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Microsoft's retail retreat predated pandemic, analysts say

COVID-19 may have hastened the end of Microsoft Corp.'s brick-and-mortar retail operations, but analysts say the shift away from physical retail sales predated the pandemic.

While Microsoft tried operating a network of stores to compete with Apple Inc., Microsoft's core customer base remained far more enterprise than consumer-focused — and its strategy became increasingly digital.

Microsoft recently announced that nearly all of its stores, most of which were located inside shopping malls, will remain shut permanently after initially closing due to the pandemic in March. The few storefronts that remain — in New York City, Sydney, London and Redmond, Wash. — will transition to "experience centers," or places where the company will allow hands-on interaction with its products and services and provide technical support.

All product sales will occur online, a company spokesperson said, at Microsoft's digital storefronts on Microsoft.com, its Xbox game platform and in the Windows operating system.

"Customers will be able to experience our products, see product demos, explore device bars and learn about our technology," the Microsoft spokesperson told S&P Global Market Intelligence. "We will also offer consultations for small business and education customers and host training for our enterprise customers."

The store closures will result in a pretax charge of about $450 million, or 5 cents per share, which Microsoft will record in the quarter ending June 30. The charge includes primarily asset write-offs and impairments.

"The physical stores generated negligible retail revenue for Microsoft and ultimately everything was moving more and more towards the digital channels over the last few years," said Dan Ives, managing director of equity research at Wedbush Securities.

SNL ImageMicrosoft is closing all but four of its physical retail stores to focus on online sales. The remaining locations will be "experience centers" focused on product demos and customer support.
Source: Microsoft

"In this COVID-19 environment, this was the right time for Microsoft to rip the Band-Aid off and close the stores, strategically speaking, with a one-time charge being primarily overlooked by the Street," Ives added.

A survey conducted by S&P Global Market Intelligence's 451 Research unit in late March found that many merchants were expecting more brick-and-mortar store closures even before the pandemic took hold in the U.S.

"We fielded questions to businesses about their thoughts about physical store closures and found that most of them were expecting this trend to accelerate," said Sheryl Kingstone, research vice president, customer experience and commerce at 451 Research.

The results showed 29.1% of U.S. merchants surveyed thought the pace of physical store closures in the retail industry would significantly increase in the next two years, while 41.1% thought the pace would somewhat increase. Of those that expected store closures to increase, over half, 55.4%, said they expected Amazon.com Inc., eBay Inc. and other digital-native retailers would make physical stores irrelevant.

"The results show that this trend was already ongoing and the pandemic only accelerated this, making physical stores even less relevant," Kingstone said.

James Sanders, a cloud analyst at 451 Research, noted that Microsoft had started shutting down its in-mall kiosks in 2019. Microsoft CEO Satya Nadella has focused on transitioning the company into an enterprise-focused provider of digital services, including its fast-growing Azure cloud-computing platform.

"Microsoft tried to break into the retail space like Apple ... but under Nadella's leadership, their focus is mostly on the cloud," Sanders said. "It is very likely that Microsoft would have closed its stores regardless of the pandemic."

Apple's business has always been much more consumer-based, so it makes sense for Apple to maintain stores to display its devices, Sanders said. While Microsoft's strength is more digital, he said it will be interesting to see how the lack of a direct-to-consumer presence impacts the sales of Microsoft's new dual-screen Surface devices set to launch later this year.

"Trying to explain dual-screen modality to consumers without having an official physical presence in malls and stores may prove to be difficult," Sanders said.