Internal documents reveal details of Apple's retail development

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Exclusive - Apple Computer claims its retail operation is the fastest in history to reach $1 billion in sales—it took the company only three years to do so, besting the previous record holder, Gap Inc., which took an additional year to reach that milestone.

In three years Apple has finely honed the business of designing, constructing, and staffing its retail stores to create not only a superior customer buying experience, but also a positive cash flow.

Throughout the initiative, the company has retained a tight lip. Although Apple rarely exposes the specifics of its retail operation, a series of confidential documents, financial reports, and personal accounts have recently combined to provided extensive details of Apple Retail's early days.

An Initiative is Born

It all began quietly when Apple hired a man named Ron Johnson under an alias in January of 2000. A former vice-president of merchandising for Target, Johnson's identity and background were kept a secret inside Apple for months— as not to alert the competition to the company's retail plans.

Johnson's first task was to craft a store design and sales philosophy that matched Apple's heritage as a company that did things "different." He was then given two huge and seemingly impossible tasks: spend $700 million to create a chain of retail stores and to quickly make them profitable.

Johnson, assuming the role of Apple's Sr. vice-president of Retail, proved successful on both counts, and is now leading the company's move to open 100 stores by year's end, all the while maintaining profitability— a fundamental requirements that CEO Steve Jobs established for the operation.

During an April 2004 speech, Johnson recalled that Apple built a full-sized mock-up of the first store design in a warehouse near the company's Cupertino, Calif. headquarters. However, the model didn't marry the company's products to what consumers really wanted to do\emdash tap into Apple's digital hub of video, music and photos. With all the design work basically done, Johnson told Steve Jobs it was all wrong. The design process began again anew, and the current store prototype was born.

Along the way, the company managed to trim the cost of building the first third of its retail stores, but also committed some big money to lease its flagship stores in Chicago and New York City.

Regardless of their location, Apple's stores were built to meet the sometimes conflicting requirements for retail stores to be good-looking, voice the company's style, and include standard elements that would allow them to be constructed less expensively.

The Details

According to internal documents, the first two retail stores at Glendale (Calif.) and Tyson's Corner (Virg.) were installed in existing malls for $1.6 million each, and the company signed 10-year leases on both of them for $5.3 million and $8.9 million respectively.

According to Apple's plan, the first 11 stores were, with one exception, cranked out for $1.6 million in construction costs each and 10 or 12-year leases ranging from $2.6 million (Mall of America, 5-year) to $5.2 million (The Falls, 10-year).

Those early stores were relatively large, ranging from 8,349 square-feet (International Plaza) to 6,250 square-feet (Mall of America). Only the Palo Alto store was built at street-level, while the others were at enclosed or open-air malls.

Apparently, Apple was able to shave some of the costs off the next 13 stores, negotiating a $1.3 million construction price for most of them. Again the company signed 10 or 12-year leases, for total commitments ranging from $2.8 million (Wellington Green) to $5.6 million (Twelve Oaks).

The exceptions to Apple's cost-shaving efforts were its SoHo and North Michigan Avenue flagship stores, which were major commitments, both in construction and money. Both are two-story locations, with expensive design elements, including a glass staircase to the second floor.

In New York City's SoHo district, Apple took over a former Postal Service building, then retained the façade, but gutted the interior. According to internal documents, the company spent $5 million on the reconstruction, and then signed a 12-year lease with a total commitment of over $24 million.

Some of the earliest Apple Retail Stores.

At the corner of E. Huron St. and North Michigan Ave. in Chicago, Apple demolished a former Gap store and built a new three-story building to house a retail store and training center. Apple spent $5 million on the construction, and then signed a 15-year lease, committing the company to over $50 million in lease payments.

Three other stores were also more expensive than the standard models. The Burlingame store cost $3 million to demolish a bank building and assemble a new structure. The Colorado Blvd. store cost $3 million to retain an older building's façade and renovate the interior. And the Palo Alto store likewise cost $1.8 million to perform construction inside a building that is protected by the city's heritage ordinances.

The cost per square-foot to lease the early Apple stores ranged from $45.12 at Walden Galleria to $101.44 for North Michigan Avenue. The average for the 24 stores on the early list of stores was $63.70 per square-foot.

Some details from the "second wave" of Apple Retail Stores.

Success at a Time of Failure

Ironically, about the time Apple's 27th store was holding its grand opening, competitor Gateway Inc. was in the midst of cutting back their retail operation, which boasted 327 stores, including some in Canada. By the end of 2001 they had just 296 stores, and were looking to dump leases on another 40 stores. At the end of 2002, Gateway had just 277 stores, and had eliminated all of its 463 store-within-a-store locations.

During 2001, the year that Apple opened its first stores, Gateway took a charge of $74 million to cover terminated leases and "impairment of store assets." The company fired 1,700 retail store employees, and ate an estimated $12 million in severance payments.

Overall, it cost Gateway over $86 million to close stores and terminate retail employees during 2001, about one-half the amount Apple was spending at the same time to begin a retail operation.

And in April 2004, Gateway announced that it would close down all its remaining retail stores, just a month before Apple opened its 79th store at Montgomery Mall (Md.).

Total Commitment

In financial filings, Apple said that by July 2004 it he had committed $386 million to retail store lease payments. The same documents note the company had so far spent $359 million on capital expenditures for its retail stores, or a total commitment of $745 million by the end of June 2004.

According to internal documents, those early 22 non-flagship stores had average lease commitments of $4.4 million.

The documents also indicate that Apple's early lease agreements included certain other provisions, including a "buy-out" cost for some locations, and "tenant incentives."

For the SoHo store, documents indicate a $4 million buy-out price, apparently indicating Apple could end the lease before its 12-year term. Meanwhile, the Mall of America lease features a $500,000 buy-out provision.

In all, the documents list tenant incentives for 15 of the early retail stores, ranging from $950,000 for the Palo Alto store, to $100,000 for five stores, including Aspen Grove, Westfarms, Woodfield, The Falls and Twelve Oaks.

Looking Ahead

Johnson and his team have not slowed down since the early stores were finished. The company has officially committed to opening another 19 stores by the end of 2004, representing an estimated $83.6 million in lease commitments, and $25 million in construction costs.

Meanwhile, tipsters and other sources have identified yet another 14 store locations, including at least three international stores, pushing Apple's total financial commitments for its retail stores to over $920 million.

Additionally, Apple has identified 100 potential store locations, raising the possibility that the company could reach another $1 billion milestone—an additional 100 stores would put Apple's total retail operation costs and commitment at over $1.3 billion. Crossing this threshold would definitely indicate Apple's continuing belief that elegantly-designed retail stores provide a positive way to promote their brand and, most importantly, sell products.

Later this year Apple will launch a pair of new flagship international retail stores in Osaka, Japan and London, England. All the while, the company continues to scout numerous locations in Japan and Canada. And in the United States Apple is pursuing additional markets through a series of mini-stores, apparently intended to reduce costs, but still present the company's brand to even greater array of customers. But even going small, Apple has made huge investment in its retail store operation and shows few signs of slowing down.

Gary Allen is the author of ifoAppleStore, which focuses on the operation of Apple's retail stores, often uncovering future locations before the mainstream press.

Kasper Jade is the Editor-in-Chief of AppleInsider, one of the original Apple insider news and rumors publications. AppleInsider broke the story on Apple's retail operation in 1999, almost two years prior to its inception.