Change is in the wind at Apple (NASDAQ:AAPL).
After being hampered by concerns over its upside potential, Apple proved doubters wrong in a big way with its record-setting earnings report late last month. And in just a few months, Apple could disrupt yet another major industry with the launch of its Apple Watch.
However, the coming changes don't stop there. A renaissance is about to play out at one of the most underappreciated parts of Apple's business: retail.
Coming to a store near you
After languishing for years, Apple's retail operation is to receive a significant overhaul in coming months at the hands of former Burberry CEO turned Apple retail chief Angela Ahrendts. However, Ahrednts won't oversee these sweeping changes alone. Apparently, she is closely collaborating with Apple design guru Jonathan Ive to give the company's retail locations a face-lift.
So what might these changes look like?
Much of the change appears designed to prepare Apple retail operations to accommodate the imminent arrival of the Apple Watch. This will obviously require some shifting of product placement within each Apple store, but the changes are intended to go deeper than updating the layout. Because the company wants to position the Apple Watch as an aspirational item within the broader wristwatch and emerging smart watch space -- much as it has done so successfully with the iPhone in the smartphone market -- Apple reportedly wants to add an extra element of luxury to the parts of its stores where the new device will be displayed.
In an anecdote from a recent profile on Ive in The New Yorker, reporter Ian Parker noted that Apple's design chief told him about overhearing someone on the retail redesign team say "I'm not going to buy a watch if I can't stand on carpet." While adding carpeting to an area of the Apple stores might seem minor, my point is that Apple understands the Watch shopping experience will likely need to be fundamentally different from the way it presents and brands its current suite of products. There has also been mention of installing new seating arrangements within Apple retail stores beyond the current seating options, which are largely relegated to the Genius Bar, but this seems less integral to the overall retail overhaul storyline.
Why this matters more than you might think
After proving critical in Apple's massive rise to power from the launch of the iPod to the dawn of the iPhone era, Apple's retail operations seem to have slowly faded into a secondary business driver in most investors' eyes in recent years. With the iPhone selling in greater numbers online and through the stores of third-party telecom partners such as Verizon and AT&T, Apple's retail sales have grown increasingly less important to its overall business performance. As you can see below, since 2008 when the iPhone enjoyed its first full year of sales, Apple's retail sales as a percentage of total company revenue has fallen from nearly 20% to 11%.
It might sound simple, but the Apple Watch's newness will be the key driver here. Because entirely new product categories require a more firsthand examination from consumers before a purchase decision occurs, the Watch is likely to increase foot traffic at Apple Stores. Knowing this full well, Apple appears to be moving decisively to prepare its retail operation to not only accommodate, but also maximize, this coming customer glut in the months ahead.
It's also worth briefly mentioning that this retail reversal-of-fortunes narrative could come undone over time as consumers become more familiar with the Apple Watch and the requirement for that firsthand experience before buying lessens. However, since the Watch seems unlikely to prove the data hog that the iPhone is, a lower percentage of Watch sales coming through third-party telecom partners might help retain Apple's retail importance to a greater degree than has been the case with past products.
Apple's stores are far and away the most profitable retail stores in business today, with $4,500 of average sales per square foot, as calculated by eMarketer. It's also worth noting that Apple ended the specific "Retail" reporting segment line in its SEC filings starting with its recent fiscal 2015 first-quarter report. Going forward, Apple's retail sales will be reflected in their respective geographic locations. So while it might now prove slightly more difficult to specifically identify the retail comeback narrative, Apple's retail revival will likely reach a fever pitch in the months ahead.
Andrew Tonner owns shares of Apple. The Motley Fool recommends Apple and Burberry. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.