Amazon: Still A Charity For Consumers Funded By Investors?

Jan 30 2014, 6:19pm CST | by

Roughly a year ago, after Amazon came out with its 2012 earnings report, Slate columnist Matthew Yglesias called Amazon ”a charitable organization being run by elements of the investment community for the benefit of consumers.”

He goes on to explain:

The shareholders put up the equity, and instead of owning a claim on a steady stream of fat profits, they get a claim on a mighty engine of consumer surplus. Amazon sells things to people at prices that seem impossible because it actually is impossible to make money that way. And the competitive pressure of needing to square off against Amazon cuts profit margins at other companies, thus benefiting people who don’t even buy anything from Amazon.

A year later, and Amazon has again put out an eye-popping earnings report — not just for its huge revenue growth numbers but also for its razor-thin profit margin. The company booked $74.45 billion in revenue in 2013 and $274 million in income for a 0.37% profit margin.

While $274 million in profits is nothing to sneeze at for most companies, for one with nearly $75 billion in revenue, it’s surprisingly little.

To give you an idea of just how little that is, compare these results with the fiscal 2013 results for Barnes & Noble‘s bricks-and-mortar operations (I exclude Nook here because B&N’s digital business is wildly unprofitable and the company operates it as a separate business unit anyway). For the year, Barnes & Noble's retail and college bookstores had about $6.3 billion in revenue for $485 million in EBITDA (earnings before interest, taxes, depreciation and amortization — essentially, one way profit is measured). That’s a margin of about 7.7% — respectable, especially considering how challenging it is for Barnes & Noble to compete in a world where more people are buying things online and where your biggest online competitor is Amazon.

Not only does Barnes & Noble’s profit margin blow Amazon’s out of the water, its overall profit in dollars is nearly double Amazon’s — and on less than 10% of the revenue. In one way of looking at it, it’s better to be an owner of beleaguered Barnes & Noble than of high-flying Amazon.

While Amazon is more than just a bookseller, how is Barnes & Noble or any other bookseller supposed to compete with a company that seems content to make little or no money? Take the example of an independent bookstore owner who needs to sell books at a certain margin to pay her mortgage and feed her family. To compete with Amazon on price, she would have to sell books almost at cost, leaving little leftover at the end of every month for bills and food.

So, who benefits? Well, consumers, of course, who pay lower prices when they shop at Amazon; even consumers who don’t shop at Amazon benefit because Amazon’s rivals often lower prices to compete with the large e-tailer.

But consumers are small-business owners and employees at Amazon competitors, too. So, in a way, it doesn’t benefit them.

Further, investors seem to reap little reward for parking their money with Amazon, yet they continue to do so, despite company’s thin margins. (That said, Amazon shares were down some 10% in after-hours trading on the news of 2013 earnings.)

Perhaps these contradictions are why investor and entertainer Jim Cramer called Amazon “modern art” and “a cult, but a cult that everyone should join,” speaking a the Digital Book World conference earlier this month.

For their part, investors are waiting for the day when Amazon can turn its massive scale into profit. Some critical of Amazon fear that the company’s path to profitability involves cornering a market — the market for books, for instance — and raising prices.

Brad Stone, an Amazon expert and author of The Everything Store, a recent release about the company, doesn’t think so. Also speaking at the Digital Book World conference, he said raising prices wasn’t in Amazon’s “DNA.”

So when will the extremely unprofitable and extremely admired company become less of a charity and more of a business? Every year, observers say, “this will be the year that Amazon turns a big profit” and so far they’ve been wrong every time.

As for Amazon’s competition, Slate’s Yglesias offers some advice:

It’s a truly remarkable American success story. But if you own a competing firm, you should be terrified. Competition is always scary, but competition against a juggernaut that seems to have permission from its shareholders to not turn any profits is really frightening.

Essentially, be afraid.

Source: Forbes Business

 
 

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