Every time Best Buy and Radio Shack sell an Apple (Nasdaq: AAPL) product, their profit margins get a little bit thinner. And there's not a thing they can do about it.
For example: Best Buy purchases the 16 GB iPhone 4S from Apple for about $600 then sells it for $300 to consumers when they sign up for two-year wireless contracts. Then the wireless providers, like AT&T and Verizon, pay Best Buy a $400 commission for signing the subscriber, compensating for the loss and leaving them with a $100 profit.
But $100 isn't very much, especially compared to Android devices. Reuters reports Best Buy pays Motorola $300 for the Droid RAZR and sells it for $200. They still receive the $400 commission from the wireless service, and now their profit is $300 for the sale.
That's a huge difference, especially when you think of the number of devices sold, which is to say, millions.
"Clearly, the profit margins on Apple products are thinner than other products, whether you are talking about an iPod versus another mp3 player, whether you are talking about an iPhone versus Android or BlackBerry handsets," said Anthony Chukumba, an analyst with BB&T Capital Markets in an interview with Reuters.
Stuck between an iPad and a hard place
In fact, the choice between iPad and Android tablets gets worse: Many iPads are wi-fi only, so there's no subsidy to collect from wireless carriers.
It's too bad, because they can't do a thing about it. Without Apple products, they would lose the majority of their foot traffic. Chukumba says "They have to carry Apple products from a sales perspective, a relevance perspective, and a customer traffic generation perspective."
And there's no conversation to be had. Apple has so much influence over the market, retailers would be fools to try and haggle for a different price. The best these stores can do is push for sales of accessories and warranties. For retailers, these are the equivalent of overpriced popcorn and soda at movie theaters.
Investors are also discouraged. Narrow profit margins, partly due to Apple products, have caused investors to sell off their stock of several electronic retailers.
Hoping for competition
The new iPad can operate on a high-speed 4G Long-Term Evolution (LTE) network, giving retailers more more opportunity to sign wireless contracts and earn commissions. But what they really want is a competitor that gives them higher margins.
"Best Buy would love nothing more than for there to be competitive Android tablets," said Chukumba.
Business section: Investing ideas
Here's a list of electronics retailers who are affected by Apple's sales and some tools to help analyze them. Do you think any of them will take a knock this year if Apple's popularity continues to swell the electronic marketplace? (Click here to access free, interactive tools to analyze these ideas.)
Press play on the Compar-O-Matic to see changes in market cap for the companies listed below.
Press play on the Compar-O-Matic to see changes in the companies' one-year returns.
1. Best Buy (NYSE: BBY): Operates as a retailer of consumer electronics, home office products, entertainment products, appliances, and related services primarily in the United States, Europe, Canada, and China. Market cap of $8.68B.
2. RadioShack (NYSE: RSH): Engages in the retail sale of consumer electronic goods and services through its RadioShack store chain and kiosk operations. Market cap of $695.24M.
3. Staples: Operates as an office products company. Market cap of $10.69B. The stock has lost 21.91% over the last year.
4. Target (NYSE: TGT): Operates general merchandise stores in the United States. Market cap of $38.61B.
5. Wal-Mart Stores (NYSE: WMT): Operates retail stores in various formats worldwide. Market cap of $205.76B.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Rebecca Lipman does not own any of the shares mentioned above.
