Apparently you've bought in to the [incorrect] notion that they are losing money on every unit they sell.
David - how do you know Amazon is not losing money on every unit they sell? Isn't it true that because Amazon is recording some of their fulfillment costs in marketing & sales expense that we really don't know if their margins are positive or negative - for any item they sell?
You and many others have stated that the losses that Amazon is currently accumulating are temporary - that once they've completed their warehouse investment and have expanded into many retail categories that their spending will actually decrease - and that they will actually start showing profit. I am not convinced of this - for a few reasons, including:
1. I believe Amazon will have to continue to spend large amounts of money on sales and marketing. Amazon has certainly done a good job to date in establishing their brand. But because customer switching costs on the internet are extremely low, there is a chance that internet retail brand customer loyalty may be extremely shallow - we don't know this for sure, yet, as we have no historical data by which to judge. The problem is that it's just so easy for a customer to go to another web site - especially if another web site is offering the same item at a lower price. To keep customers coming to their site, Amazon is going to have to continue to spend very large amounts of money on marketing and advertising (this is, I believe, their biggest expense category).
2. The web super-store model is unproven. Amazon is betting that they can become the Wal-Mart of the web. But it may be that Wal-Mart was able to become Wal-Mart because it existed in the bricks & mortar world. Wal-Mart had the perfect formula for targeting the large percentage of the US population that lived in suburban and rural areas - customers could go to Wal-Mart to buy anything and everything they needed. On the web, however, the super-store model may not work as well. Amazon may in fact experience intense competition from specialty retailers - a site may do a better job of marketing itself by focusing on one retail category. By focusing on so many retail categories, Amazon actually risks diluting it's brand - and over-extending itself.
If you are absolutely certain that Amazon is obtaining positive profit margins on any items it is currently selling, please show your data - it would be interesting to see. And I will ask you the same question I ask everyone I encounter that is bullish on Amazon: when do you expect the company to be profitable - and how profitable do you expect them to be? If you have been following Amazon (as it appears you have been from your posts), you will know that they were first expected to be profitable in 1999 - and it's obvious they didn't make it (no need for you to provide an explanation as to why - I've read them all). Personally, I feel there is a tremendous risk in investing in Amazon - Bezos has embarked on an experiment that includes a high degree of uncertainty - no one knows if they will succeed, or if they do, how successful they will be. And as an investor, it's a bit disconcerting to see the lack of caution the company exhibits in piling up losses. I hope Amazon does make it - as I hate to see people lose money, and I hate to see people lose jobs. However, I believe Bezos would do well to exercise a little more prudence in his approach to guiding Amazon to profitability - I don't seem to ever recall Bill Gates or Andy Grove boasting that profits are not important (as Bezos has done on occasion).
Thanks,
-Eric Wells |
