Microsoft: What’s in Store for their Company Store?

Microsoft, following other major brands like Apple, Nike and Ralph Lauren recently launched their first company store in Phoenix Arizona to showcase their latest Xbox, PCs and Zunes.  The Microsoft move is widely seen as a bit of catch-up with rival Apple, which at the end of 2008 operated some 247 retail stores around the world. Considering Microsoft’s product dominance, what took them so long to get into retail?

There are many good reasons for manufacturers to display its wares within their own retail environment. For example, a company can create the best merchandising and brand experience for their products and services. As well, companies can use retail space to build a footprint in underdeveloped markets or learn more about their consumers.  Despite these benefits and Apple’s trailblazing, Microsoft may have delayed retail expansion out of concern for triggering major channel conflicts with its retailers (or, cynically, to cope with an onslaught of walk-in users with buggy software). 

On the other hand, perhaps Microsoft uncovered what a Wharton School of Business and INSEAD study recently concluded.   Namely, that operating company stores in the same market as your retail channel does not saturate markets, create inefficiencies or promote channel conflict.  In fact, the opposite is the case:  the rising tide of a company store lifts all retail boats.

The researchers used a series of mathematical models to simulate and analyze the marketing and price-setting behaviors of independent and manufacturer-owned retailers.  The model showed that when company stores and independent retailers compete in the same market, manufacturers typically set relatively high prices for goods in their own stores. Higher price points creates room for independents to reduce discounting (versus when company stores aren’t present) thereby improving their margins. Additionally, the presence of company stores can induce independents to increase their marketing efforts resulting in greater support for the manufacturer’s brand and overall brand sales in the market.

Given these conclusions, do company stores end up putting the manufacturer brands at a disadvantage?  Not according to the research.  Independent retailers end up charging more for a given product when competing against a company store than they would if competing only against other independents. Having higher pricing is crucial for the manufacturer to preempt channel conflict and to support its premium brand positioning.  Furthermore, the research shows that independent retailers will undertake greater marketing effort when competing against a company store since they can benefit from significant “effort spillover” from the manufacturer’s store – the phenomenon of one retailer’s marketing and product education efforts helping to create a sale for another.

As for Microsoft, the question remains whether their stores will mirror the success of Apple or the failure of Gateway, a computer company that gave retail a try during the 1990s and closed its 188 retail shops in 2004.  A major reason for Gateway’s failure was its inability to create any in-store or brand sizzle for their discount PCs-in-the-box.  Microsoft’s first store is not lacking in “experiential” impact but many things can still go wrong.

Microsoft rarely undertakes an initiative without considerable research and investment.  Look for them to make an impressive retail debut, although achieving Apple or Nike standards may require a 2.0 launch.

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