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Why Are Apple and Target Falling Into Each Others' Arms?

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You know those stores within a store at your local Best Buy (NYSE: BBY  ) ? I'm talking about the not-quite-fenced-off-but-still-quite-separate areas of Best Buy where you can focus on finding your next cell phone or dive deep into the Apple (Nasdaq: AAPL  ) catalog. Target (NYSE: TGT  ) wants to copy the concept with a handful of Apple sections inside Target locations.

According to Apple Insider, about 25 Target stores will get a Cupertino-flavored makeover in 2012. For Apple, it's a push into markets that can't support a full-blown Apple Store with a Genius Bar and the airy design -- those are typically found in high-end malls, far away from the suburban areas where Target battles Wal-Mart for everyday dominance.

For Target, this would be a conscious effort to raise the company's profile. Notice how easily I compared Target with Sam Walton's discount empire? Target would love to live a few classes above that level, because the margins are fatter up there.

Yes, Verizon (NYSE: VZ  ) CFO Francis Shammo recently said the iPhone actually hurts his company's margins even as it boosts revenue numbers, but then the wireless industry plays by very different rules from the retail giants. Verizon's trailing net margin stands at 6.5% today, and AT&T (NYSE: T  ) enjoys an even richer 9.3% profit take; Target, Wal-Mart, and Best Buy would all sell their mothers for margins like that. Of those three, Target's net margin is the lushest at 4.3%.

If this handful of Apple Targets helps both partners, we should expect many more of them in the coming months and years. The Minnesotan retailer runs more than 1,750 stores today, nearly double the location count of Best Buy and many times the retail footprint of Apple's 245 stores on American soil.

This move might help Target stave off Wal-Mart in the traditional retailing space, but the real Wal-Mart killer doesn't live in big-box stores at all. Learn all about the real cash kings changing the face of retail in a special report, free to Fools for a limited time.

Fool contributor Anders Bylund holds no position in any of the companies mentioned. The Motley Fool owns shares of Best Buy, Wal-Mart Stores, and Apple. Motley Fool newsletter services have recommended buying shares of Apple and Wal-Mart Stores. We have also recommended creating a bull call spread position in Apple, writing covered calls in Best Buy, and creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Check out Anders' holdings and bio, or follow him on Twitter and Google+. We have a disclosure policy.

Read/Post Comments (4) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 09, 2012, at 8:43 PM, Hawmps wrote:

    Hey, it worked out pretty well for Starbucks... can I have an iPhone and a latte to go?

  • Report this Comment On January 10, 2012, at 9:57 AM, SunFade wrote:

    Have you shopped a Target lately? iProduct is not exactly being targeted at the right level of consumer in this deal. When I go to Target, its to get certain items at a somewhat cheaper price then I could at the supermarket or drug store. The people I see shopping along side me seem more likely to buy a decent deal on an Android tablet rather then the high end iPad.

    This notion might work IF Apple were to begin catering to the low end. Perhaps coordinate new iTargets with some new cheaper low end Mac product releases. Otherwise, this project is doomed to fail, and probably take a little bit of Apple's rep with it.

  • Report this Comment On January 10, 2012, at 10:08 AM, Turfscape wrote:

    SunFade, you're missing the boat on Target. TGT has made very strong in-roads to the more discerning shopper with merchandise like that from luxury brands Missoni and Alexander McQueen (and others).

    It's leveraging its locations and market penetration to take high-end brands to new places.

    Target already carries a limited range of Apple product. Putting in a store-in-a-store concept will strengthen both brands.

  • Report this Comment On January 10, 2012, at 5:47 PM, Hawmps wrote:

    Unfortunately, there is not a target where I live and I would trade our Wal Mart for a Target in a heartbeat... Borders closed last summer, but that property would be too small for a Target.

    Target in general does a good job of introducing the "Wal Mart Shopper" to some better options for products at a slight price premium (and they keep their stores cleaner). While many Wal Mart stores have a small McDonald's tucked into the corner near an entrance. Target has Starbucks. Anyway, that's the overgeneralized Cliff's notes version that you can read between the lines.

    As for an Apple presence in Target... I see it more as a billboard for Apple. They'll have the top shelf gadgets on display that people can see and touch and they will probably sell some accessories and such. Although I would not expect great sales numbers from these co-locate Target locations, it provides a point of access to customers that Apple did not have previously. Potential new customers can stop by while doing regular houshold shopping and check out that stupid iPhone that their neighbor has been raving about since Christmas and they would not have to go out their way to check it out which they probably wouldn't do in the first place. So, now you have the potential for non-Apple customers to see and touch Apple products that would ordinarilly not see the products at all.

    I do not own AAPL, our family has a few iPods and such (which I absolutely love) and I'll buy the previous generation at 50% on ebay when the new generation comes out. Hey, what can I say? I'd rather have the extra cash and put it to work for me.

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