AMZN - Amazon.com Inc.

[cmlber]

It isn't an either-or situation.  Maybe AMZN has certain densely packed markets with large customer densities where its own shipping makes sense, especially to offer products such as same day shipping where using UPS is cost prohibitive, and they could still use UPS for everywhere else.  I'm sure they have the data to see where doing thier own shipping could save them money and allow them to provide faster shipping to their customers.  It isn't like they have to do all of their own shipping and never use UPS again.

 

I agree.  The point I was making is simply that if superior delivery economics is the moat, it's not that wide (if it even exists) and certainly not worth $250 billion.

[ni-co]

Have you attempted to quantify that "advantage?"  DHL attempted to enter the US ground shipping market and exited after years of losing billions of dollars.  It takes A LOT of scale to be efficient at package delivery.  If AMZN shipping operations are one day as efficient as DHL was before they exited, their "advantage" would cost them compared to competitors willing to pay UPS enough to make its margin.

 

And even assuming AMZN is miraculously able to match UPS' costs to ship, UPS margin is only ~12-13%.  If shipping is ~10% of the cost of an order, you're talking about a 1.2% margin advantage over other retailers who don't have an internal shipping operation.  Good luck with that.

 

Thank you very much! As I mentioned above: They don't need to be as efficient! UPS doesn't make money from the contents of the parcels they transport, they make their money from shipping them. Unlike DHL, Amazon doesn't need to turn a profit on its logistics operations; they can run them at cost indefinitely. I'd highly recommend Ben Thompson's article I linked above. Read it and think about it.

 

 

The point I was making is simply that if superior delivery economics is the moat, it's not that wide (if it even exists) and certainly not worth $250 billion.

 

The moat comes from the economies of scale. It's hard to think about a moat that is more sustainable than this one. How would an imagined company have to look to out-compete AMZN? I don't see it.

[cmlber]

Have you attempted to quantify that "advantage?"  DHL attempted to enter the US ground shipping market and exited after years of losing billions of dollars.  It takes A LOT of scale to be efficient at package delivery.  If AMZN shipping operations are one day as efficient as DHL was before they exited, their "advantage" would cost them compared to competitors willing to pay UPS enough to make its margin.

 

And even assuming AMZN is miraculously able to match UPS' costs to ship, UPS margin is only ~12-13%.  If shipping is ~10% of the cost of an order, you're talking about a 1.2% margin advantage over other retailers who don't have an internal shipping operation.  Good luck with that.

 

Thank you very much! As I mentioned above: They don't need to be as efficient! UPS doesn't make money from the contents of the parcels they transport, they make their money from shipping them. Unlike DHL, Amazon doesn't need to turn a profit on its logistics operations; they can run them at cost indefinitely. I'd highly recommend Ben Thompson's article I linked above. Read it and think about it.

 

 

The point I was making is simply that if superior delivery economics is the moat, it's not that wide (if it even exists) and certainly not worth $250 billion.

 

The moat comes from the economies of scale. It's hard to think about a moat that is more sustainable than this one. How would an imagined company have to look to out-compete AMZN? I don't see it.

 

What advantage does being able to operate at cost indefinitely provide?  None.  Imagine that I'm a competitor.  We both try to sell a case of Coke to a customer.  Let's imagine the case costs $10 and you have no advantage over me in procurement cost.  Now let's assume you have "scale" and your shipping cost is $3.  Now assume I don't have "scale" and pay UPS.  UPS charges me $3 but makes a 12% margin because it is far more efficient than you (this isn't hypothetical, this is a fact if you are only as efficient as DHL).  Now we can both sell the customer the same product delivered for $13.  Congrats, you benefited from "scale."

 

If I gave you $200 billion to compete with AMZN, do you think it would be easy or difficult? 

[ni-co]

What advantage does being able to operate at cost indefinitely provide?  None.  Imagine that I'm a competitor.  We both try to sell a case of Coke to a customer.  Let's imagine the case costs $10 and you have no advantage over me in procurement cost.  Now let's assume you have "scale" and your shipping cost is $3.  Now assume I don't have "scale" and pay UPS.  UPS charges me $3 but makes a 12% margin because it is far more efficient than you (this isn't hypothetical, this is a fact if you are only as efficient as DHL).  Now we can both sell the customer the same product delivered for $13.  Congrats, you benefited from "scale."

 

I could think of many benefits to customers a tailor-made logistics network would provide for AMZN. Apart from that, they could take additional freight from other retailers and earn a margin on it because the fixed cost is already covered by AMZN's own business. That's how scale works. Why is AWS cheaper than its competitors? Because AMZN needs to put up the fixed cost anyway for their own retail business and they can lease further capacity at a lower price at the margin.

 

If I gave you $200 billion to compete with AMZN, do you think it would be easy or difficult?

 

Are we talking about losing $200bn (which nobody on this planet will be able or prepared to do)? Or are we talking about risking $200bn? Assuming the latter, I think that it would be immensely difficult to compete with Amazon. Even if you succeed, it would take you several years to come to the point where they already are today. $200bn is not that much money when it comes to creating a sustainable $100bn revenue flow.

[cmlber]

What advantage does being able to operate at cost indefinitely provide?  None.  Imagine that I'm a competitor.  We both try to sell a case of Coke to a customer.  Let's imagine the case costs $10 and you have no advantage over me in procurement cost.  Now let's assume you have "scale" and your shipping cost is $3.  Now assume I don't have "scale" and pay UPS.  UPS charges me $3 but makes a 12% margin because it is far more efficient than you (this isn't hypothetical, this is a fact if you are only as efficient as DHL).  Now we can both sell the customer the same product delivered for $13.  Congrats, you benefited from "scale."

 

I could think of many benefits to customers a tailor-made logistics network would provide for AMZN. Apart from that, they could take additional freight from other retailers and earn a margin on it because the fixed cost is already covered by AMZN's own business. That's how scale works. Why is AWS cheaper than its competitors? Because AMZN needs to put up the fixed cost anyway for their own retail business and they can lease further capacity at a lower price at the margin.

 

If I gave you $200 billion to compete with AMZN, do you think it would be easy or difficult?

 

Are we talking about losing $200bn (which nobody on this planet will be able or prepared to do)? Or are we talking about risking $200bn? Assuming the latter, I think that it would be immensely difficult to compete with Amazon. Even if you succeed, it would take you several years to come to the point where they already are today. $200bn is not that much money when it comes to creating a sustainable $100bn revenue flow.

 

That sounds nice in theory, but why would another retailer ship via AMZN instead of UPS other than lower price? And AMZN can't possibly offer a lower price than UPS and be profitable.  So either it will never happen, or it will happen and will result in massive value destruction. 

 

Let's call the $200bn "risk taking."  I could easily replicate AMZN with that amount of money.  AMZN has not spent nearly that much to grow to this point.  And if you're right on the value of AMZN, it would be worth the investment, since one day the $200bn may be worth a trillion dollars.

 

And could you explain one of "the many benefits a tailer made logistics network would provide to customers?"  I can't think of one that UPS either doesn't already offer or couldn't also offer, given that they are probably smart enough to see and invest ahead of the ecommerce trend.

[Liberty]

And AMZN can't possibly offer a lower price than UPS and be profitable.  So either it will never happen, or it will happen and will result in massive value destruction. 

 

Amazon's playbook is: Use their own e-commerce scale to bootstrap something, then open up the platform to third parties, then operate at a loss or break-even for a while to get maximum growth, and once enough scale has been reached and/or competitors are out of business, start making a profit (and use it to finance another startup elsewhere in the company).

 

So right now, the distribution business might get financed by profits from AWS and e-commerce, and Amazon can operate it at low, or negative margins for a long time, something that UPS and Fedex won't do, so they might take market share (and if UPS and Fedex lose scale, that makes them even less able to compete, and they don't have another cash cow like AWS to finance themselves).

[dwy000]

And AMZN can't possibly offer a lower price than UPS and be profitable.  So either it will never happen, or it will happen and will result in massive value destruction. 

 

Amazon's playbook is: Use their own e-commerce scale to bootstrap something, then open up the platform to third parties, then operate at a loss or break-even for a while to get maximum growth, and once enough scale has been reached and/or competitors are out of business, start making a profit (and use it to finance another startup elsewhere in the company).

 

So right now, the distribution business might get financed by profits from AWS and e-commerce, and Amazon can operate it at low, or negative margins for a long time, something that UPS and Fedex won't do, so they might take market share (and if UPS and Fedex lose scale, that makes them even less able to compete, and they don't have another cash cow like AWS to finance themselves).

 

Financed by profits from AWS and e-commerce....but there are no profits from those (or at least no real cash flow after investing costs).

 

I don't question their willingness or ability to do things that go after other people's profit margin (anybody can get volume if you are willing to operate at a loss or breakeven), the question is IF and WHEN they can flip this magic profit switch.  I can't recall a single industry where somebody came in operating at breakeven to gather scale and then was able to suddenly raise prices and become consistently profitable. This is like WEB's discussion on the original Berkshire Hathaway.  They'd invest a ton of money to get cost advantage which would last a year until everyone else bought the same machines.  Ultimately it was just a race to the bottom and nobody ever made money again.  This feels similar.  There will never be a point where they can say okay, we are a monopoly and can now raise prices.

 

 

[Palantir]

How is AMZN financing all these plans and massive capex if there is no true economic profit to reinvest? Where is the money coming from?

[Liberty]

And AMZN can't possibly offer a lower price than UPS and be profitable.  So either it will never happen, or it will happen and will result in massive value destruction. 

 

Amazon's playbook is: Use their own e-commerce scale to bootstrap something, then open up the platform to third parties, then operate at a loss or break-even for a while to get maximum growth, and once enough scale has been reached and/or competitors are out of business, start making a profit (and use it to finance another startup elsewhere in the company).

 

So right now, the distribution business might get financed by profits from AWS and e-commerce, and Amazon can operate it at low, or negative margins for a long time, something that UPS and Fedex won't do, so they might take market share (and if UPS and Fedex lose scale, that makes them even less able to compete, and they don't have another cash cow like AWS to finance themselves).

 

Financed by profits from AWS and e-commerce....but there are no profits from those (or at least no real cash flow after investing costs).

 

There are, they're just being reinvested in growth. Amazon should be looked at as a collection of businesses, some are mature and profitable, and some are startups that aren't profitable yet. The latter are financed by the latter, with the aim of mostly breaking even on the net.

 

It's a sound model, but it makes it very hard to value the business as a whole or understand what is going on under the consolidated numbers.

 

I've always liked Amazon's model (except when they tried to build a premium smartphone -- not playing to their strengths), but I've always had trouble valuing it...

[cmlber]

And AMZN can't possibly offer a lower price than UPS and be profitable.  So either it will never happen, or it will happen and will result in massive value destruction. 

 

Amazon's playbook is: Use their own e-commerce scale to bootstrap something, then open up the platform to third parties, then operate at a loss or break-even for a while to get maximum growth, and once enough scale has been reached and/or competitors are out of business, start making a profit (and use it to finance another startup elsewhere in the company).

 

So right now, the distribution business might get financed by profits from AWS and e-commerce, and Amazon can operate it at low, or negative margins for a long time, something that UPS and Fedex won't do, so they might take market share (and if UPS and Fedex lose scale, that makes them even less able to compete, and they don't have another cash cow like AWS to finance themselves).

 

Come on...  It's more likely that UPS will become the dominant retailer than it is that AMZN beats UPS at logistics.  UPS doesn't need to operate at negative margins to destroy AMZN in logistics.  At break even, AMZN would have to operate with negative 15% operating margins for years just for customers to maybe be indifferent between the two. 

 

And even if AMZN, by some miracle, is able to displace and become the new UPS, UPS' enterprise value is $100bn.  So if that's the end game, congrats, you paid $250bn to one day in the distant future own what is today a $100bn company.

[dwy000]

How is AMZN financing all these plans and massive capex if there is no true economic profit to reinvest? Where is the money coming from?

They are self funding.  But they don't throw off excess cash.  True economic profit is after the capital required to support the business.

[Liberty]

And AMZN can't possibly offer a lower price than UPS and be profitable.  So either it will never happen, or it will happen and will result in massive value destruction. 

 

Amazon's playbook is: Use their own e-commerce scale to bootstrap something, then open up the platform to third parties, then operate at a loss or break-even for a while to get maximum growth, and once enough scale has been reached and/or competitors are out of business, start making a profit (and use it to finance another startup elsewhere in the company).

 

So right now, the distribution business might get financed by profits from AWS and e-commerce, and Amazon can operate it at low, or negative margins for a long time, something that UPS and Fedex won't do, so they might take market share (and if UPS and Fedex lose scale, that makes them even less able to compete, and they don't have another cash cow like AWS to finance themselves).

 

Come on...  It's more likely that UPS will become the dominant retailer than it is that AMZN beats UPS at logistics.  UPS doesn't need to operate at negative margins to destroy AMZN in logistics.  At break even, AMZN would have to operate with negative 15% operating margins for years just for customers to maybe be indifferent between the two. 

 

And even if AMZN, by some miracle, is able to displace and become the new UPS, UPS' enterprise value is $100bn.  So if that's the end game, congrats, you paid $250bn to one day in the distant future own what is today a $100bn company.

 

Amazon is already a logistics company. They just keep expanding what they do year after year, little by little. They're not going after everything UPS does right away, but it's definitely something they're looking at.

 

Tell someone in 2006 that some online book and CD seller would be the main internet infrastructure company in ten years and it would've sounded pretty far-fetched too.

[Liberty]

How is AMZN financing all these plans and massive capex if there is no true economic profit to reinvest? Where is the money coming from?

They are self funding.  But they don't throw off excess cash.  True economic profit is after the capital required to support the business.

 

It's a dial that can be turned up or down. If they stopped investing as much in growth and just did maintenance + some more modest growth capex, I'm pretty sure that they wouldn't be breaking even anymore but would have a surplus. The problem is that this is very hard to prove, because as I said, we don't have visibility into all the P&L centers inside Amazon. Hard to know what kind of ROIC they're getting over the long term. The company will be controversial with investors as long as they maintain this model.

[Palantir]

How is AMZN financing all these plans and massive capex if there is no true economic profit to reinvest? Where is the money coming from?

They are self funding.  But they don't throw off excess cash.  True economic profit is after the capital required to support the business.

 

Yes, but they are spending to grow the business in addition to supporting it. So there would be economic profit if they only stood to support the business. All in all, there has to be a source of cash for all these growth initiatives.

[dwy000]

How is AMZN financing all these plans and massive capex if there is no true economic profit to reinvest? Where is the money coming from?

They are self funding.  But they don't throw off excess cash.  True economic profit is after the capital required to support the business.

 

Yes, but they are spending to grow the business in addition to supporting it. So there would be economic profit if they only stood to support the business. All in all, there has to be a source of cash for all these growth initiatives.

Exactly.  But now you can never shut off that spend.  It starts to support growth but can never be stopped because it becomes the cost of doing business and remaining competitive.

 

Look at Prime Video.  That's a $2bn annual spend that has helped support the growth of Prime.  But now you can never stop spending that $2bn (and growing due to competition) or your competitive rationale supporting the Prime business goes away.  So now that's not growth spend.  It's just spend.

[KCLarkin]

How is AMZN financing all these plans and massive capex if there is no true economic profit to reinvest? Where is the money coming from?

They are self funding.  But they don't throw off excess cash.  True economic profit is after the capital required to support the business.

 

To be fair, they aren't quite self-funding. Last year, they had these sources of funding:

$2B in stock-based compensation

$2.5B increase in working capital float

$5.1B in new leases

 

They have a wonderful business where capital is supplied by employees, vendors, and customers.

[rkbabang]

Come on...  It's more likely that UPS will become the dominant retailer than it is that AMZN beats UPS at logistics.

 

 

"Come on" indeed.  That has got to be the silliest thing I've read in this discussion.  AMZN is much more likely to put UPS out of business entirely, drive it straight into bankruptcy, than UPS is to become anything that could even be described as a competitor to any of Amazon's other businesses.

 

[cmlber]

Come on...  It's more likely that UPS will become the dominant retailer than it is that AMZN beats UPS at logistics.

 

 

"Come on" indeed.  That has got to be the silliest thing I've read in this discussion.  AMZN is much more likely to put UPS out of business entirely, drive it straight into bankruptcy, than UPS is to become anything that could even be described as a competitor to any of Amazon's other businesses.

 

Good luck with that bet.  There's no chance of either happening, because UPS management likes being profitable and returning cash to shareholders.  But if UPS just wanted to grow top line irrationally, they could enter ecommerce a lot easier than AMZN could enter parcel delivery in a big way.  It's a lot easier to build a website and advertise it then it is to build a network of drop off locations and customers that creates dense delivery routes.  If that was easy, AMZN would have done it already.

[Liberty]

If that was easy, AMZN would have done it already.

 

Who said it was easy?

[ni-co]

I can't recall a single industry where somebody came in operating at breakeven to gather scale and then was able to suddenly raise prices and become consistently profitable. This is like WEB's discussion on the original Berkshire Hathaway.  They'd invest a ton of money to get cost advantage which would last a year until everyone else bought the same machines.  Ultimately it was just a race to the bottom and nobody ever made money again.  This feels similar.  There will never be a point where they can say okay, we are a monopoly and can now raise prices.

 

I would say this is true for nearly every media company. Certainly true for every cable company. True for Facebook & Google…

It's the only sensible strategy in industries where scale gives you a competitive advantage.

[cmlber]

I can't recall a single industry where somebody came in operating at breakeven to gather scale and then was able to suddenly raise prices and become consistently profitable. This is like WEB's discussion on the original Berkshire Hathaway.  They'd invest a ton of money to get cost advantage which would last a year until everyone else bought the same machines.  Ultimately it was just a race to the bottom and nobody ever made money again.  This feels similar.  There will never be a point where they can say okay, we are a monopoly and can now raise prices.

 

I would say this is true for nearly every media company. Certainly true for every cable company. True for Facebook & Google…

It's the only sensible strategy in industries where scale gives you a competitive advantage.

 

The quality of Amazons business is in no way similar to the quality of Facebook or Google.

 

Facebook has massive network effects that Amazon doesn't have.  A social network is useless unless everyone else is using it. 

 

Google is free.  Much easier to form a habit as a consumer when there is no price for the service.  If I make the same user experience as Amazon and charge 2% less, the average consumer will switch.  If I make the same user experience as Google, nobody will care because it's already free and they use it multiple times a day and it's good enough to form a habit.  Scale is also much more important in search, so odds are I could never provide the same user experience as Google.

 

Scale is a nice word, but what exactly does it allow Amazon to do that others can't?  It's not delivery.  Maybe it's something else I'm unaware of, but I think the right answer is probably nothing.  But I guess we'll see who's right in ten years.  I hope it's you.

[winjitsu]

I can't recall a single industry where somebody came in operating at breakeven to gather scale and then was able to suddenly raise prices and become consistently profitable. This is like WEB's discussion on the original Berkshire Hathaway.  They'd invest a ton of money to get cost advantage which would last a year until everyone else bought the same machines.  Ultimately it was just a race to the bottom and nobody ever made money again.  This feels similar.  There will never be a point where they can say okay, we are a monopoly and can now raise prices.

 

I would say this is true for nearly every media company. Certainly true for every cable company. True for Facebook & Google…

It's the only sensible strategy in industries where scale gives you a competitive advantage.

 

Sorry -- without having read too much of the rest of this thread, I would argue that Amazon's competitive advantage is switching costs (customer stickiness), primarily from Prime members.

I'm thinking of the roll-outs of 1 or 2 day prime shipping and the shift from distribution centers closer to the cities. Also keep in mind their recent acquisition of last-mile package delivery in Europe (I think UK?) and the recent freight plane purchases. I believe this distribution network is where the competitive advantage lies (not to mention Kiva...). I see UPS has been discussed, but clearly Amazon is on the offensive.

 

I would imagine the future, competitors could be able to keep Amazon in check with similar prices, but Amazon wins via convenience and customer habits. I myself am guilty of this as I have prime and its my go-to place to buy things now -- I rarely price check with other sites. So their profit would be excess margins via distribution efficiency over competitors, not due higher prices (now that I've typed this out ... kind of reminds me of Walmart back when they were expanding).

 

Anybody know how Jet.com is doing? Haven't heard anything from them in a while but basically raised $1bn + in capital in attempts to tackle Amazon head, but this was back in the unicorn bubble era a year or two ago. Their success/demise should point to whether Amazon has an advantage or not. 

[DCG]

Jet certainly seems to be advertising pretty heavily on TV.

[dwy000]

I can't recall a single industry where somebody came in operating at breakeven to gather scale and then was able to suddenly raise prices and become consistently profitable. This is like WEB's discussion on the original Berkshire Hathaway.  They'd invest a ton of money to get cost advantage which would last a year until everyone else bought the same machines.  Ultimately it was just a race to the bottom and nobody ever made money again.  This feels similar.  There will never be a point where they can say okay, we are a monopoly and can now raise prices.

 

I would say this is true for nearly every media company. Certainly true for every cable company. True for Facebook & Google…

It's the only sensible strategy in industries where scale gives you a competitive advantage.

 

I think that's apples and oranges.  None of those companies came in with a strategy of underpricing the competition and forgoing profits with a goal of changing the business model and raising prices later.  Facebook and Google have always been higher priced than the competition (as has cable vs satellite).

[nsx5200]

Amazon's 'competitive advantage' is not their retail operation.  I don't have the articles to back me up, but Bezo has more of less stated many times in the past the long-term plan for Amazon.  They're trying to build the go-to online retail infrastructure for the world.  Their ultimate goal is not to be THE RETAILER, but rather the infrastructure that all the other retailers use to sell stuff to you.

 

This is evident in the way they have built up, and opened up the infrastructures.  The retail operations is, in a way, a 'demo' of that retail infrastructure.  This is all seen in the way they partner(at least they used to) with traditional retailers like Toys'R US to be their online store front.  They have since opened up that infrastructure, even including their customer service with their 'fulfilled by Amazon'.  That explains why they're willing to such a small profit on the retail operations, not because they're nice, but because they're trying to demo the platform.

 

On the side, they're more or less experimenting with different ideas to see how they might be bolted onto the overall infrastructures.  Some will flop, but some seems to have succeeded (Kindle).  Whatever it may be, they're trying to find whatever method to open up a retail portal to people's homes so that other retailers can take advantage of that and use that to sell stuff to you.  That is their dominate strategy.

 

Other than that, I have no further insight into Amazon's goals and operation.  When I go to Walmart, I still see the parking lots packed full of cars, and all those physical goods has to be physically moved.  I don't know how this will play out in the end, but Walmart is at a minimum halfway a cigarette butt.

 

disclosure: I'm a long-time owner of Walmart stocks, but none of Amazons.