Yesterday, CNBC reported that Jeff Bezos, in an all-hands meeting earlier this month, said: “Amazon is not too big to fail…In fact, I predict one day Amazon will fail. Amazon will go bankrupt. If you look at large companies, their lifespans tend to be 30-plus years, not a hundred-plus years.” He was responding to an employee asking if the CEO had learned any lessons after Sears and other big retailers recently filed for bankruptcy.
There are a few reasons why Bezos right. As one retail investor said to me, “the nature of all retailers is to eventually go bankrupt.” It’s a cynical point of view but it reflects reality: Retail goes through cycles. Certain kinds of retailers become popular, but then they fail to adapt and their businesses decline and eventually vanish. We see that over and over again. The retailers who can change are the exceptions, not the rule.
But Amazon is now the second-largest retailer in the United States. How is it possible that a thing that big could vanish?
It’s possible that the company could lose touch with its customer, but that seems highly unlikely for Amazon. That’s the one thing it’s known for being hyperfocused on.
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It’s well known that Amazon is not judged on its profitability. If it were, its stock price would be a small fraction of what it is now. Amazon has done an incredible job at many different things, and one of them is getting the financial markets to value the company based on its revenue growth, with the assumption that profitability will come later. Amazon explains away its low profits by saying that it uses what profit it makes to invest in new ideas and experimentation to stay ahead. So far, the market has accepted Amazon’s explanation. People I talk to say that as long as Amazon keeps growing its revenue by 20-25% per year, the market will impute future profitability to the company and the stock price will continue to rise.
For over 100 years before it went bankrupt, Sears had everything for everybody and successfully adapted to what its customers wanted.
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But as Amazon blows past the $200 billion revenue threshold, it gets harder to find sources of revenue that will have the impact it needs on revenue growth. You can’t, for example, double the number of Prime subscribers in the country; there aren’t enough households left to do that and the saturation is already too high. It needs to find new sectors to bring online, like it first did with books. It needs new industries, like grocery, health care, banking or automobiles, that have relatively low online penetration and the potential for conversion to online sales to sustain its revenue growth. But the thing about that is, it’s hard and it’s uncertain. Amazon has owned Whole Foods for well over a year and the conversion to online doesn’t appear to be happening, at least so far.
If Amazon doesn’t find new sources of revenue growth in other industries, its expansion will slow. And because its stock price has been so influenced by revenue growth, it won’t continue to rise. That’s key for Amazon more than for most companies because so many of its middle- and upper-level employees are incentivized by company stock. An important part of their compensation, more than for most other companies, is based on the stock price continuing to rise. If that stops happening, Amazon employees, who are already very sought after by other companies, will be more susceptible to other offers than ever before. When they start to leave, the stock price stagnation will make it hard for Amazon to replace them and the whole wheel can stop spinning in a hurry.
You may say that Amazon is too much a part of people’s daily habits for it to vanish. That’s true for a while, but when a company loses its best people, the ability to innovate goes away, too. It isn’t long before it’s overtaken.
Link to the rest at Forbes
PG suggests that one of the characteristics of business organizations in a capitalist economy is a very high likelihood they will not last forever.
That’s a feature, not a bug.
If a business organization fails, quickly or slowly, to be responsive to customer’s needs, whatever they may be, it will start to decline. If the organization doesn’t turn its focus back to what its customers and prospective customers want and will pay for, that organization will decline and eventually disappear.
Unlike other organizations (dictatorships, for example, or government-owned businesses), business organizations in free economies must continue to please their customers upon pain of corporate death. The opportunity for new companies to start and grow into competitors to established businesses (see, for example, as Exhibit A: Amazon) is an important part of this model.
Without the threat of failure tied to customer dissatisfaction, organizations will almost inevitably turn inward and focus on internal organizational issues as key players compete to succeed under the rules that evolve for internal organizational standards and practices. That can and has happened even in the face of failure.