Can Someone Please Explain the Amazon Business Model???

[lektrode]

Re: The Everything Store

did you read the whole thing, jb?

until i read that story, i never really thot much about em - altho like GRG's question above - esp as it pertains to FB - have wondered how it is they have kept going this far - what, going on 20 years - headed toward 100 BILLION in sales - without a nickle in 'profit' ?

this piece really brings it all together - esp from the POV of those being 'disrupted' - and eye REALLY like that in a news story - even if it is more op/ed than 'news' - tho i tend to gravitate toward that section of newspapers anyway - on the idea that the writers of op/eds likely know more about the topic than i do (hopefully, anyway - not that its all that difficult on most topics ;) and appreciate some sort of analytical perspective vs 'just the facts, ma'am' (= why i'm here)

but wow - when WMT's 'efficiency' M.O. starts to sound 'outmoded' ? - one gets the idea that AMZN has been getting 'special treatment' from the lamerstream media - and never mind wall st - since its the first time eye've seen that kind of language used about AMZN in the same news space (without WMT getting bashed even harder)

and dont get me wrong here, i buy from whoever offers the best price vs service/quality - but a lot of times - hell, MOST of the time lately - the price is all i can afford to think about

altho once upon a time - the 'category killer' concept seemed like it was valid/good biz, acceptable even - but after reading this?

and the very idea that with its current course/speed, that tween them and wmt we'll end up with the same sitch as say like with the airlines (never mind TBTF, inc)?

methinks it just about time to bring back the trust busters

but i'll be very interested to hear lake-d's take on all this....

sez this disrupted type
(tho it wasnt amzn who caused it)

[don]

Re: The Everything Store

too graphic, Jeff?




And as a bonus chart, this from the WSJ:



(posting graphics on the 'tulip has become a disaster)

[Milton Kuo]

Re: The Everything Store

(posting graphics on the 'tulip has become a disaster)

Links to ZeroHedge are no longer allowed and are automatically munged by the software. Here are the two graphics you tried to post.

1. Jeff Bezos' net worth compared to all profits Amazon has ever earned in its lifetime:


Jeff Bezos in perspective_0.jpg

2. A comparison of the change in Amazon's revenue, expenses, income, and stock price over the past 10 years:

AMZN wsj.jpg

[EJ]

Re: The Everything Store

Amazon's business model?

Think of the last 10 items you purchased via Amazon. They generally fall into two major categories.

1) You had a specific item and manufacturer/brand in mind and you knew it will be cheaper on Amazon so you searched for it on the Amazon site first and purchased it there.

2) You had a specific item in mind but did not know which manufacturer/brand to choose and needed to compare items in person before deciding. You locate a local retailer to taste, touch, or feel the items you are considering for purchase.

You made your decision on manufacturer/brand based on what you saw but do not buy the item there from the local brick-and-mortar retail store because the product was more expensive than on Amazon because all items there are subject to taxes and mark-up to cover rent, inventory float costs, and retail store labor costs. You went home and order it from Amazon. In fact, you knew all along it was going to be cheaper on Amazon so it is always your intention to purchase on Amazon.

Amazon's brick-and-mortar retail competitors are all providing a costly in-person product evaluation service to Amazon customers for free.

This research paper concludes that if Amazon purchases were taxed as are local purchases, revenue will decline by 9.5% on average and 19.8% for large items.

Due to low interest rates, inventory float costs for both Amazon and the brick-and-mortar retail store are insignificant but even lower for Amazon due to economies of scale with respect to purchasing inventory and also Amazon's ability to get the lower cost line of credit due to the sheer size of the company's receivables.

If in addition to taxation Amazon also had to compete on a level playing field brick-and-mortar retail stores on rent, float, and labor costs then Amazon's revenue will decline by at least as much, by another 10%.

Amazon has a two-step business model comprised of a Competition Destruction Phase and a Quasi-Monopoly Pricing Phase, which are implemented one market area at a time. During the Competition Destruction Phase Amazon uses the advantage of lower fixed costs to put it's brick-and-mortar competition out of business (e.g., Barnes & Noble, RadioShack, etc.). Later during the Quasi-Monopoly Pricing Phase Amazon then starts to raise prices for products in those markets where they no longer face effective competition.

Amazon's stock price reflects a future balance sheet of a company with Quasi-Monopoly pricing power across a broad range of retail markets.

[lektrode]

Re: The Everything Store

Amazon's business model?....
....
Amazon's brick-and-mortar retail competitors are all providing a costly in-person product evaluation service to Amazon customers for free.

This research paper concludes that if Amazon purchases were taxed as are local purchases, revenue will decline by 9.5% on average and 19.8% for large items.

....
If in addition to taxation Amazon also had to compete on a level playing field brick-and-mortar retail stores on rent, float, and labor costs then Amazon's revenue will decline by at least as much, by another 10%.

Amazon has a two-step business model comprised of a Competition Destruction Phase and a Quasi-Monopoly Pricing Phase, ....
....
Amazon's stock price reflects a future balance sheet of a company with Quasi-Monopoly pricing power across a broad range of retail markets.

some of which are just starting to wake up to the realties of...
curious if you read what i linked-to above?

which suggests that their labor practice$/strategy are a key underpinning of their ops.

and eye recall, Mr J - that you had mentioned something awhile back - to the effect of - that in the longer term 'mall operators are a sell' - which has dire implications for municipal tax bases (as we're already seeing lots of dead/dying malls, with 'marginal' retail ops barely hanging on)

so the question becomes: how much longer do you see amzn's 'strategy' being allowed to continue?
(esp considering the comparison to wmt, in the story above)

personally, i've bought very little from em - being the sort that likes to eyeball stuff up close, hold it in my hands to get a feel for it's ruggedness/sturdyness, texture, etc - smell, even (am definitely a 'tactile type') - and kinda like the 'instant gratification' of being able to pop into the closest (and usually cheapest) retailer of whatever item i'm desiring at the moment (with mere day to day survival items being my most likely desires)

so would think that it's going to take quite a bit more than simply 'low prices' to take out much more of the competition, esp as the sales tax issue (along with property tax - read: state/municipal revenue sitch growing more dire by the day), energy-cost-driven transportation/distribution costs - never mind a 'labor uprising' - start to take a bigger bite out of their top of the line?

course with the (his) wapo aquisition, they'll have a pretty awesome propaganda machine working for em....

[don]

Re: The Everything Store

thanks Milton!

[jk]

Re: The Everything Store

Amazon's business model?

Think of the last 10 items you purchased via Amazon. They generally fall into two major categories.

1) You had a specific item and manufacturer/brand in mind and you knew it will be cheaper on Amazon so you searched for it on the Amazon site first and purchased it there.

2) You had a specific item in mind but did not know which manufacturer/brand to choose and needed to compare items in person before deciding. You locate a local retailer to taste, touch, or feel the items you are considering for purchase.

You made your decision on manufacturer/brand based on what you saw but do not buy the item there from the local brick-and-mortar retail store because the product was more expensive than on Amazon because all items there are subject to taxes and mark-up to cover rent, inventory float costs, and retail store labor costs. You went home and order it from Amazon. In fact, you knew all along it was going to be cheaper on Amazon so it is always your intention to purchase on Amazon.

there are certainly customers who are "show-rooming" at local stores, but as a regular customer of amazon i don't, and i don't feel like i need to. and amazon now collects sales tax in my state, so that's gone too.

what amazon does have is REVIEWS, tens, hundreds, sometimes thousands of reviews. yes there are sock puppet reviews, but they're usually easy to spot. but when i'm at a brick and mortar store [which i hate doing, except for groceries] i don't have nearly the information available to me at the amazon website. i can't distinguish on the basis of looks which item is going to function well, which is going to break down. i can't rely on brands anymore, either, since they've moved their manufacturing to china and the brand no longer carries any meaning for assumed quality.

i'd be buying on amazon if its items cost [somewhat] more, including tax, than what i can get locally because in a regular store i am at an informational disadvantage. i think someone won a prize for writing about the market for lemons, an analysis of information assymetry. this crowd-sourced informational value is rarely mentioned in analyses of amazon's business, but i think the amazon community, such as it is, is a tremendously valuable resource "owned" by the company.

[jiimbergin]

Re: The Everything Store

there are certainly customers who are "show-rooming" at local stores, but as a regular customer of amazon i don't, and i don't feel like i need to. and amazon now collects sales tax in my state, so that's gone too.

what amazon does have is REVIEWS, tens, hundreds, sometimes thousands of reviews. yes there are sock puppet reviews, but they're usually easy to spot. but when i'm at a brick and mortar store [which i hate doing, except for groceries] i don't have nearly the information available to me at the amazon website. i can't distinguish on the basis of looks which item is going to function well, which is going to break down. i can't rely on brands anymore, either, since they've moved their manufacturing to china and the brand no longer carries any meaning for assumed quality.

i'd be buying on amazon if its items cost [somewhat] more, including tax, than what i can get locally because in a regular store i am at an informational disadvantage. i think someone won a prize for writing about the market for lemons, an analysis of information assymetry. this crowd-sourced informational value is rarely mentioned in analyses of amazon's business, but i think the amazon community, such as it is, is a tremendously valuable resource "owned" by the company.

That is a prime reason we have shopped at Amazon for more than a decade. Amazon has to collect sales tax in NC also, but that does not stop us from using it.

[EJ]

Re: The Everything Store

there are certainly customers who are "show-rooming" at local stores, but as a regular customer of amazon i don't, and i don't feel like i need to. and amazon now collects sales tax in my state, so that's gone too.

what amazon does have is REVIEWS, tens, hundreds, sometimes thousands of reviews. yes there are sock puppet reviews, but they're usually easy to spot. but when i'm at a brick and mortar store [which i hate doing, except for groceries] i don't have nearly the information available to me at the amazon website. i can't distinguish on the basis of looks which item is going to function well, which is going to break down. i can't rely on brands anymore, either, since they've moved their manufacturing to china and the brand no longer carries any meaning for assumed quality.

i'd be buying on amazon if its items cost [somewhat] more, including tax, than what i can get locally because in a regular store i am at an informational disadvantage. i think someone won a prize for writing about the market for lemons, an analysis of information assymetry. this crowd-sourced informational value is rarely mentioned in analyses of amazon's business, but i think the amazon community, such as it is, is a tremendously valuable resource "owned" by the company.

I'm playing devil's advocate with my analysis of Amazon's business plan. Obviously there is more to Amazon that taking business away from brick-and-mortar competitors. The reviews from established and credible Amazon reviewers are a key differentiator. And Amazon has online competition. eBay, for example.

But over the years I've noticed that the products available at stores like Target have gone from costing less than I'd expect for the quality to costing more.

Low quality, low cost products are now ubiquitous at brick-and-mortar retail stores like Target. Seems that Amazon is one of the few places I can go to buy high quality products that are well rated and not over-priced.

I have no data to support this but I can't help thinking that this has something to do with the fact that even though 1/2 of all US states now collect a sales tax on Amazon purchases, the other fixed cost advantages of rent, float, and labor still give Amazon a significant advantage at providing higher price/value than competitors can.

[Fiat Currency]

Re: The Everything Store

I think EJ's comments are spot on from a business standpoint … and jk hit another big nail on the head.

I would also add ...

3) You live in Canada or rural USA, and most stores cannot afford to stock all items, especially if you're looking for a more unique item, size, colour, feature etc. Amazon fulfills the "I can get you exactly what you are looking for" spot.

FWIW - I don't understand their valuation no matter how I try to rationalize it.

Jeff Bezos in perspective.jpg

[jpetr48]

Re: The Everything Store

Eric's comment on inventory made me think how they manage with all the products. Does their revenue rise faster than their inventory? Not by much as shown in attached and this is a problem.
The other point that stuck how is their decrease in operating margins to less than 1%. From 2004 to end of Q2 2014, SG&A has risen from 12% to 19% while operating margin has declined from 6 to under 1% in same time period.
This is quite surprising as these SG&A percentage of revenues are more common for a feet on the street distribution model- then again I have not looked at many SG&A percentages of internet retailers- it would be interesting to see where amzn stacks on its SG&A compared to other internet retailers-

[Jill Nephew]

Re: The Everything Store

There are also ways to optimize the supply chain. Inventory costs. Distribution centers can have horrible human rights practices and mistrreated and 'mistreating' workers stay out of the consumers sentiment as well.

[don]

Re: The Everything Store

Not sure if the Amazon business model applies in any way to Uber or airbnb, both of which annihilate overhead cost by pushing them on to desperate providers. Uber, which our daughter provided on our trip to California a few weeks ago, is a driver using his personal vehicle for a trip fee, period. Insurance, gas, vehicle wear and tear, tip, etc. are in his financial bailiwick. Airbnb is similarly constructed. Both are businesses of our times . . . .

[Polish_Silver]

Re: The Everything Store

I definitely agree with that analysis, but I am not sure what to do about it. I feel that something like Amazon has a legitimate role to play, for example, helping you buy hard to find items. But Amazons one disadvantage--shipping cost, doesn't outweigh the massive reduction in overhead they have. The shipping cost is more than offset by the time saved shopping on line vs the store.

[jk]

Re: The Everything Store

FWIW - I don't understand their valuation no matter how I try to rationalize it.

when facebook went public its initial market valuation was $104billion. after the price dropped, after the ipo, its p/e dropped to only 85!

how did someone calculate instagram's $1billion value? it was acquired for that price with zero earnings and a grand total of 13 employees.

how about google paying just under $1billion for waze? $1.65billion for you-tube? $3.2billion for nest?

these prices were not based on any price to earnings ratio, i assure you.

how about $19billion for What'sApp? anyone want to explain that valuation?

amazon is still a startup! get used to it. it's been a startup for 20 years, since it was founded in 1994. it is likely to be a startup for a good many more years. that's how it thinks of itself, and that's how it's valued by the market.