AMZN - Amazon.com Inc.

[rpadebet]

Ok forget the packers. I don`t know how much they pay the postal service per package, but this is per item you buy, where as at WMT you buy a lot more stuff in one swoop. Imagine you had to pay 1$ for every item you buy at WMT, or WMT would get 1$ less per item. This adds up to enormous sums of money and that is WMTs advantage and their higher margin. I can`t see how AMZN can ever get to these margins without a fully automated delivery service, like the drones they are testing.

 

Every brick and mortar store has that advantage over internet retailing. Which model is winning though over the last few decades?

 

[GregS]

WMT has pretty much the similar back-end supply chain as AMZN. I don't know if they call those fulfillment centers, but there are centralized locations where "stuff" is stocked before it is shipped to the store front.

 

Reading The Everything Store, it was pretty clear that Wal-Mart's distribution model providing bulk stuff to stores was quite different than Amazon's model of shipping individual goods to the customer.  Amazon's fulfillment was originally designed by Wal-Mart guys but then they had to redesign the whole thing.

 

Maybe Wal-Mart can figure it out but I've always felt one of Amazon's key competitive advantages was in its distribution.

[CorpRaider]

Maybe they can expand into the steel industry or iron ore mining, once they finish building out that fat margin grocery delivery business.  That's probably worth a 200 multiple.  ;D  Sorry to muck up the thread.  I won't make a habit of it.  I might be back when it hits about a 5 enterprise multiple.  The lack of transparency and history of management, combined with their control of the common alone would require a huge discount for me to get interested. 

[frommi]

Every brick and mortar store has that advantage over internet retailing. Which model is winning though over the last few decades?

 

The question was if AMZN can operate at WMT`s margins not if customers prefer to buy online.

[rpadebet]

WMT has pretty much the similar back-end supply chain as AMZN. I don't know if they call those fulfillment centers, but there are centralized locations where "stuff" is stocked before it is shipped to the store front.

 

Reading The Everything Store, it was pretty clear that Wal-Mart's distribution model providing bulk stuff to stores was quite different than Amazon's model of shipping individual goods to the customer.  Amazon's fulfillment was originally designed by Wal-Mart guys but then they had to redesign the whole thing.

 

Maybe Wal-Mart can figure it out but I've always felt one of Amazon's key competitive advantages was in its distribution.

 

WMT, if I am not wrong, operates its supply chain with a hub and spokes model. They have what they call distribution centers (about 150 of these) which are strategically located such that each DC serves about 200 WMT retail store fronts within a 24hr period. Suppliers and Vendors manage their inventory for them by shipping from their own warehouses to these DCs. (Some local suppliers though supply directly to the retail store fronts)The DCs sort the inventory and send them to each retail store front as per forecasted demand.

 

AMZN, has a similar infrastructure. They have 90-100 or so warehouses which they call Fulfillment centers. These are also strategically located so as to reach most of their client base (retail customers) as quickly as they can. Suppliers and vendors manage inventory at these FCs and AMZN sorts and ships the items directly to customers.

 

WMT has a very sophisticated model which was optimized for the last century customer shopping experience, but they are trying to adapt it to fit the new eCommerce model. Instead of building a new model, they feel they can use their 4000 retail store fronts to provide faster and cheaper shipping. The advantages of this are obvious, WMT can easily do same day delivery or same day pick up because they only have to ship for the last 5-10 miles from their store fronts. The disadvantage is, you now have to manage inventory across the DCs and retails store fronts and this could lead to errors in shipping the correct packages to customers as retail store front employees now also have to be trained in picking, packaging and shipping apart from their regular "day job".

 

AMZN can operate their model cheaper primarily because they don't have to run and manage the 4000 odd store fronts and related employees. Yes they ship for larger distances, but I guess they have whole sale below market deals with UPS/Fedex etc given AMZN's strategic importance to these shippers, and are most likely not paying by the box to ship.

 

I feel AMZN can theoretically operate at or better than WMT margins.

[Palantir]

Do they need to have better margins than WMT? If they attract more shoppers than WMT, this can make up deficiency in margin. I think this is quite likely as they can offer a far bigger range of products compared to WMT which is limited to what it fan fit into their B&M store. I want to buy protein shakes....I can pretty much order anything on AMZN...whereas at WMT I get a choice of 3-4. Maybe I'm a really picky guy and only want hydrolyzed whey protein with no artificial sweeteners...good luck there...but on AMZN there's probably a 3P merchant willing to sell.

[KCLarkin]

Instead of building a new model, they feel they can use their 4000 retail store fronts to provide faster and cheaper shipping. The advantages of this are obvious, WMT can easily do same day delivery or same day pick up because they only have to ship for the last 5-10 miles from their store fronts.

 

Didn't WMT say they are suspending this experiment on their last call?

[rpadebet]

Instead of building a new model, they feel they can use their 4000 retail store fronts to provide faster and cheaper shipping. The advantages of this are obvious, WMT can easily do same day delivery or same day pick up because they only have to ship for the last 5-10 miles from their store fronts.

 

Didn't WMT say they are suspending this experiment on their last call?

 

I may have missed that. Do you have a reference to this? Did they explain what their new model is going to be?

 

If they are going to be shipping directly from their DC's then its comparable to AMZN model, but maybe slightly more expensive cost wise and service wise because their DC's were optimized to serve their super stores, not the customers directly. If they try the Tesco model of smaller more urban stores, then service might be better and faster, but selection will be limited and operating costs huge

[rkbabang]

Do they need to have better margins than WMT? If they attract more shoppers than WMT, this can make up deficiency in margin. I think this is quite likely as they can offer a far bigger range of products compared to WMT which is limited to what it fan fit into their B&M store. I want to buy protein shakes....I can pretty much order anything on AMZN...whereas at WMT I get a choice of 3-4. Maybe I'm a really picky guy and only want hydrolyzed whey protein with no artificial sweeteners...good luck there...but on AMZN there's probably a 3P merchant willing to sell.

 

If you are overly picky than I sympathize with you, because I am the same way.  I am rarely ever able to find anything I'm looking for at a B&M store anymore.  Whether it is electronics (Best Buy has only a handful of products/options, I've been there to look, but I never buy anything because they never have exactly what I want) or anything else, I recently spent a week looking for sneakers (running shoes for those not from New England).  I knew exactly what I wanted, but I couldn't find it anywhere, so I ended up ordering them online at Amazon.  The problem is when you know exactly what you want is that the B&M stores never have exactly that product and Amazon does.  For food products/supplements (like your example whey protein) this is especially true.  I wouldn't put anything so-called edible that WalMart has in stock in my body.

 

[KCLarkin]

Instead of building a new model, they feel they can use their 4000 retail store fronts to provide faster and cheaper shipping. The advantages of this are obvious, WMT can easily do same day delivery or same day pick up because they only have to ship for the last 5-10 miles from their store fronts.

 

Didn't WMT say they are suspending this experiment on their last call?

 

I may have missed that. Do you have a reference to this? Did they explain what their new model is going to be?

 

If they are going to be shipping directly from their DC's then its comparable to AMZN model, but maybe slightly more expensive cost wise and service wise because their DC's were optimized to serve their super stores, not the customers directly. If they try the Tesco model of smaller more urban stores, then service might be better and faster, but selection will be limited and operating costs huge

 

No, I think I misunderstood:

 

Ashe announced that next year Walmart will build new online fulfillment centers in Georgia and Pennsylvania, each over 1 million square feet. These centers will be part of its next generation fulfillment network that includes dedicated online fulfillment centers, shared distribution centers, and ship-from-store locations that are all tied together by one of the biggest and most efficient transportation networks in the country.  Walmart will also add new fulfillment centers in Brazil and China.

[rpadebet]

Instead of building a new model, they feel they can use their 4000 retail store fronts to provide faster and cheaper shipping. The advantages of this are obvious, WMT can easily do same day delivery or same day pick up because they only have to ship for the last 5-10 miles from their store fronts.

 

Didn't WMT say they are suspending this experiment on their last call?

 

I may have missed that. Do you have a reference to this? Did they explain what their new model is going to be?

 

If they are going to be shipping directly from their DC's then its comparable to AMZN model, but maybe slightly more expensive cost wise and service wise because their DC's were optimized to serve their super stores, not the customers directly. If they try the Tesco model of smaller more urban stores, then service might be better and faster, but selection will be limited and operating costs huge

 

No, I think I misunderstood:

 

Ashe announced that next year Walmart will build new online fulfillment centers in Georgia and Pennsylvania, each over 1 million square feet. These centers will be part of its next generation fulfillment network that includes dedicated online fulfillment centers, shared distribution centers, and ship-from-store locations that are all tied together by one of the biggest and most efficient transportation networks in the country.  Walmart will also add new fulfillment centers in Brazil and China.

 

It looks like they are making decisions at WMT using a committee :P, going with All of the Above approach!

 

They have a tough problem to solve and if anyone among the retailers can solve it, it has got to be WMT given their supply chain focus. They are admitting they have a last gen model. They are adding new gen on top and adapting some old centers. They might be able to make it work, but to me it sounds and feels incredibly difficult to do.

 

If they fail, they might end up like SHLD very quickly.

[Palantir]

Do they need to have better margins than WMT? If they attract more shoppers than WMT, this can make up deficiency in margin. I think this is quite likely as they can offer a far bigger range of products compared to WMT which is limited to what it fan fit into their B&M store. I want to buy protein shakes....I can pretty much order anything on AMZN...whereas at WMT I get a choice of 3-4. Maybe I'm a really picky guy and only want hydrolyzed whey protein with no artificial sweeteners...good luck there...but on AMZN there's probably a 3P merchant willing to sell.

 

If you are overly picky than I sympathize with you, because I am the same way.  I am rarely ever able to find anything I'm looking for at a B&M store anymore.  Whether it is electronics (Best Buy has only a handful of products/options, I've been there to look, but I never buy anything because they never have exactly what I want) or anything else, I recently spent a week looking for sneakers (running shoes for those not from New England).  I knew exactly what I wanted, but I couldn't find it anywhere, so I ended up ordering them online at Amazon.  The problem is when you know exactly what you want is that the B&M stores never have exactly that product and Amazon does.  For food products/supplements (like your example whey protein) this is especially true.  I wouldn't put anything so-called edible that WalMart has in stock in my body.

 

Yep, I decided to start taking Omega 3 supplements...took me about 5 min to research which was the best one (http://nutrigold.com/Omega-3-Fish-Oil) and get it off AMZN with free shipping...How can WMT compete with this?

 

 

I like the Benedict Evans analogy - just like AWS is a platform for software developers the retail side is a platform for merchants....when there is a huge userbase, there are ecosystem effects I suppose

[rkbabang]

Do they need to have better margins than WMT? If they attract more shoppers than WMT, this can make up deficiency in margin. I think this is quite likely as they can offer a far bigger range of products compared to WMT which is limited to what it fan fit into their B&M store. I want to buy protein shakes....I can pretty much order anything on AMZN...whereas at WMT I get a choice of 3-4. Maybe I'm a really picky guy and only want hydrolyzed whey protein with no artificial sweeteners...good luck there...but on AMZN there's probably a 3P merchant willing to sell.

 

If you are overly picky than I sympathize with you, because I am the same way.  I am rarely ever able to find anything I'm looking for at a B&M store anymore.  Whether it is electronics (Best Buy has only a handful of products/options, I've been there to look, but I never buy anything because they never have exactly what I want) or anything else, I recently spent a week looking for sneakers (running shoes for those not from New England).  I knew exactly what I wanted, but I couldn't find it anywhere, so I ended up ordering them online at Amazon.  The problem is when you know exactly what you want is that the B&M stores never have exactly that product and Amazon does.  For food products/supplements (like your example whey protein) this is especially true.  I wouldn't put anything so-called edible that WalMart has in stock in my body.

 

Yep, I decided to start taking Omega 3 supplements...took me about 5 min to research which was the best one (http://nutrigold.com/Omega-3-Fish-Oil) and get it off AMZN with free shipping...How can WMT compete with this?

 

 

I like the Benedict Evans analogy - just like AWS is a platform for software developers the retail side is a platform for merchants....when there is a huge userbase, there are ecosystem effects I suppose

 

Yep, I like NutriGold, their Vitamin D3 is suspended in Olive Oil rather than the high Omega-6 oils (soy usually) used in WalMart type brands.  The "Now"  supplements are usually good as well.

 

I like the platform analogy.  The only thing missing is same day delivery of things you need today, if they solve that problem nationwide (maybe with drones someday) the Targets and WalMarts of the world will be in some serious trouble.

 

[JAllen]

I've wondered how much it costs to build out one of their FCs.  Looks like it's only $75M.  This is why AMZN had capex/revenues of ~1.5% for the decade prior to 2010.

 

 

So if they have something like 80 of these worldwide (excluding AWS for this discussion), it's cost them $6B in property.  And they're generating almost $6B in operating cash flow.

 

 

Walmart has 2 billion feet of retail space that's cost them $200B to build.

 

 

There's almost no comparison between the two in capital costs.

[Guest Schwab711]

Do they need to have better margins than WMT? If they attract more shoppers than WMT, this can make up deficiency in margin. I think this is quite likely as they can offer a far bigger range of products compared to WMT which is limited to what it fan fit into their B&M store. I want to buy protein shakes....I can pretty much order anything on AMZN...whereas at WMT I get a choice of 3-4. Maybe I'm a really picky guy and only want hydrolyzed whey protein with no artificial sweeteners...good luck there...but on AMZN there's probably a 3P merchant willing to sell.

 

If you are overly picky than I sympathize with you, because I am the same way.  I am rarely ever able to find anything I'm looking for at a B&M store anymore.  Whether it is electronics (Best Buy has only a handful of products/options, I've been there to look, but I never buy anything because they never have exactly what I want) or anything else, I recently spent a week looking for sneakers (running shoes for those not from New England).  I knew exactly what I wanted, but I couldn't find it anywhere, so I ended up ordering them online at Amazon.  The problem is when you know exactly what you want is that the B&M stores never have exactly that product and Amazon does.  For food products/supplements (like your example whey protein) this is especially true.  I wouldn't put anything so-called edible that WalMart has in stock in my body.

 

Yep, I decided to start taking Omega 3 supplements...took me about 5 min to research which was the best one (http://nutrigold.com/Omega-3-Fish-Oil) and get it off AMZN with free shipping...How can WMT compete with this?

 

 

I like the Benedict Evans analogy - just like AWS is a platform for software developers the retail side is a platform for merchants....when there is a huge userbase, there are ecosystem effects I suppose

 

 

Isn't there a big difference between buying a single product with specific specifications as opposed to normal living items. I know a lot of people buy specific stuff on amazon/ebay. I don't know how anyone could fully move their purchases from Walmart to Amazon. I understand the grocery delivery, ect but I think there will always be a place for Walmart. I think Amazon will cannibalize everyone other than WMT.

[JAllen]

AMZN is fully capable of replacing all purchasing, except for some clothes and obviously pretty much everything you need immediately.

 

 

Amazon Pantry will do this: you can get all of your Pantry goods delivered for $6 in a huge box.  Groceries, soap.  It's been a while since one hasn't ever needed to go to a Walmart.

 

 

I do well over 90% of our shopping on Amazon, except for groceries, because we live two blocks from a Whole Foods and it's such a habit, but that's changing too.

[rkbabang]

Do they need to have better margins than WMT? If they attract more shoppers than WMT, this can make up deficiency in margin. I think this is quite likely as they can offer a far bigger range of products compared to WMT which is limited to what it fan fit into their B&M store. I want to buy protein shakes....I can pretty much order anything on AMZN...whereas at WMT I get a choice of 3-4. Maybe I'm a really picky guy and only want hydrolyzed whey protein with no artificial sweeteners...good luck there...but on AMZN there's probably a 3P merchant willing to sell.

 

If you are overly picky than I sympathize with you, because I am the same way.  I am rarely ever able to find anything I'm looking for at a B&M store anymore.  Whether it is electronics (Best Buy has only a handful of products/options, I've been there to look, but I never buy anything because they never have exactly what I want) or anything else, I recently spent a week looking for sneakers (running shoes for those not from New England).  I knew exactly what I wanted, but I couldn't find it anywhere, so I ended up ordering them online at Amazon.  The problem is when you know exactly what you want is that the B&M stores never have exactly that product and Amazon does.  For food products/supplements (like your example whey protein) this is especially true.  I wouldn't put anything so-called edible that WalMart has in stock in my body.

 

Yep, I decided to start taking Omega 3 supplements...took me about 5 min to research which was the best one (http://nutrigold.com/Omega-3-Fish-Oil) and get it off AMZN with free shipping...How can WMT compete with this?

 

 

I like the Benedict Evans analogy - just like AWS is a platform for software developers the retail side is a platform for merchants....when there is a huge userbase, there are ecosystem effects I suppose

 

 

Isn't there a big difference between buying a single product with specific specifications as opposed to normal living items. I know a lot of people buy specific stuff on amazon/ebay. I don't know how anyone could fully move their purchases from Walmart to Amazon. I understand the grocery delivery, ect but I think there will always be a place for Walmart. I think Amazon will cannibalize everyone other than WMT.

 

Neither my wife nor I go to WalMart for anything.  We do buy fresh food from local markets (Amazon Fresh isn't available in our area) and we get our meat from a local CSA (and even that we sometime make a bulk order online at http://www.grasslandbeef.com/), but other than that almost everything we buy we get online.  I think back to years ago when we used to go to WalMart often and shudder, the only thing more disgusting than the people who worked there was the other customers who shopped there.  I can't use enough hand sanitizer after leaving that place to feel clean again.  It just isn't worth it to save 17 cents on a roll of paper towels.

 

[JAllen]

My guess is that Walmart don't really compete much actually.  Think about the people you know that shop at one or the other.  Can you see them shopping at the other?  I can't.  But I know incredibly few people that would ever shop at Walmart, and the closest one to us is a 30-40 minute drive.  I've only been there to buy fishing stuff I needed that day.  The last time I was there it took me a few minutes to find a shopping cart that was in working condition.

[valueinvestor82]

Everything you guys are saying about AMZN's position and strengths are true. But please be honest in acknowledging that it is not a value investment. It requires massively optimistic speculation of the future to justify a lofty current price, which apparently has already been accepted by existing shareholders. I (unsurprisingly) see little discussion of current valuation and what exists now, but rather status quo gushing over how if they keep building warehouses, they'll avoid taxes and become the next Walmart. Red flags everywhere. At least the 724 pages of SHLD alternate between hating Lampert and discussing actual assets. LOL.

[JAllen]

Go back a few pages and you'll see I discuss their cash flows ad infinitum.

 

 

 

 

[dwy000]

Everything you guys are saying about AMZN's position and strengths are true. But please be honest in acknowledging that it is not a value investment. It requires massively optimistic speculation of the future to justify a lofty current price, which apparently has already been accepted by existing shareholders. I (unsurprisingly) see little discussion of current valuation and what exists now, but rather status quo gushing over how if they keep building warehouses, they'll avoid taxes and become the next Walmart. Red flags everywhere. At least the 724 pages of SHLD alternate between hating Lampert and discussing actual assets. LOL.

 

You don't need to go back too far to see that I am one of the ones who questions today's valuation and the ability to grow into it.  But to say there's no discussion of current valuation is wrong.  The whole basis for today's valuation is the assumptions about tomorrow

[Palantir]

JAllen - just to make sure that we are all in agreement, do you agree that it is roughly 30x owner earnings?

 

As an aside, the S&P 500 EY is about 5%, while AMZN is at 3%. If we assume AMZN grows at 20% and market grows at 9% (optimistic)...we get:

 

AMZN S&P 500 Year 3.0 5.3 1 3.6 5.7 2 4.3 6.2 3 5.2 6.8 4 6.2 7.4 5 7.5 8.1 6 9.0 8.8 7 10.7 9.6 8 12.9 10.5 9 15.5 11.4 10 18.6 12.5

 

[JAllen]

Everything you guys are saying about AMZN's position and strengths are true. But please be honest in acknowledging that it is not a value investment. It requires massively optimistic speculation of the future to justify a lofty current price, which apparently has already been accepted by existing shareholders. I (unsurprisingly) see little discussion of current valuation and what exists now, but rather status quo gushing over how if they keep building warehouses, they'll avoid taxes and become the next Walmart. Red flags everywhere. At least the 724 pages of SHLD alternate between hating Lampert and discussing actual assets. LOL.

 

 

Buffett disagrees with you:

 

 

"The term "value investing" is widely used to imply the purchase of stocks having attributes such as a low ratio of price to book value, a low price-earnings ratio, or a high dividend yield. Unfortunately, such characteristics...are far from determinative as to whether an investor is indeed buying something for what it is worth and is therefore truly operating on the principle of obtaining value in his investments. Correspondingly, opposite characteristics - a high ratio of price to book value, a high price-earnings ratio, and a low dividend yield - are in no way inconsistent with a "value" purchase." - Warren Buffett

 

 

By the way, that's from the Berkshire Hathaway 1992 Annual Letter.  Probably not a place he speaks lightly.

 

 

Thanks LC, I fixed it!

[LC]

JAllen, let me post that quote since it's not visible in your post:

 

"The term "value investing" is widely used to imply the purchase of stocks having

attributes such as a low ratio of price to book value, a low price-earnings ratio, or a

high dividend yield. Unfortunately, such characteristics...are far from determinative as

to whether an investor is indeed buying something for what it is worth and is therefore

truly operating on the principle of obtaining value in his investments.

Correspondingly, opposite characteristics - a high ratio of price to book value, a high

price-earnings ratio, and a low dividend yield - are in no way inconsistent with a

"value" purchase.

[JAllen]

In my comment above about it only costing $75M to build out a FC I forgot to link:

 

 

http://www.businesswire.com/news/home/20141028005388/en/Governor-Quinn-Senator-Durbin-Amazon-Announce-Plans#.VFEZb4vF-EQ

 

 

So AMZN has about 50 of these in the U.S. and let's say they actually cost $200M, including robots, etc.

 

 

That's $10B of property to run their U.S. business.

 

 

Walmart has 3400 supercenters in the U.S. that cost about $25M to build in the suburbs.  That's $85B they've spent.  And Walmart still has to operate distribution centers as well.  Walmart handles goods twice, AMZN doesn't.  AMZN doesn't have retail staff at all.

 

 

I don't know how anyone can't see the long-term cost advantage selling goods solely online and increasingly automated affords AMZN.