Please ensure Javascript is enabled for purposes of website accessibility

Apple Stores Lose Ground to Wireless Carriers

By Jamal Carnette, CFA - Apr 14, 2016 at 9:44AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Apple wanted to increase the percentage of iPhones sold in its stores. What happened?

More people are buying Apple's current-gen iPhones from carriers. Source: Apple

When it comes to retail operations, Apple (AAPL -2.46%) has been head and shoulders above the competition. In the heavily watched metric of sales per square foot, Apple led all U.S. retailers with a figure of $4,798.82, 53% higher than high-end jeweler Tiffany & Co. Even better for Apple investors, Apple grew its retail sales per square foot 5.4% last year from 2014's figure of $4,551.

The impetus for Apple's retail growth has been sales of the company's signature iPhone product. Apple grew iPhone sales from inception to $155 billion last fiscal year. In the recently reported first quarter, iPhone growth substantially slowed. Apple sold 74.8 million units during the quarter, less than 1% higher than last year's corresponding quarter.

A report from Consumer Intelligence Research Partners, or CIRP, points to further trouble ahead for both Apple's iPhone and retail sales.

More consumers are buying iPhones from carriers
CIRP's data shows fewer U.S. iPhone consumers are buying the phone directly from Apple. Last year the company reported that 11% purchased the device direct from Apple versus 16% two years earlier. Instead, these consumers are increasingly buying iPhones from wireless carriers, with this method growing from 65% to 76% during the same time frame. Three years ago, Apple CEO Tim Cook rallied his retail staff in an attempt to sell more iPhones through Apple Stores. CIRP's data seems to point to these efforts as unfruitful (side note: two-hour waits to talk to product specialists aren't conducive to increased sales). Selling a lower percentage of its own device is negative for Apple on a few levels. 

Perhaps the most direct way investors would be affected is in the company's margins. Apple and carriers have been tight-lipped in regard to selling fees, but Apple pays a fee for the carrier to sell the unit. So far, this hasn't been an issue for the company. Over the past two fiscal years, Apple's been able to grow its heavily watched gross margin percentage from 37.6% to 40.1% by raising iPhone prices and controlling its supply chain.

It's possible the biggest risk is unable to be measured. As Apple's highest-grossing product, the iPhone drives considerable traffic into Apple's retail stores. If a larger percentage of these purchases are occurring outside Apple's stores, Apple loses out on impulse buys and in-hand, direct product marketing.

What to make of device subsidies?
After T-Mobile axed device subsidies in 2013 for phone leasing plans, there's been a shift among major carriers to decouple the cost of the device from the cost of wireless service. Many predicted iPhone sales would surge as carrier leasing plans would lead many consumers to upgrade smartphones annually instead of the traditional two-year cycle. Others predicted upgrade cycles would lengthen once consumers were aware of the device's real cost.

The jury is still out, but if last quarter is any indication, the latter may be more indicative of Apple's future. During the first-quarter conference call, Apple CEO Tim Cook said he expected Apple unit shipments to fall in the current quarter. A larger percentage of iPhones purchased through carriers, combined with fewer subsidies, seems to be a risk to both Apple's iPhone revenue and the company's enviable retail sales-per-square-foot metric.


Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
$137.35 (-2.46%) $-3.47

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/20/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.