Long run Operating Margins for Internet retailers?

[LongHaul]

I was just curious what people thought a decent long run operating margin would be for internet retailers?

 

Retail itself is tough and generally pretty low margin.  On the internet people are just a few clicks away from a competitor.

In addition, internet retailers can require much less capital (no stores, less inventory, etc.)

 

Amazon last year did a ~1% Operating margin.

 

 

[ItsAValueTrap]

newegg has pretty good margins.  they decide to pull their IPO though but you can read their registration statement.

[ZenaidaMacroura]

I've been hoping that this EM thing pulls MercadoLibre down to ~$70.  That's a multibagger a few years out...

[LongHaul]

Newegg is an interesting data point, thanks for pointing it out.  Did about 2% operating margin in 2009. 

Blue Nile did about 7% operating margin in 2007 and now it is down to 3.1%.

 

My guess is that the internet is more competitive than it was 5-10 yrs ago.

 

If one assumes Amazon does 1.5% EBIT margins long term then NI for 2014 might be about $1b.

It is currently trading at a market cap of ~$167b, or 167x earnings.  WOW! 

 

1.5% EBIT margin is the big assumption.  I really don't know where it will end up.

[nestorius]

Here's the bull case on AMZN margins.

 

http://csinvesting.org/wp-content/uploads/2012/08/amzn-valuexvail-2012-josh-tarasoff1.pdf

[Liberty]

I think it depends on your model. If you're selling the same stuff as everybody else the same way, it'll be very hard to have higher margins than average over sustained periods. In that game, Amazon will eventually win because of their scale and focus on operations.

 

But if you can have exclusive products that people want and a different, more effective way to sell and build customer relationships, you can have pretty good sustainable margins. I'm thinking of QVC here. Not 100% internet retailer, but its video + web model is closer to that than traditional brick & mortor.

 

http://oraclefromomaha.files.wordpress.com/2013/10/linta-7.png

 

(and unlike the big department stores, that's with prices that are competitive with Amazon)

[DCG]

To have good margins in online retail (or brick & mortar for that matter), you need to either produce the product(s) you sell, or be the exclusive company that sells the product(s).

 

 

Re-packaging other products can be decent as well (for example, purchasing food products from other companies and re-selling them as gift baskets/boxes. Combining products increases the value and lets you charge more. Real low barrier to entry though, so tough to keep margins high for very long doing this.

[Yours Truly]

To have good margins in online retail (or brick & mortar for that matter), you need to either produce the product(s) you sell, or be the exclusive company that sells the product(s).

 

 

Good post!

[Guest ajc]

I thought this, by Odd Lot Investing - on retail margins - was a really interesting read:

 

http://oddlotinvest.wordpress.com/2014/01/23/pavlovs-margins-thinking-fast-and-slow-in-business-and-investing/