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Technology Stocks : Internet Analysis - Discussion
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To: Chuzzlewit who wrote (218)3/28/1999 1:38:00 PM
From: Chuzzlewit  Read Replies (2) of 419
 
General Considerations Part 2 of an unknown number of parts

A thought on how best to measure e-tailing profit

For the reason given in the previous post, I think it is important to shift the metric we use to some measure of profitability that provides at least a modicum of matching, as does accrual accounting, but also gives weight to cash flow. I suggest that EBITDA may be convenient for these purposes. For those who are unfamiliar with EBITDA, it stands for accounting earnings before interest, taxes, depreciation and amortization.
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Some time ago a very astute post by Michelle Harris pointed me to what I have come to believe is at least one key strategy in successful e-tailing. Michelle's key was the concept of commodity. The meaning of the word commodity in this sense is a product that is fungible -- a product where branding is not important but where functionality is the primary driver for the purchase decision.

I believe that one possible strategy for successful e-tailing is the elimination of multiple SKUs which leads to high inventory maintenance costs. Huge numbers of SKUs in Amazon's business model is one of the reasons it will be difficult to make this company profitable. Books and CDs are not fungible. If Amazon is out of a copy of Martin Chuzzlewit (God forbid!) a copy of Madam Bovary will not do! This leads certain e-tail companies to incur huge costs associated with the large number of SKUs.

Now contrast that situation with Dell. Dell does millions of dollars worth of daily business on the internet. Like Amazon, Dell has a remarkably low CCC (around -8 days as I recall), but unlike AMZN, Dell is quite profitable. Consequently Dell sports an ROIC of around 180%. I believe this is a natural consequence of the combination of the limited number of SKUs, and the high price of a commodity. I submit that Dell is one paradigm for a very successful network-based business.

I am sure that Michelle could be persuaded to discuss SCM at Dell at some length, and how that part of the model integrates with the internal inventory issues I raised.

-- More to come --
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