Glen, from couch over @MF. As you can see he's talking about your 8% post yesterday. No I'm not becoming an Amzn bull but as I've said before we must examine their business model objectively.
<Taffy,
This SI poster contends that Amazon's business model is misleading reagrding cash flow because the distributor maintains the inventory (that's good for Amazon), but Amazon has to pay 8% more for the same book compared to buying in bulk.
Paying 8% more is obviously not a good thing, but is it really that bad? I view this a being analogous to the make/buy decision that many manufacturers face. If you buy vs. make, you pay more for the product but avoid the complications of manufacturing and material management, as well as eliminate the need to build and maintain manufacturing facilities.
With Amazon, they may pay 8% more for the product, but they avoid (1) inventory management (i.e., no slow-moving inventory); (2) inventory facilities (retail locations and warehouses); and (3) freight and storage costs. Amazon is operating a very light business, and the outsourcing of inventories is a vital part of it. On top of that, they are maximizing their cash flow.
It is impossible for us outsiders to really know the details involved in this insource/outsource decision, but I'll guess that the "light business" model will always be at a great advantage (especially in the future, as more products become digital vs. physical).
Walk into a B&N or Border's and look at all those books. The store is huge, and books are everywhere. Now imagine how long it would take to sell ALL those books (every one of those suckers). Add in a few warehouses and multiply by a thousand. That's a lot of "dead" assets not adding a dime to current revenues. Now add rent, payroll, etc. and you can see that 8% doesn't look so bad.
In addition, Amazon's management is only burdened with a fraction of the facilities management, inventory management, and payroll management that the brick & mortar stores are. Management is left free to think about one thing - increasing sales.
In my opinion, paying a few bucks more per sold book (and gaining all the advantages mentioned above) is a much better deal than getting a discount on a book that's going to sit on the shelves in some store or warehouse. I can't prove it by numbers, but I can by example (look at Dell's business model). |
