Folks were telling me last week that two big advantages in the Amazon model are no leases, and negative inventory carry.
Bill, nice to see you looking at the fundamentals even if these arguments are old news at best. ;-)
If you take a look at BKS or BGP financials, you should be able to figure out what portion of their revenues is absorbed by rent, fixed asset depreciation and mortgage interest (if any). However, there have been at least a few quotes from analysts and others posted here that debunk the myth that not having brick & mortar stores translates to better margins. If you consider the advertising value of a well located, visible store, not to mention the level of service, incremental revenue opportunities, and instantly gratified customers in a physical store, you must realize that a Web-only retailer has a big marketing job to do, on an ongoing basis, to generate revenues. The CFO and many analysts like to assume that these much higher marketing costs are only temporary, that they could simply stop spending on marketing whenever they deem it important to generate profits. Hence, the "EBITDMA" argument. Bull!
On the issue of inventory turns, I'll agree that a Web only retailer SHOULD have better turns than a retailer with 1000 locations, but AMZN has already admitted that they underestimated the inventory needs of their business model and have built more warehouses to stock larger quantities of more titles. If you think about it, the alternative of ordering from publishers as customers order from AMZN or even letting publishers ship direct are not viable solutions if they expect large volumes. The longer you make people wait for the goods you are selling, especially small ticket impulse buys like books and music, the more likely they are to get in their cars and go get it from a local store. Obviously, for highly specialized titles that one would not find at the local retailer, one would not expect AMZN to provide same day shipment either, but any title you can get from AMZN in 3-5 weeks, you can get from the local Borders in about one week. And you'll pay less at Borders too.
Which brings up the big cost disadvantage of AMZN - shipping. AMZN can not effectively compete on price without discounting by at least enough to offset shipping. For this reason alone, they will never achieve the kind of gross margins that BKS and BGP enjoy.
Lower gross margins, higher marketing costs, and bigger than expected inventory costs. Did the folks you were talking to mention these things? Did they comment on the repeated downward revisions to earnings estimates (after repeatedly stating that they believe their estimates to be overly "conservative") or explain how that is consistent with a supposedly successful business model?
The supposed "advantages in the Amazon model" are a myth.
Regards,
Bob |
