell us they love our people," he told the audience. There are over 5,000 employees working in the stores now, and he said that a year from now, 4,000 will still be working there--an annual turn-over rate of just 20 percent, in an industry that suffers from 50 percent turn-over or more. "That's an amazing number when you think about it," Johnson said.

The employees are not on commission, he explained. "Why? We want them in Mike's heart, and not Mike's wallet," he said, apparently referring to ThinkEquity chairman Michael Moe, who invited Johnson to speak.

"Customers love our Genius Bars," he said. When Johnson first talked to Jobs about the concept, Jobs told him, "I don't know. I like the idea of a face-to-face support. But you're not going to find people who can do tech support and be friendly. Because I know these people! Maybe we should call it something else." Johnson wouldn't reveal exactly what Jobs suggested for the name (Jerk Bar?).

The reality filter was kicking in at that point, Johnson said. So they looked at the reality, and realized that young people were growing up with computers. "Computers were to them what a baseball bat was to me when I was growing up. This is easy. We're going to find young people that want to deliver great service at an Apple store." Now, He said over 1 million people come to the Apple stores each week for face-to-face support with a Genius.

Johnson said that customers love the stores' theaters, "where we have them." In fact, the company has been retro-fitting its older stores, taking out the space-hogging theaters and replacing them with Studio or iPod bars. But even with a reduced number of theaters, the stores are conducting 3,500 events a week in the theaters.

Customers love the free Internet access, Johnson said. "The question I get all the time is, 'The store's too crowded. How do people buy anything?' But we all know what we like--we like busy places." Johnson admitted that, "Free Internet access is the way we bring people into our stores." He continued, "And people touch a Mac for the first time and they go, 'Wow! That's just like my computer. Macs and PCs aren't that different.' Big part of the story."

He talked about Tuesday School Nights, when they spotlight student projects. So many students liked this event that the company added Apple Camp, which was attended by 20,000 children this past summer. He showed photos of camp events in Japan and the United States. "Connecting with people..is this a store, or is this enriching lives?" he asked as he paged through the photos.

"Customers also love special events," he said. Every week in Japan, the Apple stores host concerts. So far, five of the top 10 bands have played at these in-store events. Stores in the U.S. also host musicians and other performers, and even the Tribeca Film Festival at the SoHo store.

Johnson said that he's added resources to the stores since they first opened. "We want to upgrade our store just like Apple upgrades its operating system." A year ago they added the Studio bar to help people who wanted to actually do something with their computer--edit a movie, print a photo book or create music. "If you're on your own, it's really hard," he explained. So Apple opened the Studios and staffed them with photographers, musicians and filmmakers.

He said they hired just-out-of-school creative people, who believe the job would be a "pretty good first job for my career." And while they working for Apple, the company will teach them how to use Final Cut Pro, GarageBand and other applications.

A year ago Apple added personal training for those who purchased the $99 per year ProCare service. "So for $100, you can have access to the best of the Apple store all year long." Johnson said it was an extremely inexpensive but effective way of receiving one-on-one help. If you used it once a week, he said, it would cost just under $2 an hour, which is pretty low compared to the common $100 per-hour rate for other personal training. And, Johnson said, "It gets people into the store. It gets people connected to Apple. And gets people to share what they create with their friends, which builds promoters, which builds their brand.

Right now, Johnson said, there are over 100,000 ProCare members. It's like a country club membership--"You feel like you're part of something," Johnson told the group. Each Apple store has over 1,000 ProCare members, "who call the store their club, and they come to the store and we know them by name."

Johnson then returned to the vision of enriching lives. "The reason Apple is really good, I think, and the reason their stores succeeded, is not just 'cause we know the big idea, but we have a real passion for the littlest detail. It's legendary in our products." He mentioned the built-in iSight cameras in laptops and iMacs, and the Mag-Safe power cord. "We have the same passion for detail in retail," Johnson told the group.

To demonstrate that passion, Johnson turned to the Fifth Avenue store that opened in May 2006. Showing photos of the store, he explained the glass staircase and the display floor. "As you look at that, every little detail is thought through." He noted that it's underground, adding, "There's not a stand-alone retail store in the world today that's underground. But we said, 'That would be interesting.'"

He then showed a video of Fifth Avenue that focused on the design and construction of the store. When he finished he explained, "Great businesses aren't about just the big idea. It's about the detail. And the fun is in the detail."

"We leveraged our strengths," Johnson said. "We had a precise vision and we love to innovate. And we're just getting started."

He recalled Target, saying it took them 30 years to realize that good design doesn't have to be expensive. "We're learning every day. I look forward to where we are 30 years from now."

What about the next five years---"Well, it's Apple. I can't talk about it," Johnson told the group. But he did say that they're going to continue to open stores. "They're getting better all the time. The world is a big place. But we're going to open them at the pace we are, which is the pace we've been going...40 stores a year. Because it's about quality, not about quantity. It's only about opening great stores."

"And in the very near future, we're actually going to take the wraps off an entire new store design. We loved doing the Fifth Avenue store so much, that we said, wouldn't it be great if every store we built was inspired by Fifth Avenue, and not what we thought retail would be five, six years ago." He revealed the grand opening of the Providence Place (RI) and Mall in Columbia (Md.) stores on Sept. 23rd, and that they would have the new design. He called it the "next generation Apple store" and "an upgrade."

He said of the design, "It plays off service, in the fact that so many love to visit our stores, and it allows us within the same footprint to do a significantly better job."

"So at Apple, we basically plant seeds. That's what we do every day. In our retail stores, every customer one-on-one plants seeds."

"When you plant a lot of seeds, and you have faith...." [the recording ends at this point...what's the punch line?]