Amazon Tries to Turn a Profit

The NYTimes is carrying a story I thought was interesting about Amazon.com trying to actually, gasp, turn a profit. When you have a small business it isn't terribly difficult to make sure you're selling things for more than they cost you. For an outfit like Amazon, it's a little more challenging.

Comments

Shipping is a big problem.

[TheLink]

At the moment it is not cheap to ship lots of diverse stuff in small packages to numerous different locations.

That's why hypermarts, stores etc rent/buy floorspace - to provide an area where customers can go get the goods themselves. Easy and cheap to move the goods in bulk from a few spots to a single spot.

The five warehouses are a symptom of this problem - Amazon still got floor space in the end.

Dell does ok because it sells profit dense items and knows how to keep inventories low, and is quite specialised.

So there's a point where shipping is cheaper than floorspace rental, but what?

Ebay's model is likely to be more profitable - the customers do almost everything themselves. E-bay just helps with the information - the very thing the WWW is good for.

Cheerio,
Link.

Lessons of Amazon

[e_lehman]

I'm not a stocks-and-business person. But following Amazon as a sort of case study has taught me a lot. (Perhaps a real financial person can correct me where I err...)

• Stock analysts generally suck. During the big tech-stock price run-up, analysts like Henry Blodget and Mary Meeker became famous for accurately predicting the rise. Of course, after the market began to collapse, they still predicted a rise. And after everyone else said, "Gee whiz-- I guess the bubble burst" and went home, they were still predicting a rise. Turns out they weren't analysts at all, just eternal optimists who, to a significant extent, created the bubble with their relentless, baseless cheerleading. (Sadly, while screwing investors who listened to their advice, they may have served their firms well-- in the short term-- by bringing in investment banking business.) Every now and then someone comes within a standard deviation of reasonable (Ravi Suria), and it really shakes up the house.
• The financial media generally sucks. Blodget and Meeker didn't just "become famous", they were lionized by the breathless bimbos on CNNfn and in investing magazines who apparently wanted to make thoughtful investing into a sort of celebrity gala. To this day, these media buffoons love to quote the same analysts who completely failed to predict, observe, or even retroactively recognize the tech stock bubble burst. (WSJ rocks, though.)
• Companies strive to deceive. Amazon, like many companies, reports a thing called "pro forma" financial results. These are sort of like real financial results, except that they throw out a half dozen or so things that make them look bad, such as interest payments on their massive debt. When Amazon says it will soon make a profit, they mean a pro-forma profit, which means a loss. It's intentional deception and should be outlawed by the SEC.
• Analysts still suck? Amazon's stock has been up recently because their results in the last quarter were better than expected. To some extent, though, this seems driven by Christmas toy sales. Since there isn't a Christmas every quarter, things might not really be so rosy. I haven't seen discussion of this in the financial press, however.

accounting 101... well, maybe 99

[swinge]

You are using the word "cost" where you should be using the word "costs". Let's say that you buy a book for $5 and sell it six months later for $6. Did you make money? ... it all depends.

• What is the inventory carrying cost, e.g., how much of the rent on the warehouse is due to that book? But the warehouse is extra large to leave room for future expansion... now how much?
• Oh, you own the warehouse... outright or mortgage? What's the interest on the mortgage? And how much could you make on your equity in the warehouse had you invested it in other opportunities you had?
• How much management and labor, and senior management time or other central corporate (yes, that's the same as /. "corprate") expenses are due to owning the warehouse?
• But, in the middle of the six month period you built a new warehouse, and sold the old one. So split the "cost" of the new, and the capital gain from selling the old.
• You considered "the opportunity cost of capital", that is, what else you could have invested the warehouse money in (and the book money, too). But what is your actual cost of capital? You got the money to pay for all this stuff (the new warehouse is much bigger, and you're dumping lots of new stuff in it) from investors. Bondholders expect interest, so we know how much we pay them, but they don't generally lend money to risky businesses like ours. Based on our current share price, vs our cash on hand, is it "worth it" to sell more shares to raise more money?
• How long can we hold out at our current rate of expenditure? There is no "current" rate, all the numbers are growing every month, take that into account.
• Oh, yeah, don't forget what are the "terms" we buy the books on, vs. those we sell on: how long after we got the book did we actually pay for it (accounts payable), and how long will take after we ship to get the money from the customer (accounts receivable). Even though we sell for more than we buy for, since we are growing, it turns out that we owe much more than we are due.

  Oh, and set some money aside to cover returned merchandise... how much?

• Was the book sold to a new customer? Our marketing people tell us that a new customer will likely buy another $400 of merchandise in the next year, vs an existing customer's expected $200. How much of our advertizing and marketing costs should be applied to this book, vs how much the profit from expected future books sold to this customer?
• If purchasing habits are so predictable, shouldn't all that expected future profit accrue to this book which did the heavy lifting?
• What if we can charge this customer a higher price for those future books than they would ordinarily pay? (we just need cookies, and one click... STOP! I'm not talking about the ethics of it, or the public relations if anybody found out... books were bought and books were sold, we're just trying to figure out whether we made any money. Later we can decide whether the programmers of that system are more or less ethical than either the marketers, or the customers who take advantage of our generous return policy, never even thinking about what shipping costs us. Certainly all are less moral than we accountants who are honestly trying to arrive at the right numbers here.)
• Of course, there's lots more...

advanced accounting is a highly technical and extremely fascinating subject. 101 is kinda boring, but it's the only way to get there... To sum up, there is no "correct" answer to whether you made money from the $6-$5 book. Over periods of time, the entire firm can be seen to make money or not, but it's always in the context of what came before and what position they'll be left in for the future.