Is Tim Cook Making a Huge Mistake?

Just two weeks ago, Apple (Nasdaq: AAPL  ) made some drastic changes to its retail operations. Temp staffers were dropped, promotions rolled back, and the ship tightened up in several other cost-cutting ways.

Cupertino then said that some of these changes were a mistake, brought on by errors in a new staffing formula. "Making these changes was a mistake and the changes are being reversed," said spokeswoman Kristin Huguet. So no, new retail chief John Browett is emphatically not revamping Apple's retail chain in the image of his old haunt, the Dixon's empire of pan-European electronics stores.

Except maybe he is. And that might not be a good thing at all.

What's going on here?
A new report from the Apple Store-watchers at ifoAppleStore.com cites numerous store employees to confirm that Apple Stores really are becoming more like the Dixon's chains.

According to the report, CEO Tim Cook himself spearheads a new focus on generating revenue and profits rather than the old goal of delighting customers until they just start buying stuff of their own free will. Among the reported changes, you'll find these nuggets:

  • Reduce budgets for store maintenance.
  • Stock more small products to encourage impulse buys.
  • Push accessories and optional warranty plans with every major gadget sold.
  • Encourage customers to buy gear using the EasyPay app, even though those transactions then won't show up in the seller's performance reports.

Overall, these changes seem designed to squeeze out higher margins, which certainly is an idea right in Tim Cook's operational wheelhouse. But side effects might include dirtier stores, uncomfortable customers, and unappreciated employees. Indeed, ifoAppleStore says that "employee morale has plummeted [because of] the lack of information, the inability to discuss it with management, and the increased emphasis on sales instead of customer satisfaction."

What's wrong with this picture?
These changes would never fly under Steve Jobs. When Jobs took a six-month medical leave in 2009, Cook and other high-level executives leaned on then-retail boss Ron Johnson to increase sales even at the cost of lower customer satisfaction. Jobs had Johnson's back, but now there's nobody left to reinforce his focus on a deluxe store experience.

Under these circumstances, Johnson's move to J.C. Penney (NYSE: JCP  ) makes perfect sense. Whether his radical ideas have any place in Penney's big-box mall format is up for debate, but the approach sure worked for Apple.

But to a pure numbers guy like Cook, the stores look like an inefficient mess. The division made $4.6 billion in operating profits on $18.1 billion of sales over the past four quarters for an operating margin of 25.4%. Over the same period, J.C. Penney's operating margin was just 0.2% and noted luxury retailer Tiffany (NYSE: TIF  ) kept 20.6% of its revenue. Beating Penney may not be much of a feat, but Tiffany is a market leader and a role model for other retailers -- and Cupertino beats that top-shelf mall rival, too. So in the context of other retailers, Apple's margins are totally awesome.

But Apple is used to doing even better. The total operating take sits at 35.6% right now, including the comparatively anemic retail contribution. Genius training and meticulous store upkeep are expensive line items. So why not cut a few corners, try some harder sales tactics, and watch this laggard division catch up to Cupertino's overall standard of operational excellence?

Danger, Will Robinson!
The new strategy almost makes sense when you say it like that. But then, Apple Stores play a critical role in Apple's ecosystem. That's where you go when that iMac won't start, or if Siri gives you lip. The stores are just as meticulously designed as the iPhone and the Macbook Air and are seen as physical manifestations of Apple's culture and philosophy.

So what happens when the Genius Bar becomes more frustrating than helpful, and the wide aisles of spotless demonstration units turn into unending shelves of not-so-perfect product presentations?

Sometimes you get exactly what you pay for, and Apple has been paying big bucks in store maintenance and operations to present a perfect promotional face to the world. I think it was margin-sapping money well spent.

There's an app for that, and it's called history. Just look at the financial trouble Best Buy (NYSE: BBY  ) is getting into with a similar refocus on margins over quality. Think back to the implosion of Circuit City, where the bottom line trumped all other concerns -- until the retailer wasn't a going concern anymore.

I'm not saying that Apple will destroy its brand and go bankrupt over these changes, but I am saying that Cook had better be open to backing out when this experiment turns sour. Because it will.

Apple is going to need to stay vigilant and adjust its corporate philosophy to meet consumers' needs. In our latest premium research report, our analysts have dissected the tech giant from every angle, giving you the opportunities and pitfalls that Apple will face. For less than a Hamilton, you, too, can gain an investing edge. Get this premium report on Apple.

Fool contributor Anders Bylund holds no position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Motley Fool owns shares of Best Buy, Tiffany, and Apple. Motley Fool newsletter services have recommended buying shares of Apple, creating a bull call spread position in Apple, and shorting Tiffany. We Fools don't all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Foolish disclosure policy doesn't want store credit; it just wants the old Apple stores back.


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