Loss Leaders: How Seven American Companies Lose Money To Make Money

‘Tis the season for loss leaders.

Maybe retailers were scared by the ho-ho horrible recent holiday seasons or maybe they were concerned that consumers remained as worried as ever about the economy though it is showing some tepid signs of improvement.  But companies are relying on one of the oldest tricks in the book — selling products at a loss — to attract customers during the time of year that’s most critical for their balance sheets.

One of the more famous cases involving loss leaders studied in business school involves razors.  The money to be made is not with the razors but the blades.   At least, that is how King Gillette, inventor of the safety razor, figured it.  Gillette, of course, turned out to be right.  People always need to buy blades.  People can use the same razor for years. Even today buying a non-disposable razor is far cheaper than the blades.

Variations of Gillette’s strategy are alive and well.   Supermarkets have sold turkeys at below cost this year to lure in customers. While companies are not “giving away the store” , some “doorbusters” come awfully close.  The strategy appears to be working, at least for now.  According  to the National Retail Federation, holiday sales are expected to rise 3.3%.

Here are a seven companies that will lose money selling products this holiday season:

1) Wal-Mart

Wal-Mart Stores Inc. (NYSE:WMT) has built a multi-billion retail empire around this concept. Its website lists a toy kitchen set for toddlers at $15. One of the reasons why it’s probably listed as out of stock is that it usually sells for about $35.  Fancy kitchen playsets retail for more than $100.

2) Amazon.com

Amazon.com Inc.  (NASDAQ:AMZN) has slashed prices on some video games by 33%.  The largest Internet retailer is offering a Panasonic 2.1 Channel Soundbar and Subwoofer System for $199.  It lists for $349.95.

3) Barnes & Noble

Barnes & Noble Inc. (NYSE: BKS)  is offering 60% off children’s books on its websites.  Some titles in the popular LeapFrog Tag series are being offered for 40% off their regular prices.

4) Boarders

Hardcover books at Borders Group Inc. (NYSE:BGP)  are selling for as little as $15. The printing cost of an average hardcover is just under $3. A best-selling author gets as much as 20% of the book’s retail price, so the number could be as high as $7.  Prices for cookbooks have been slashed by as much as 46% with Kids and Teens sets discounted by 40%

5) Sears

Customers of Sears Holdings Corp. (NASDAQ:SHLD) who spend $19.99 online or more can purchase a pair of diamond earrings for $29.99 that regularly retail for $99.99.   Snuggies are on sale for $9.99, down from a regular $14.99, according to a circular

6) Macy’s

A Tommy Hilfinger leather bomber jacket that regularly sells for $450 is available for $99 at Macy’s Inc. (NYSE:M), according to a circular.  Other deals include a 12-cup Cuisanart coffee maker that regularly sells for $149.99 on sale as a “webbuster” deal for $69.99

7) Amazon.com

iSupply estimates that it costs about $156 to build  the Amazon.com (NASDAQ: AMZN) Kindle 3G with Wifi.   That doesn’t include other costs such as licensing technology and marketing.  Since this Kindle model retails for $189, that leaves very little — if any — profit.  The world’s largest Internet retailer sees the e-books ,included in its library of 750,000 titles, as its blades;

8) Apple

Apple (NASDAQ: AAPE)iPhone and AT&T (NYSE: T) – Parts to build a 16G iPhone 4 cost $187.  This does not include shipping, labor, patent licensing, software development, or marketing.   AT&T is currently selling the 16G iPhone 4 for $199 and the 8G iPhone 3GS for only $99.  AT&T buys the iPhone for Apple for between $400 and $600 a unit, according to industry experts.;

Whether this all will pay off will be apparent when first quarter earnings are reported.  Until then, shoppers should enjoy the bargains as shareholders gnash their teeth.

–Jonathan Berr, Charles Stockdale and Douglas A. McIntyre