Over the weekend, the New York Times' (NYSE: NYT) namesake newspaper published a fourth article in a series shining a critical light on Apple (Nasdaq: AAPL), the widely admired company that in 10 years has gone from eating Microsoft's (Nasdaq: MSFT) dust to defining the future of technology, on the way capturing the crown of the world's most valuable company.
Past articles in the Times have looked at Apple's decisions to outsource much of its production to China, the human-rights concerns endemic in that Chinese labor force, and the effect that that outsourcing has had on the American economy. Another one examined the company's tax avoidance strategy, while Sunday's story called out Apple for underpaying its workers and taking advantage of their loyalty. Unlike Verizon or AT&T wireless stores, Apple doesn't offer its sales force commissions, and the company pays its workforce less than other retailers such as Tiffany, lululemon athletica, and Costco despite easily ranking No. 1 in sales per square foot among American retailers.
Apples and oranges
The Times makes the point that a majority of Apple's employees work in its stores (30,000 out of 43,000), but unlike other retailers, the company is primarily engaged in designing and making its products, not running stores and ringing up sales. The products drive the in-store sales, not the other way around. In 2011, Apple brought in $16 billion through its stores but racked up revenue of more than $100 billion in total. Clearly, the vast majority of income comes not through its own stores but from wireless and electronics retailers such as the telecom giants, Radio Shack and Best Buy, or the online channel. Its retail peers that the Times chose sell only through stores or online, not through other partners. Lululemon and Costco are well known in the retail industry for paying and treating their employees well, and often help as models for successful human resources operations. For a company like Tiffany, selling in the big-ticket jewelry industry, a skilled and knowledgeable salesperson is especially important to close the deal.
Meanwhile Apple, selling high-tech electronics, can't be fairly compared with a clothing, bulk-goods, or jewelry retailer. Apple's products are the opposite of the commodities like those found in Costco or the diamonds for sale at Tiffany's. For many consumers, there is no peer for the iPad or the iPhone. Apple's retail success is an extension of the popularity of its products and the cult-like following they've inspired. Like drugs, they sell themselves. As one commenter said, "Being an order taker is not the same as being a salesperson. Apple stores' sales staff are little more than mobile cashiers."
Emotional capital
A recurring theme in the Times article is the notion that Apple can get away with paying its workers less than they deserve because of its brand power. The iPhone-maker has built such a degree of emotional capital with its legions of fans that applications will always be piling up to work in its stores. Rather than celebrating this as an achievement, the Times spins this as a form of exploitation, saying, "Apple can do something unique in the annals of retailing: Pay a modest hourly wage, and no commission, to employees who typically have college degrees and who at the highest performing levels can move as much as $3 million in goods a year."
The core argument in the article seems to be that Apple should be sharing more of its huge profits with its front-line sales force, but fat margins are the norm among big tech companies rather than the exception:
AAPL Profit Margin data by YCharts
Newcomer Facebook (Nasdaq: FB) clocks in with a hefty 24% profit margin as well. The explanation for these wildly profitable companies is simple: All four have come to dominate their respective niches, establishing quasi-monopolies that enable them to charge a premium for their products or services. Prices are based on what the market will bear rather than costs. But unlike Microsoft, for example, which has locked out competition despite offering what some see as inferior products, Apple has succeeded in ruling the smartphone and tablet industry and has also created a level brand equity through its product superiority and savvy marketing that would make most companies green with envy. Apple's brand power can be seen not just in the success of its stores or in its profits, but also through the consistent evangelizing of its most devoted customers.
Microsoft has recently opened several of its own Apple-inspired retail stores, and given its plans to open more, the early ones may be seeing success, but it's hard to see the Windows-maker pulling off the same retail coup that Apple did without a similar degree of emotional capital.
Foolish takeaway
Perhaps the biggest flaw in the Times article is the implication that profits should be proportionally shared with all employees. Undertones throughout the story seem to accuse Apple of exploiting its workers even as it rakes in record profits. But like the market for consumer goods and services, prices in the labor market are determined by supply and demand. Front-line retail jobs at any company are notorious for low-pay, grueling, and thankless tasks, and little career growth. That a job at an Apple Store should be as "magical" as the first touch of a new iPad is a silly notion.
The brand value Apple has created over the years has given it a number of advantages, among them the ability to select from a more talented applicant pool than other retailers. This should be seen as a mark of success rather than the ethical stain the Times makes it out to be.
As one former employee said about the company replacing him: "There was never a shortage of resumes. People will always want to work for Apple."
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