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The Limits of Amazon

1 January 2018

From The Wall Street Journal:

Amazon.com Inc. is a colossus. In the near future, it could even surpass Apple Inc. as the world’s largest publicly traded company.

But whether you think it will get there depends on how big you think the market is for the products and services Amazon is best at. One secret to Amazon’s amazing scalability is this: Not everything is an Amazon business.

Amazon is the largest online retailer in the U.S. by a huge margin. In cloud-computing services, it is the world leader by nearly every measure. With the Echo speaker, it was the surprise early leader in voice-based computing, and that business has exploded as well.

Meanwhile, Amazon is leasing planes and buying semi trailers to compete with FedEx and UPS for delivery of its own goods. This year it is on track to spend as much on video content as Netflix did in 2017.

. . . .

And though no one knows what Amazon will do with Whole Foods, its push into physical retail has rival Wal-Mart scrambling to match Amazon in other ways, such as e-commerce.

All of these moves fit into Amazon’s core mission as a data-driven instant-gratification company. Its fanaticism for customer experience is enabled by every technology the company can get its hands on, from data centers to drones. Imagine the data-collecting power of Facebook wedded to the supply-chain empire of Wal-Mart—that’s Amazon.

There is one major problem with the idea that Amazon will eat the entire universe, however. Amazon is good at identifying commodity products and making those as cheap and available as possible. “Your margin is my opportunity” is one of Chief Executive Jeff Bezos’s best-known bon mots. But this system isn’t very compatible with big-ticket, higher-margin items.

Could Amazon’s Lab126—famous for both the successful Echo and the failed Fire phone—ever produce something as premium as an iPhone or an OLED TV? Its success in electronics has come from driving their prices to the very bottom.

. . . .

In 2017, 66% of the money Amazon shoppers spent world-wide was for goods sold by companies other than Amazon, Euromonitor estimates. Amazon typically takes a 15% margin from other sellers, and can generate extra revenue by warehousing and delivering their goods, as well.

Eventually, Amazon could become the ultimate platform for retail, the “retail cloud” upon which countless other online retail businesses are built, said Juozas Kaziukėnas, founder and chief executive of Marketplace Pulse, a business-intelligence firm focused on e-commerce. “Maybe eventually you can even outsource your manufacturing to Amazon,” he added.

. . . .

Amazon may be mastering commodity goods; its own Basics line went from about 250 products in 2013 to over 1,500 today. But making items widely available at low prices runs directly counter to the way higher-profit businesses work.

. . . .

Consider the makers of high-end handbags, which limit who can distribute their wares and, as a result, who can buy them. Not surprisingly, many of those brands refuse to sell on Amazon at all.

Link to the rest at The Wall Street Journal

PG is a bit puzzled by the complaint expressed in the OP. Amazon is huge and dominating. Amazon continues to increase its sales at an incredible pace. Amazon is aggressively moving into big new markets.

But Amazon has a problem because it’s not selling high-end handbags. Amazon has a problem because it’s not manufacturing and selling iPhones.

PG suggests Amazon, with its broad range of business lines, has a better and less-risky business model than Apple does.

In the first fiscal quarter of 2017, 69.4% of Apple’s worldwide revenues were from iPhone sales. Apple is essentially a single-product company that outsources the production of that single product line to Chinese and other overseas suppliers meaning, in part, that Apple doesn’t have total control over the cost of its products. The sophistication of the iPhone means that there are not more than a handful of suppliers anywhere in the world that are able to manufacture iPhone’s to Apple’s high standards. Apple charges premium prices and must have premium products to support those prices.

To be fair, Apple makes very high-quality products and PG has purchased iPhones for years. His observations about Apple vs. Amazon are not a knock on Apple, but rather a comparison of what PG thinks their long-term futures might be.

PG does have the impression that a lot of the magic has gone out of Apple since the death of Steve Jobs. For a while, Tim Cook could finish up various Jobs projects in the pipeline, but after those were done, PG hasn’t seen much dynamism from Apple. From all that PG has read, the iPhone X, while a good product per Apple’s tradition, has not been rolled out with a typical high-quality Apple PR effort.

Comparing video of a Steve Jobs product launch with a Tim Cook product launch is painful.

Additionally, PG thinks the X pricing was a bad mistake. Prior to release, PG was at least 95% certain to upgrade to the X with a standard Apple new iPhone price bump, but the larger than expected price increase has caused him to hesitate, turning a sure sale into a wait-and-see. Various observers of Apple are reporting that iPhone X sales are disappointing in the US and some other major Apple markets.

PG suspects the price increase for the X was driven more by pressure to fix Apple’s flat sales and less-than-expected profits than any thoughtful analysis of what the market would bear and what new value the X added for owners of late-model Apple phones.

At the end of this post is a list of the Top 100 US Retailers from the National Retail Federation (2016 full year ranking based on US sales).

A couple of details you can confirm from reviewing the online data.

  • Amazon is, of course, ranked higher than Apple in total US sales (#7 vs. #13)
  • Amazon’s 2016 US sales increased by 24.6% over 2015 sales. Its worldwide sales growth was up 200% year over year.
  • Apple’s unit sales for 2016 declined over its sales for 2015.

1 – Wal-Mart Stores
2 – The Kroger Co.
3 – Costco
4 – The Home Depot
5 – CVS Caremark
6 – Walgreens Boots Alliance
7 – Amazon.com
8 – Target
9 – Lowe’s Companies
10 – Albertsons Companies
11 – Royal Ahold Delhaize USA
12 – McDonald’s
13 – Apple Stores / iTunes
14 – Best Buy
15 – Publix Super Markets
16 – Rite Aid
17 – Macy’s
18 – TJX Companies
19 – Aldi
20 – Dollar General
21 – H-E-B Grocery
22 – Dollar Tree
23 – Sears Holdings
24 – Kohl’s
25 – Verizon Wireless
26 – Meijer
27 – Wakefern / ShopRite
28 – Ace Hardware
29 – Starbucks
30 – Whole Foods Market
31 – 7-Eleven
32 – Nordstrom
33 – Subway
34 – AT&T Wireless
35 – Ross Stores
36 – BJ’s Wholesale Club
37 – J.C. Penney Co.
38 – Gap
39 – Bed Bath & Beyond
40 – SUPERVALU
41 – L Brands
42 – Burger King Worldwide
43 – Menard
44 – BI-LO
45 – Health Mart Systems
46 – YUM! Brands
47 – Hy-Vee
48 – Good Neighbor Pharmacy
49 – Giant Eagle
50 – Wendy’s
51 – AutoZone
52 – Dunkin’ Brands Group
53 – O’Reilly Auto Parts
54 – Wegmans Food Market
55 – Staples
56 – Army / Air Force Exchange
57 – Dick’s Sporting Goods
58 – QVC
59 – Sherwin-Williams
60 – Alimentation Couche-Tard
61 – Ascena Retail Group
62 – Toys “R” Us
63 – Office Depot
64 – Darden Restaurants
65 – DineEquity
66 – Ikea North American Svcs.
67 – Tractor Supply Co.
68 – WinCo Foods
69 – PetSmart
70 – Chick-fil-A
71 – Dillard’s
72 – Foot Locker
73 – GameStop
74 – Burlington Coat Factory
75 – Signet Jewelers
76 – Domino’s Pizza
77 – Defense Commissary Agency
78 – Panera Bread Company
79 – AVB Brandsource
80 – Big Lots
81 – Academy Sports + Outdoors
82 – Jack in the Box
83 – Speedway
84 – Saks Fifth Avenue / Lord & Taylor
85 – Williams-Sonoma
86 – Neiman Marcus
87 – Michaels Stores
88 – True Value Co.
89 – Ulta Salon, Cosmetics & Fragrance
90 – Shell Oil Company
91 – Sonic
92 – Exxon Mobil Corporation
93 – Belk
94 – H&M
95 – Advance Auto Parts
96 – Sprouts Farmers Market
97 – Stater Bros. Holdings
98 – Petco Animal Supplies
99 – Save Mart Supermarkets
100 – CKE Restaurants

In a more recent Global Powers of Retailing ranking in the magazine’s latest issue, Amazon is ranked #6 and Apple is ranked #34.

Amazon

30 Comments to “The Limits of Amazon”

  1. Ashe Elton Parker

    I’d like to suggest that those looking for designer-style handbags on Amazon are probably people who’d rather have the cheaper knockoff anyway, instead of the outrageously-priced designer version.

    Me, I use a messenger-bag style backpack for my handbag needs.

  2. OP seems to be mistaking profit margin for profits.

  3. PG is a bit puzzled by the complaint expressed in the OP. Amazon is huge and dominating. Amazon continues to increase its sales at an incredible pace.

    When you can’t find much wrong the business they are in, then complain about the business they are not in.

  4. I have trouble understanding why anyone wants overpriced goods, much less why Amazon would want to sell them. No handbag is worth $1000+, no matter who makes it. The same goes for most electronics: there is usually a cheaper, just-as-good model out there.

  5. I purchased a fair number of Christmas gifts this past season from brick & mortar businesses. In many cases the price on Amazon was significantly greater than the price I paid – in a few cases double! – and in the other cases they were comparable. Just sayin’.

    • Four years ago, I bought a DeWalt cordless drill with two batteries and charger from Lowes online for $99 ($106 with tax). At the time, Amazon’s lowest price was $119. (It’s a great drill.)

      Just for fun, I have followed the price of that drill on Amazon for four years. At any given time, lowest available price has varied from $79 to $129. Timing is a huge factor in buying from Amazon.

      I included shipping in the Amazon price, and I am a Prime member.

    • i found the same to be true DaveMich. Since about a year ago, I check other sources for same item, including office supplies, books, household supplies, feed, personal items, animal supplies, tools.

      Often price is far cheaper elsewhere. The trope of everything is cheaper at AMZ isnt always so, and in case of certain day to day items, never so. Even tho we have Prime. Doesnt matter. Prices plus shipping lower elsewhere often. And if a home depot or lowes is spitting distance from homeplace, can have item within an hour.

      • Terrence P OBrien

        And if a home depot or lowes is spitting distance from homeplace, can have item within an hour.

        And at an additional transaction cost. Each individual has to determine that for himself, but it’s real.

  6. PG – at least in AUstralia the iPhone 8 and 8 plus were relased at bout the the same time as the iPhone X. Not much different internally and just results in indecision and sticking with the phone (style) you know. I’m sure that put a huge dent in the iPhone X sales as well.

    I also agree with Sean that there is confusion about profit margin (i.e. markup on individual items) and profit (how much money the company makes beyond what it costs to run the company). I also notice confusion all over the place between profit and revenue (total sales). It is easy to have a huge amount of revenue and very little, or even negative, profit if your business is not efficient.

    I suspect many aspiring and/or non-business-minded authors might also benefit from brushing up on these concepts.

  7. Sounds to me like wall street is still upset that they just can’t figure out how/why Amazon does what it does and does it so well.

  8. Apple’s unit sales for 2016 declined over its sales for 2015.

    That article was based on an analyst’s estimate of sales volume in advance of Apple’s actual report, and in fact, eight months before the end of 2016. In actuality, Apple’s sales for fiscal 2016 did decline slightly from 2015, but not by anything like the analyst’s guess. Sales and earnings were up again in 2017, though not quite to the 2015 level.

    Be careful to distinguish between old estimates and current data.

  9. can anyone explain to me how apple is weighted with their mythic billions kept offshore? I’ve read certain shareholders want apple to release some of that in dividends, but apple seems to keep caching it. Thanks.

    • Terrence P OBrien

      I’m not sure what you mean by “weighted.” But Apple definitely does have billions outside the US. Those holdings are not mythical. They are real liquid assets.

      One reason companies keep it offshore is because bringing it into the US puts them at a disadvantage to any non-US company operating in the US.

      A German company can earn $100 in China and pay $10 in Chinese tax. Nothing more. Then it can use that $90 in the US to build a plant.

      A US company can earn $100 in China and pay $10 in Chines tax. Nothing more. But when it brings that money back to the US, it has to pay an additional $10 in US tax that the German company did not have to pay. So, the US company has $80 vs the German company’s $90.

      If the US company takes its $90 from China and builds a plant in Taiwan, It can use all $90. If it brigs it to the US, it can use only $80.

      This one simple example of why companies keep money out of the US. There are many others.

      We don’t know what Apple will do with it now. It hasn’t had a chance to do anything under then new tax law.

      • I’m not arguing with you Terrence, but whenever I asked the finance people why we kept so much money off-shore that could have been invested in on-shore development, they blamed the whopping discount in converting foreign currencies to US dollars. I noticed money moving onshore whenever the exchange rate dropped.

        • Currency conversion is an issue but it pales against the US corporate tax rate. Conversion rate issues usually run maybe 5-7%. Whereas, until the recent revamp, the tax on repatriated wasn’t 10%. It was 35%. Apple may not have a clear use for their $100B stash but they definitely prefer to have $100B than $65B.

          A second big issue is that until the economy picks up for real there is no incentive to invest those earnings in the US.

          https://www.cbsnews.com/amp/news/us-companies-offshore-cash-wont-rush-home/

          Even the new 15% rate is still double what other countries charge.

  10. With the Echo speaker, it was the surprise early leader in voice-based computing, and that business has exploded as well.

    My first thought was, “Why a surprise?”

    The reason the Echo has taken the lead is that Amazon made it easy and fun to use. It understands most of what you ask or tell it on the first shot. And the number of quirky responses to geeky questions is an almost endless source of amusement.

    Apple had Siri long before Amazon had Alexa, but despite being an Apple fangirl, Siri mostly frustrated me. She rarely understood anything I asked her, causing me to try to rephrase the question multiple times without a positive result. It’s too easy to bring up Siri, blocking other functions, when trying to get to something else. (Seriously, it matters how quickly I push the button twice on my iPhone?) Mostly she was an annoyance until I found a way to get rid of her quickly.

    And I agree about Apple having lost its mojo since Steve Jobs died. Now it’s just another big company producing premium-priced goods without the innovation.

    • Its funny, I was just teaching my dad that he could talk to his phone over Christmas. I have an Android, he has an iPhone. He gave up on Siri and installed Google Now after about ten minutes.

    • Amazon has the lead because they were first. Google’s MeToo speaker has barely beem shipping for a year, Microsoft’s for six months, and Apple won’t ship for months if at all.

      The key point is that Alexa is primarily a voice control interface whereas Cortana, Siri, and Google are primarily database query systems being refitted with control APIs. The difference is why Amazon and Microsoft could so readily agree to cooperate: there is very little overlap and a lot of complementary value in their systems.

      Amazon got there “firstest with the mostest”. And now they get to defend their turf in home automation.

      The game is barely starting but they do have a nice beachhead.

  11. Forget Amazon. I can’t believe Staples is on that list. There are a handful within driving distance of my house I’ve never seen anybody in them.

    • I’ve gone to Staples when I needed specific paper products.

      I expect that the majority of their sales come from supply contracts for office products.

      • Considering Staples closed about 1/3 of their locations in the last two years, and was just bought in June by a private equity firm that is more interested in their real estate, I’d say that supply contracts aren’t getting it done.

  12. Wow, when I read the article before seeing it landed on here, I had a completely different takeaway. I didn’t see it as bashing Amazon at all. I read it as refuting claims that Amazon was going to eat the entire retail ecosystem, because a large portion of that ecosystem includes premium products at a premium price, which isn’t an area Amazon is built to devour, and isn’t interested in competing in.

    Then the article gave solid examples. Not sure what the fuss is about here.

    • Amazon isn’t interested in premium-priced products?
      Then why do they sell diamonds, jewelry, paintings, and yes, OLED TVs.

      Amazon.com is an online mall. They sell lots of premium priced products. Their house brand product sales are a minimal fraction of what the mall’s anchor–AMAZON LLC–carries. And irrelevant to what the other “mall tenants” sell.

      There’s a lot more to Amazon.com than Amazon llc and Lab126.

    • Terrence P OBrien

      Amazon is not going to turn away any vendor because it sells premium priced goods.

  13. I think everyone is missing the lede here:

    66% of the money Amazon shoppers spent world-wide was for goods sold by companies other than Amazon, Euromonitor estimates. Amazon typically takes a 15% margin from other sellers, and can generate extra revenue by warehousing and delivering their goods, as well.

    That is effectively at least a 13% net profit on 2/3 of the consumer spending at Amazon. That’s 10 times what one would expect from a commodity retail operation.

  14. I just know i hate the ribbon on my Macbook Pro. Steve would never have allowed a mis-key to call up that idiot Siri every time the little finger on the right hand waggles when it should have woggled.

  15. The most interesting thing about that list is how many of those stores we *used to* have in my area. Many of the others, I know of only by seeing their names go by on the net. Many of the rest I’ve never heard of at all, at least under those names.

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