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Microsoft stores get bigger without getting better

Microsoft's (MSFT) new CEO Satya Nadella isn’t trying anything new with the company’s burgeoning but underutilized retail store chain. And that may be a problem.

Microsoft announced Monday it would open a “flagship” store on Fifth Avenue in New York City, one of the ritziest neighborhoods in the world and, probably not coincidentally, just a few blocks south of one of Apple’s (AAPL) massive flagship outlets.

"As our first flagship store, it will serve as the centerpiece of our Microsoft Stores experience," David Porter, Corporate Vice President for Worldwide Retail Stores, said in a statement. "This is a goal we’ve had since day one – we were only waiting for the right location."

The high-profile addition to the 114-strong existing chain may grab headlines for a few days, but it does little to solve Microsoft’s biggest retailing problem – nobody goes there.

Well, not literally nobody. But in an industry where Apple set the pace with 114 million visitors in just the fourth quarter of last year, Microsoft gets only a tiny fraction of that much foot traffic for its stores. The company won’t give any details about the traffic beyond a statement that, since 2009, including all retail and online stores worldwide, it has attracted a total of more than 400 million customers.

Analysts fear only a small minority actually went into one of the U.S. retail stores and bought something. And anecdotes continue to proliferate about the many less-than-packed Microsoft outlets across the country.

Take, for example, the Microsoft store in Boston’s upscale Prudential Mall. The spacious store, positioned just off the center of the mall, is filled with bright lights and colors and all the latest Microsoft gear, including Surface 3 tablets and XBox One game consoles connected to giant, wall-sized screens.

But on a short visit on Monday at noon, even as hundreds of people walked by, the store was almost a ghost town. Two people got help at the Answer Desk, Microsoft’s version of Apple’s genius bar, while an occasional tourist or two checked out the wares.  No one seemed much interested in an offer of $650 toward the purchase of one of the new Surfaces with a trade-in of a Macbook Air.

Few customers frequented the Microsoft Store in Boston's Prudential Mall at the height of lunch hour.
Few customers frequented the Microsoft Store in Boston's Prudential Mall at the height of lunch hour.

At the height of the lunch hour rush there were never more than a dozen people in the store at once, with most wandering in for just a minute or two. And no one bought anything. More than twice as many people were in line around the corner at a Qdoba in the food court.

Oh, and just across busy Boylston Street, there is a much larger, three-story Apple store, one that still had a line of more than 50 people waiting for new iPhones on Monday. Store clerks were busy ringing up all manner of other purchases, too, from phone covers and charger cables to iMac computers and Macbook Airs.

And that highlights the problem with the Microsoft retail strategy initiated by former CEO Steve Ballmer. Wonderful stores in wonderful locations filled with wonderful employees need one more thing: wonderful products.

“The best channel in the world won't be able to sell products that don't excite people,” explains Forrester analyst J.P. Gownder. “While Microsoft has a lot going for it in Microsoft Stores -- premier locations, trained staff, nice displays -- they must also generate interest on the product side to make the whole system work.”

Unlike Apple, Microsoft only partially controls its new product pipeline. If partners such as Sony (SNE) and Dell don’t make compelling laptops and tablets, the stores are out of luck. Microsoft’s own tablets and phones, mainly the Surface line plus everything from Nokia, aren’t exactly lighting the world on fire, either.

Nadella may be content to establish a chain of attractive stores ready and able to seize the moment once some more compelling products arrive. It could be a smart bet if the supply chain ever delivers.

It’s hard to know just how big a bet Nadella is making, however. Microsoft buries the revenue and gross profit for its stores in the “other” line of its Devices and Consumers unit, a line that also includes its online Windows app store, phone app store, all of Office 365 for consumers, search ad revenue and “and certain other consumer products and services not included in the categories above.”

For what it’s worth, revenue for all those things combined rose 10% to $7.3 billion for the fiscal year ended June 30. Gross profit declined 13% to $1.8 billion.

Apple does disclose the performance of its retail unit. For the 12 months ended June 2014, its stores garnered $20.8 billion of revenue up 4% from the same period a year earlier. Even at Apple, not all is rosy, as average sales per store declined and the company hasn’t given out new traffic numbers for six months.

But as seen in the pesky, continuing iPhone 6 lines outside Apple stores Monday, the company does have at least one thing Microsoft lacks: a hit product.

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