AMZN - Amazon.com Inc.

[txlaw]

ajc, great post. 

 

AMZN continues to push the limits on automating these warehouses and distribution centers, which I think means that they are probably building the lowest cost facilities out there.  Just one of the reasons why I think AMZN has a big moat.

 

Check out AMZN's wholly owned subsidiary, Kiva Systems:

http://www.kivasystems.com/

 

I should add lowest cost, for now, though.  AMZN moat is big, but wait till the big guys make their assault.

 

One wonders how much it will take for the likes of WMT, TGT, and others to start converting their own distribution centers to be more automated.  They can certainly use their prodigious cash flows to do so.  And then they could have an advantage because they will also have local points of distribution that AMZN can't replicate . . . unless AMZN partners with someone locally.

 

I believe GOOG is piloting some partnerships with the older school retailers to provide a competing solution.  That's something to watch.

[Grenville]

Interesting tidbit in this article about Kiva after the Amazon acquisition.

 

Shortly after the completion of Dansko’s system, Amazon.com acquired Kiva. “We lucked out in our timing,” says Curry explaining that Amazon would not permit Kiva to take on any new jobs until their own warehouses were equipped with Kiva systems.

 

"Robots in southern Chester County? Yes."

http://www.unionvilletimes.com/?p=17535

---

 

From what I understand, most of Amazon's warehouses don't use the Kiva robots, but follow AJC's post. On the other hand Quidsi companies like Diapers.com are all on the Kiva system. They may be the ones the article above refers to.

[ItsAValueTrap]

I think Walmart has been working on improving their warehouses for years.  They failed several years ago with using RFID instead of barcodes.

 

http://www.smartplanet.com/blog/pure-genius/did-wal-mart-love-rfid-to-death/7459

 

Every company is improving their technology and their business processes.  Retail (both online and B&M) seems like a treadmill.  You have to run just to stay in the same place.

[JAllen]

@hellsten

 

"I wonder how much of $278 million is technology? I guess Wal-Mart and Sears don't have to spend $278 million per warehouse to compete, but they definitely have to upgrade the technology."

 

Good point, on this and the management (which with retail, tech and a few others is more key than usual I think).

I'm spit-balling this, but from the warehouse and distribution chapters in Sam Walton's autobiography (which is admittedly dated) and from my own experience, having worked in one of Amazon's UK warehouses, I'd say there are big differences between most of the warehouses that WalMart and Sears own and Amazon's.

 

For example, as far as I'm aware your typical warehouse for distribution to stores is done on a pallet-by-pallet basis.

So the manufacturer, will drop a truckload full of pallets of the same product at one end of the warehouse into the recieving dock.

This gets scanned, logged, etc. A forklift then takes it to the 4 or 5 level high storage bay where they park it in a barcoded section and then go back for another load.

 

At the same time, stores are sending in their requirements and so another bunch of forklift drivers from the dispatch section will be sent by computer to individual pallets of x product from that same storage bay and deliver those to your distribution trucks that are sat waiting at the other end of the warehouse.

Essentially then, trucks full of the same pallets arrive on one end and trucks leave on the other end all with a variety of pallets for the stores they're going to.

That right there is a very basic inventory/distrbution system which even though it was revolutionary when computers were added to stores, warehouses and suppliers 30 years ago is very different to what Amazon are doing.

 

This is where I'm speculating but my guess is that the vast majority of WalMart's warehouses are still of this variety because that's by far the primary way they sell their products.

 

Amazon on the other hand is far more complex.

To answer your question about how much of that is technology, I'd guess between 80 and 90 percent (so $220m to $250m or so). If you ever go inside one, you'll know why.

The place is basically an empty aircraft hangar the size of 3 or 4 football fields. The first quarter is the loading and receiving section.

The trucks full of pallets come in (I'd say about half are all the same product and half are mixed products) and the forklift drivers drop them next to a line of receivers all with their own computer, scanner and totes.

All those folks then need to process about 200 items per hour which involves deboxing all the products, scanning the barcode so it's logged and placing about 10 or 20 into each tote.

 

Once, that's done you scan the tote which has its own unique barcode and then push it onto the conveyor. So then, the system knows that tote XYZ500001 has precisely 16 items in it and what those items are.

Now, the conveyor takes the totes along and up to your 5 level storage facility which is full of packers.

The packers all have trolleys which have space for 2 totes and they take them off the conveyor, scan their first tote, then the first product and their handheld tells them to go to row14A shelf Q4. They do that, scan the shelf, scan the product, place it there, press enter and then repeat the procedure.

 

This storage part takes up 2 football fields worth. In this same storage space you have pickers going round also with trolleys, scanners and empty totes. Every time you or I click 'place order' online that gets routed to the closest warehouse and goes in line and will appear shortly on the scanner of a picker who will then take their trolley to whichever shelf the system directs them to, scan the shelf and product and put it into their already scanned tote.

Once their 2 totes are full, they go to the conveyors on the opposite side of the storage space and put it on (packers and pickers have to hit about 120 or 150 per hour by the way, if I remember right - more ground to cover).

 

Anyway, that conveyor goes down to packing which takes up 75% of the final football field.

Here, the totes back up on the conveyor belt and the packers walk to the end of their line and have to drag a few each to their station so there's not too much of a jam and then they have a bunch of different size packaging boxes for books, dvds, etc.

On their screens an order appears with say 3 items (which the system will have ensured are all in the same tote that's come down from the storage levels) and then they'll decide which box fits best and pack them up, the machine next to them prints a barcoded sticker and they slap that on, then in front of them there's another conveyor and they put the box onto it and it rolls away.

 

That conveyor then takes the boxes overhead and across to the final 25% of the last football field and as the boxes travel on the conveyor they get their barcodes scanned by sensors along the way so the system knows where to post them. The conveyor at this point links up with a new conveyor which has flat panels that can tilt to one side.

All the parcels, etc go individually onto one of these panels on the new conveyor belt which travels overhead this small distribution section in a sort of scrunched-up circular pattern (not sure if you ever played a PC-game called snake where you sometimes had to double back again and again not to be killed but it's something like that).

 

So then, there are about 100 wheeled-cages for different towns, suburbs, etc and whenever a box gets to the correct spot on the matrix then the panel flips and the box slides down the steel chute and lands in the cage.

When the cage fills, it's replaced by someone and they take that cage off to the truck in dock H and when that truck is full of parcels for its area it goes off and gets replaced by an empty one.

 

Anyway, you get the idea!  :D

Automation is key in an Amazon warehouse during every step whereas my understanding of regular warehouses like the ones they had across the road from the Amazon one for Bath and Home or whatever are that they still used the old pallet-in pallet-out system and if I'm not mistaken (though I'm open to correction) that is essentially the standard worldwide.

You can see however that Amazon is a completely different animal and frankly, without the technology it'd not be anywhere near as widely used.

 

Don't get me wrong, the people there work a real shift everyday/night but without the inventory system, computers, conveyors and scanners which dominate the place it's my opinion that the process would require way, way more people or alternatively would be nowhere near as quick (same day or next day delivery would be out of the question on a wide-scale without that specific technology and machinery I think it's safe to say).

 

Finally, the reason I attach such a high probability to the major cost of the technology is that besides that the warehouse is pretty much empty except for 10 or so basic offices and conference rooms, 4 bathrooms and 2 breakrooms with a small food counter in each.

That's it, lights - yes but no aircon, just concrete floors, loads of metal, etc.

Very much like a warehouse, surprisingly enough!  ;D

 

Okay, long answer I know but hopefully it's been somewhat useful.

 

Short answer is yes, you're totally right there would be upgrade costs and they'd probably be substantial since there's the actual technology and machinery costs which Amazon pays and then there's the intellectual property aspect which they'd all have to earn the hard way.

(I could've just said that in the beginning, but this has been way more fun!)

 

Thanks so much for this post AJC! 

 

And by the way: Is anyone long AMZN?

[Guest valueInv]

I don't think Amazon's moat is as impenetrable as many think.

 

I think there are a lot of retailers that will be willing (or forced) to take a hit on gross margin to stay relevant. See e.g. this article today from the Wall Street Journal http://blogs.wsj.com/corporate-intelligence/2013/08/19/a-problem-for-jeff-bezos-the-mall-is-becoming-cheaper-than-amazon/?mod=WSJ_hppMIDDLENexttoWhatsNewsSecond.

 

Interesting, they're turning the screws on Amazon just as it levers up.

[link01]

I don't think Amazon's moat is as impenetrable as many think.

 

I think there are a lot of retailers that will be willing (or forced) to take a hit on gross margin to stay relevant. See e.g. this article today from the Wall Street Journal http://blogs.wsj.com/corporate-intelligence/2013/08/19/a-problem-for-jeff-bezos-the-mall-is-becoming-cheaper-than-amazon/?mod=WSJ_hppMIDDLENexttoWhatsNewsSecond.

 

a follow up article provides more balance:

 

<<Market Track, a retail pricing intelligence firm, keeps tabs on pricing across the industry, and its data suggests that Amazon is still broadly cheaper than its competitors. A couple of examples the company dug up for us today: Over the last 30 days, in a sample of the top-selling items in Amazon’s Bakeware / Cookware section, the site was beaten on price on only 9% of the items.

 

Put another way, 91% of the time you wouldn’t find it cheaper anywhere else. In the treadmills and elliptical trainers section of the site, its top sellers were beaten on price 11% of the time.>>

 

http://blogs.wsj.com/corporate-intelligence/2013/08/20/live-from-the-front-lines-of-the-amazon-price-war/?mod=yahoo_hs

 

[Grenville]

 

And by the way: Is anyone long AMZN?

 

I'm long, but it's a very small position.

[Guest valueInv]

The herd moves:

 

http://venturebeat.com/2013/08/08/trust-him-hes-rich/

http://www.asymco.com/2013/08/07/the-anti-apple/

[txlaw]

And by the way: Is anyone long AMZN?

 

I'm not -- too expensive.  However, I think Bezos might be the best CEO we have in the US, so I like watching what the guy does. 

 

One thing that I believe critics have completely wrong about AMZN is their contention that it makes no profits.  AMZN almost certainly makes profits.  It's just that all those dollars are being reinvested as growth expenditures, which is obscuring AMZN's profitability in the P&L and CF statements.

 

Most of AMZN's capex is growth capex, and the SG&A and R&D lines are increasing at rapid rates because Bezos is investing for growth.  Depending on the return that Bezos is getting on those expenditures, it makes sense for him to do this.  If he is getting 30% long term returns on invested capital, then it makes sense for him to invest every dollar that comes in, so long as the financial profile of the business isn't harmed.

[link01]

And by the way: Is anyone long AMZN?

 

I'm not -- too expensive.  However, I think Bezos might be the best CEO we have in the US, so I like watching what the guy does. 

 

One thing that I believe critics have completely wrong about AMZN is their contention that it makes no profits.  AMZN almost certainly makes profits.  It's just that all those dollars are being reinvested as growth expenditures, which is obscuring AMZN's profitability in the P&L and CF statements.

 

Most of AMZN's capex is growth capex, and the SG&A and R&D lines are increasing at rapid rates because Bezos is investing for growth.  Depending on the return that Bezos is getting on those expenditures, it makes sense for him to do this.  If he is getting 30% long term returns on invested capital, then it makes sense for him to invest every dollar that comes in, so long as the financial profile of the business isn't harmed.

 

I saw a youtube interview with Bezos where he said amazon avg new growth venture initiatives take between 5 to 7 years to scale & bear fruit. during that time they generally make losses. when I think about that it boggles the mind. a minimum of 5 years worth of loss making new growth initiatives is a whole lot of baggage heaped onto the mature businesses! and not only the capex part of it. think about the employee hires for those new ventures. that & some other stuff doesn't show up in capex, it probably shows up in their gross margins (cost of sales). all kinds of things are weighing on amazons bottom line, more than you would think at first blush. I believe amzn has some serious earnings power hidden under the hood

[Guest ajc]

@Liberty and JAllen

 

Glad I could contribute.

 

Don't own any, but if the price dropped 20 to 30 percent I'm thinking seriously of making it a 5% position.

The fact that it's in retail means I want to limit it - no matter how great the idea might seem.

 

@Grenville

 

Spot on, there's no Kiva robots in most Amazon warehouses as far as I'm aware.

They sure are darn interesting though (at least if that clip on their site and the link you posted are anything to go by).

 

@ItsAValueTrap

 

Agreed.

Your point brings two things to mind.

One is that I don't want to make any retailer a large holding, and the other is that leadership matters more in retail (and technology) I think than in most other places because of what you're describing.

Eventually, whether it's Sam Walton's autobiography or Behind The Arches or Nebraska Furniture Mart I find the common theme is always that the people who hustle the hardest and the most (and in retail I'd say that means almost killing yourself) as well as focusing on a few big ideas end up winning while everyone else only gets to pick up the pieces.

 

For what it's worth, my own take on the 4 investing filters (ie. an industry you understand, able and honest management, durable competitive advantage and a fair price) is that "able and honest management" actually needs to read "able, honest, fanatical and visionary management" in those industries and then I give it a 30 to 40 percent weighting in the overall equation because it's just so key.

That's the way I look at it anyhow...

 

@JHelg

 

I think link01 and txlaw made a valid rebuttal to your link with their posts (txlaw's being the one 3 comments below link01's).

 

[Guest ajc]

@valueInv

 

Again (as with JHelg), I'm not sure I buy the "turning the screws" argument.

 

My understanding is that Amazon charges what they do these days because they no longer need to be a discount seller.

When they were a start-up then sure that was necessary to build a base as well as trust, but now they're just another mainstream retailer and so they sell at just enough of a discount to still bring everyone in though they try and make as much profit as they can so they have the cash with which to increase their global warehouse and distribution capacity.

 

As far as those two articles go, I'm not sure what point they're trying to make but I think they both fail to say anything of substance.

Don't get me wrong, they're well-written and fancy and would do great in a university newspaper or some such thing but in the real world my guess is if those were in print then that'd be the first thing people reached for if and when the toilet paper ever ran out (neither of them would ever run in a serious science or technology publication).

 

So... we may have to agree to disagree on the similarities between the handset/software world and a logistical distribution network/retailer which just happens to use robots as do Amazon.

 

Appreciate the critical viewpoint though - cheerleading parties are to be avoided, on that we undoubtedly see eye to eye.

 

[Guest ajc]

@txlaw

 

Very cool, thanks for that Kiva post and plus 1 on the best CEO, capex/profit margin situation and that it probably looks too expensive right now (I'm waiting for around 8 or 9 times BV myself).

 

Two things to add to the stuff you've already said.

First, from that Kiva site it's not much of a stretch to think that Amazon could automate the entire storage, picking, packing and shipping sections of their warehouses in the future and so instead of using 1000 people per shift they could use 250 or so and the work would also get done at a quicker speed.

The reasoning behind that thought is that the major obstacle they had when I was there was in the first stage where they got the stuff off the trucks and were logging the various products into the system.

 

One thing they'd started doing before I left was getting the exact dimensions of every product scanned in so they could recommend boxes, but presumably once the system has that info then new pallets that arrive could conceivably be picked apart by robotic arms with scanners on them which enter them into inventory, store them on those moving units, order comes through online, specific unit gets located by Kiva robot, takes storage unit to packing section, another robot arm scans and places it into a packing machine, packing machine puts wrapped article onto conveyor, conveyor spills package into correct bin, once full the bin gets replaced and moved onto waiting truck by another Kiva robot and you'd basically have a completely automated system except for the technicians who fix the belts, robots and maintain the system hardware and software.

Just an idea, but the necessary tools all seem to be there.

 

As far as a WalMart assault goes, it'll be interesting for sure. I'm skeptical that they'll win it, but clearly they'll give it a shot.

On the one hand, I wonder whether they'd choose to convert their distribution centers or build fresh and run alongside because I think they still need those in their current form and capacity for their B&M stores.

Then, as they become more of an online entity they'll need to shut stores and warehouses and lay people off. There might be alot of pain there and when do you close the B&M stores and how many, and how does the public and Wall Street react, etc, etc?

 

Something that valueInv (whose posts I may or may not have been slightly over-critical of) had in one of those articles was a comment about the ability of corporations to turn on a dime which effectively said that they couldn't and to some extent I agree though in the case of large-scale retail I think that goes to Amazon's advantage.

Can WalMart change its deeply-held approach to retail while Amazon uses a modern take on the age-old customer-first strategy? My tendency is to say it's pretty unlikely because it's a new format which Amazon has created and has a 15-year head start in intellectually and logistically.

 

And this is also why I disagree with what the "Trust Him He's Rich" article states because the writer unfortunately has some imagined artsy mental creation where the nuts and bolts nature of what Amazon does happen to not exist.

Bezos has quite obviously changed retailing just like Sam Walton did before when folks used to have to go to a bunch of different shops for all their items and to me anyway, that should necessarily be factored in.

 

I think now that Sam Walton's passed and his successors have left - for me the company (any company, but especially retail, tech, maybe a few others) loses that passion after the 2nd generation.

I'm not saying it starts to suck or anything but this goes back to the leadership issue, for me it's more important in these industries than in others because of the drive and near fanaticism as well as creativity and discipline that it requires to build it from scratch and this is something I think a number of people (yourself and other commenters included) apparently realize about Bezos.

 

Anyway, I could go on for some time and no doubt I eventually will but I'll leave it there for now.

Thanks for the insights and links and hopefully this thread will steer clear of some of the blustery and personal momentums that've unfortunately sometimes been present on some other threads.

I mean, it obviously just happens to look like a very interesting company, where if anyone puts their preconceptions aside and gives the thesis a chance (and of course if the price is right) then it wouldn't be at all surprising to me if this turned out to be a reasonably profitable investment idea over the next 2 to 3 decades.

 

Regards. 

 

 

 

[Guest ajc]

One wonders how much it will take for the likes of WMT, TGT, and others to start converting their own distribution centers to be more automated.  They can certainly use their prodigious cash flows to do so.  And then they could have an advantage because they will also have local points of distribution that AMZN can't replicate . . . unless AMZN partners with someone locally.

 

I believe GOOG is piloting some partnerships with the older school retailers to provide a competing solution.  That's something to watch.

 

Just to add on the topic of Google. I see them assisting with online ordering, mapping and so on but in my view AMZN has this 15 to 20 year head start with all of the thinking and systems and on top of that, it's their main focus.

GOOG might be able to help others with some aspects, but those corporations will have to do some serious heavy lifting and institutional transformation to be as useful in online retail as Amazon are from my perspective.

 

Here's something that struck me. Is there anyone in the WalMart organization today who has the sway and gumption to say to the company that they need to stop building stores right now in new locations and go into online retailing with all their profits immediately so that they can see off Amazon at the pass before Bezos and Co even get through?

 

As far as I know (which admittedly isn't much), that's not happening. WalMart is doing things their way and the institution supports that. Amazon isn't. Clearly.

 

In my view, Bezos has clearly grasped the idea that retailing (and its history) is about the transfer of items from production plant to an individual's personal possession - or in the case of Fresh from farm to human belly.

So Walton revolutionizes it earlier right by seeing that some towns only had a butchers, hardware store, clothing store and liquor store say.

If you wanted a bike for your kids, you had to head to the city and get one at the sports shop or if you wanted a TV you had to do the same.

Effectively, he moved those products closer to everyone than they ever were before and he obviously did it with speed, cheaply and with standards.

Result? WalMart succeeds mightily.

 

To me, that's still the standard everywhere (Walmart, Costco, etc) and I don't see that model going away - which may make it much tougher for them to adapt because it's perhaps too uncomfortable - but Amazon have realized that the final step is to actually get that stuff quickly, cheaply and with quality onto their doorsteps.

Not 10 miles away at the next turn-off. Not 500 yards away which most people could easily walk. Right there, in their hands without them having to move off the sofa (#Murica all the way!).

And the world is ready for it because techology and material advancement means it's now deliverable from point A all the way to point B instead of from A almost to B.

 

So, Amazon is busy building that and that's their central and main priority. No B&M, just you click and that afternoon or the next day it's there without you going out.

My opinion is that WalMart and others are underestimating the laziness and love of convenience that the average American (and global) consumer has and the only people who're dead serious about satisfying that craving right now and probably for the past decade at least are Amazon.

 

Yeah, so when the housewife preparing for tomorrow's dinner party doesn't want to go out in rush hour traffic and instead gets to type in a product and delivery time with Amazon then they get her business.

She can spend the time she would've used getting her nails done.

 

Or, when the shift worker gets home at 3am and is tired and needs that new set of headphones for the weekend roadtrip he's going on the day after tomorrow, he types in the item and suitable pickup time on Amazon and he knows it'll be at the door at 11am exactly just before they set off - they get his business.

 

I may be wrong, but I don't think the traditional retailers understand how important that last few miles actually is and how painful it will be for them when someone (Amazon probably) cracks that space with enough speed, quality and affordability to make it worth being lazy over.

 

My 1 and a 1/4 pennies worth...

 

(All that said, I still think 5% is the maximum portfolio weighting I'd like to give to any retailer - even a game-changing one...)

[txlaw]

@txlaw

 

Very cool, thanks for that Kiva post and plus 1 on the best CEO, capex/profit margin situation and that it probably looks too expensive right now (I'm waiting for around 8 or 9 times BV myself).

 

Two things to add to the stuff you've already said.

First, from that Kiva site it's not much of a stretch to think that Amazon could automate the entire storage, picking, packing and shipping sections of their warehouses in the future and so instead of using 1000 people per shift they could use 250 or so and the work would also get done at a quicker speed.

The reasoning behind that thought is that the major obstacle they had when I was there was in the first stage where they got the stuff off the trucks and were logging the various products into the system.

 

One thing they'd started doing before I left was getting the exact dimensions of every product scanned in so they could recommend boxes, but presumably once the system has that info then new pallets that arrive could conceivably be picked apart by robotic arms with scanners on them which enter them into inventory, store them on those moving units, order comes through online, specific unit gets located by Kiva robot, takes storage unit to packing section, another robot arm scans and places it into a packing machine, packing machine puts wrapped article onto conveyor, conveyor spills package into correct bin, once full the bin gets replaced and moved onto waiting truck by another Kiva robot and you'd basically have a completely automated system except for the technicians who fix the belts, robots and maintain the system hardware and software.

Just an idea, but the necessary tools all seem to be there.

 

As far as a WalMart assault goes, it'll be interesting for sure. I'm skeptical that they'll win it, but clearly they'll give it a shot.

On the one hand, I wonder whether they'd choose to convert their distribution centers or build fresh and run alongside because I think they still need those in their current form and capacity for their B&M stores.

Then, as they become more of an online entity they'll need to shut stores and warehouses and lay people off. There might be alot of pain there and when do you close the B&M stores and how many, and how does the public and Wall Street react, etc, etc?

 

Something that valueInv (whose posts I may or may not have been slightly over-critical of) had in one of those articles was a comment about the ability of corporations to turn on a dime which effectively said that they couldn't and to some extent I agree though in the case of large-scale retail I think that goes to Amazon's advantage.

Can WalMart change its deeply-held approach to retail while Amazon uses a modern take on the age-old customer-first strategy? My tendency is to say it's pretty unlikely because it's a new format which Amazon has created and has a 15-year head start in intellectually and logistically.

 

And this is also why I disagree with what the "Trust Him He's Rich" article states because the writer unfortunately has some imagined artsy mental creation where the nuts and bolts nature of what Amazon does happen to not exist.

Bezos has quite obviously changed retailing just like Sam Walton did before when folks used to have to go to a bunch of different shops for all their items and to me anyway, that should necessarily be factored in.

 

I think now that Sam Walton's passed and his successors have left - for me the company (any company, but especially retail, tech, maybe a few others) loses that passion after the 2nd generation.

I'm not saying it starts to suck or anything but this goes back to the leadership issue, for me it's more important in these industries than in others because of the drive and near fanaticism as well as creativity and discipline that it requires to build it from scratch and this is something I realize about Bezos to the same extent that you do (by my reckoning at least).

 

Anyway, I could go on for some time and no doubt I eventually will but I'll leave it there for now.

Thanks for the insights and links and hopefully this thread will steer clear of some of the blustery and personal momentums that've unfortunately sometimes been present on some other threads.

I mean, it just happens to look like a very interesting company, where if anyone puts their preconceptions aside and gives the thesis a chance (and of course if the price is right) then it wouldn't be at all surprising to me if this turned out to be a reasonably profitable investment idea over the next 2 to 3 decades.

 

Regards. 

 

 

Can't disagree with much of what you said.

 

And I love your willingness to share your insights into AMZN ops.  Thanks, ajc.

[txlaw]

Over the weekend, I spoke to a friend of mine who works at a company that provides an OpenStack PaaS solution. 

 

He thinks that AMZN is probably making ridiculous margins on AWS.  The fact of the matter is that AWS is very expensive, and anyone who has scale is better off owning rather than renting computing resources from the likes of AMZN.

 

Food for thought wrt public clouds vs. private clouds.

[Guest valueInv]

@valueInv

 

Again (as with JHelg), I'm not sure I buy the "turning the screws" argument.

 

My understanding is that Amazon charges what they do these days because they no longer need to be a discount seller.

When they were a start-up then sure that was necessary to build a base as well as trust, but now they're just another mainstream retailer and so they sell at just enough of a discount to still bring everyone in though they try and make as much profit as they can so they have the cash with which to increase their global warehouse and distribution capacity.

 

As far as those two articles go, I'm not sure what point they're trying to make but I think they both fail to say anything of substance.

Don't get me wrong, they're well-written and fancy and would do great in a university newspaper or some such thing but in the real world my guess is if those were in print then that'd be the first thing people reached for if and when the toilet paper ever ran out (neither of them would ever run in a serious science or technology publication).

 

So... we may have to agree to disagree on the similarities between the handset/software world and a logistical distribution network/retailer which just happens to use robots as do Amazon.

 

Appreciate the critical viewpoint though - cheerleading parties are to be avoided, on that we undoubtedly see eye to eye.

 

If they are no longer the discount retailer, why are they losing money?

[ItsAValueTrap]

Sam Walton did before when folks used to have to go to a bunch of different shops for all their items and to me anyway

 

Other countries have hypermarts/hypermarkets.  Sam tried to bring that format to America and it failed, though it morphed into the larger wal-mart format (the wal-mart supercenter). 

 

Wal-Mart versus Amazon:

Maybe there are reasons why Wal-Mart may not win the online game.  Their distribution centers and warehouses may be setup in a way that is good for bricks and mortar retailing, but not so much for online.

 

They also charge sales tax.

[Grenville]

Good talk with Amy Villeneuve, COO of Kiva Systems. The talk is more about her and her background and not so much about the company.

 

 

She joined Kiva in 2010. The company hit 100mln in sales in 2011 and is now at 399 employees in 2013, up 120 from a year ago.

[Guest valueInv]

Over the weekend, I spoke to a friend of mine who works at a company that provides an OpenStack PaaS solution. 

 

He thinks that AMZN is probably making ridiculous margins on AWS.  The fact of the matter is that AWS is very expensive, and anyone who has scale is better off owning rather than renting computing resources from the likes of AMZN.

 

Food for thought wrt public clouds vs. private clouds.

 

Firstly, Amazon has dropped prices is a big way in  price war with MSFT and Google the last few months.

Secondly, others seem to be gaining ground:

 

http://gigaom.com/2013/08/21/more-proof-that-amazon-still-leads-the-iaas-pack-but-watch-out-for-those-other-dogs/

[Guest ajc]

If they are no longer the discount retailer, why are they losing money?

 

So, I'll just direct you to txlaw's post from a few comments earlier (Aug 21st, 08h26) which essentially answers your question.

 

Regards.

[Guest ajc]

Other countries have hypermarts/hypermarkets.  Sam tried to bring that format to America and it failed, though it morphed into the larger wal-mart format (the wal-mart supercenter). 

 

Wal-Mart versus Amazon:

Maybe there are reasons why Wal-Mart may not win the online game.  Their distribution centers and warehouses may be setup in a way that is good for bricks and mortar retailing, but not so much for online.

 

They also charge sales tax.

 

From "Made In America"?

Great read, right.

 

I'm largely of the same opinion, I think Wal-Mart and others will eventually have to do something game-changing but if they leave it much longer I think it could only be good enough for 2nd or 3rd place.

 

I've also read recently that Amazon will start paying more and more sales tax in the coming years, so perhaps fortunately for their competitors that advantage is now slowly starting to erode.

 

Cheers.

[Guest valueInv]

@txlaw

 

Very cool, thanks for that Kiva post and plus 1 on the best CEO, capex/profit margin situation and that it probably looks too expensive right now (I'm waiting for around 8 or 9 times BV myself).

 

Two things to add to the stuff you've already said.

First, from that Kiva site it's not much of a stretch to think that Amazon could automate the entire storage, picking, packing and shipping sections of their warehouses in the future and so instead of using 1000 people per shift they could use 250 or so and the work would also get done at a quicker speed.

The reasoning behind that thought is that the major obstacle they had when I was there was in the first stage where they got the stuff off the trucks and were logging the various products into the system.

 

One thing they'd started doing before I left was getting the exact dimensions of every product scanned in so they could recommend boxes, but presumably once the system has that info then new pallets that arrive could conceivably be picked apart by robotic arms with scanners on them which enter them into inventory, store them on those moving units, order comes through online, specific unit gets located by Kiva robot, takes storage unit to packing section, another robot arm scans and places it into a packing machine, packing machine puts wrapped article onto conveyor, conveyor spills package into correct bin, once full the bin gets replaced and moved onto waiting truck by another Kiva robot and you'd basically have a completely automated system except for the technicians who fix the belts, robots and maintain the system hardware and software.

Just an idea, but the necessary tools all seem to be there.

 

As far as a WalMart assault goes, it'll be interesting for sure. I'm skeptical that they'll win it, but clearly they'll give it a shot.

On the one hand, I wonder whether they'd choose to convert their distribution centers or build fresh and run alongside because I think they still need those in their current form and capacity for their B&M stores.

Then, as they become more of an online entity they'll need to shut stores and warehouses and lay people off. There might be alot of pain there and when do you close the B&M stores and how many, and how does the public and Wall Street react, etc, etc?

 

Something that valueInv (whose posts I may or may not have been slightly over-critical of) had in one of those articles was a comment about the ability of corporations to turn on a dime which effectively said that they couldn't and to some extent I agree though in the case of large-scale retail I think that goes to Amazon's advantage.

Can WalMart change its deeply-held approach to retail while Amazon uses a modern take on the age-old customer-first strategy? My tendency is to say it's pretty unlikely because it's a new format which Amazon has created and has a 15-year head start in intellectually and logistically.

 

And this is also why I disagree with what the "Trust Him He's Rich" article states because the writer unfortunately has some imagined artsy mental creation where the nuts and bolts nature of what Amazon does happen to not exist.

Bezos has quite obviously changed retailing just like Sam Walton did before when folks used to have to go to a bunch of different shops for all their items and to me anyway, that should necessarily be factored in.

 

I think now that Sam Walton's passed and his successors have left - for me the company (any company, but especially retail, tech, maybe a few others) loses that passion after the 2nd generation.

I'm not saying it starts to suck or anything but this goes back to the leadership issue, for me it's more important in these industries than in others because of the drive and near fanaticism as well as creativity and discipline that it requires to build it from scratch and this is something I think a number of people (yourself and other commenters included) apparently realize about Bezos.

 

Anyway, I could go on for some time and no doubt I eventually will but I'll leave it there for now.

Thanks for the insights and links and hopefully this thread will steer clear of some of the blustery and personal momentums that've unfortunately sometimes been present on some other threads.

I mean, it obviously just happens to look like a very interesting company, where if anyone puts their preconceptions aside and gives the thesis a chance (and of course if the price is right) then it wouldn't be at all surprising to me if this turned out to be a reasonably profitable investment idea over the next 2 to 3 decades.

 

Regards. 

 

 

 

Impressive warehouses. I decided to rum some quick, simple numbers to compare Walmart and Amazon:

 

Amazon WMT

Revenues 61093 469162

COGS 45,971 352488

Gross Profit 15122 116674

Operating Expense 14446 88873

Operating Income 676 27801

D&A 2835 8501

Net Income -39 16999

 

PP&E 9582 171724

 

Operating Margin 1% 6%

Net Margin 0% 4%

ROA 2.50% 8.40%

 

Cash 11448 7781

 

Normalized to sales

Operating Expense 24% 19%

D&A 5% 2%

PP&E 16% 37%

 

Normalized to COGS

Operating Expense 31% 25%

 

Couple of things I found interesting:

- Gross margins are the same despite Walmart being infamous for squeezing suppliers, while Amazon being known to sell many items at or below cost

- I would have thought Amazon to be more efficient than Walmart on its operations with is advanced warehouses and all. Yet when you normalize opex to COGS, it seems that Amazon spends 31 cents to sell a dollar of inventory while Walmart spends 25 cents.

 

What am I missing here?

 

[Guest ajc]

Couple of things I found interesting:

- Gross margins are the same despite Walmart being infamous for squeezing suppliers, while Amazon being known to sell many items at or below cost

- I would have thought Amazon to be more efficient than Walmart on its operations with is advanced warehouses and all. Yet when you normalize opex to COGS, it seems that Amazon spends 31 cents to sell a dollar of inventory while Walmart spends 25 cents.

 

What am I missing here?

 

Frankly valueInv, I'm not sure.

I'm actually somewhat new to this business, so you probably know a fair amount more than I do.

 

However, I found a well-written and pretty interesting article on Seeking Alpha - http://seekingalpha.com/article/1385861-amazon-good-business-bad-stock-stay-away-for-now - which compared Amazon's COGS with WalMart's from the first quarter and they were not far apart at all at that time.

I'm wondering (perhaps stupidly) how something like Prime - or their Fresh initiatives, etc - impacts on that?

 

Anyway, that article and some of the comments section are pretty useful I think, and it'd be good to hear your take on it (and anyone else's for that matter) as well as the point you made earlier once you've had an opportunity to weigh the relevant information.

 

Regards.

 

 

[Liberty]

I ordered the Manual of Ideas book yesterday (a sunday). I got it today. That's with free shipping, and I'm in Canada. I don't even know how they did it, there's no mail on weekends here.

 

That's why Amazon keeps getting my business. They have good selection, good prices, and they keep surpassing my expectations.