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Grocery net profits are 1.7%. http://www.fmi.org/research-resources/supermarket-facts http://www.fmi.org/research-resources/supermarket-facts Amazon barely ma

Grocery net profits are 1.7%. http://www.fmi.org/research-resources/supermarket-facts http://www.fmi.org/research-resources/supermarket-facts Amazon barely makes money on retail operations. What is their rationalization in getting into this market?

lotso 10y ago
From the article >“Amazon wants to be the first thing any consumer thinks of when they need to buy anything,” said Jim Hertel, a senior vice president at marketing technology company Inmar Inc. “Food is the largest retail category. They can’t do what they want to do without grocery and they’re definitely not going to give up.” I'd also imagine Amazon thinks they can do much better than a 1.7% margin by leveraging all of the improvements to their approach outlined in the article.
- justaman 10y ago
  2030: Government breaks up Amazon into smaller companies.
  - losteverything 10y ago
    Judge Greene's grandaughter presides over the case. But. One difference was that At&T got something for agreeing (able to sell computers). What is Amazon prevented from doing?????? [1] The case, one of Greene's first after being named to the bench, resulted in the 1982 consent decree between AT&T and the Federal Trade Commission. The consent decree, later amended and usually called the modified final judgment (MFJ), provided for the Bell System divestiture, AT&T's spin off of the seven Regional Bell Operating Companies (RBOCs). The conclusion of the case freed AT&T to enter the computer industry, from which it had previously been barred
  - komali2 10y ago
    Why would that happen? US government appears quite happy to allow massive companies to operate as they please. There hasn't been much "trust busting" since, well, the "trust busting" era, outside of finance anyway.
- saosebastiao 10y ago
  Wildly overconfident cost predictions are amazon's #1 growth market.
petra 10y ago
Margins don't tell whole story of that business.If you start with $100 and sell $100 worth of products each year, than yes, your profit will be 1.7%. But if sell products fast("inventory turnover - TTM") and re-use the money, with $100, you can sell $1000 of product per year,getting 17% yearly ROI. But of course 1.7% is low so it's not easy staying on the positive side of profit.
- strictnein 10y ago
  He mislabeled the stat. Grocery profits are 1.7%, not margins. > Net profit after taxes-2015 1.7%
  - petra 10y ago
    This is net-profit from revenue, i.e. from those $1000 of sold goods. But you only need to invest $100 to buy them.
    - CodeWriter23 10y ago
      No. Sell them then invest another $100 to restock. ROI remains at 1.7%.
      - ryanworl 10y ago
        Your model is too simplistic here. The actual cash leaving Amazon's bank account may not be due to their supplier until 30 or 60 days after delivery. If it takes Amazon 6 days to sell that $100 worth of goods, they can effectively sell $1000 worth of product before that initial cash is due to the supplier if we're talking net 60. This is how a $100 initial cash investment in inventory can produce $17 worth of cash at the end. You use your leverage with lots of small suppliers to force them into offering generous credit. Note: this ignores the fact that these numbers are based on net profit instead of gross profit which would be the actual relevant number here. And the gross profit in groceries is a lot higher than 1.7%.
        10y ago
esMazer 10y ago
would it be possible that if they succeed to create a completely automatic checkout/payment system that the savings would significantly increase the profits in the long run?
Johnie 10y ago
Amazon's business model is all about winning on razor thin margins. They do this by making the cost side more efficient.
ryanworl 10y ago
And why are the net profits 1.7%? What are the major drivers of cost, and how might Amazon be positioned to combat those? Also, Amazon running a business at 1.7% net profit for the sake of keeping existing customers happy and potentially acquiring more of them might be worthwhile.
CobrastanJorji 10y ago
For other companies, I would agree with you, but Amazon is basically allergic to high margin businesses. Their entire business is based around scaling up low margin businesses to be so efficient that nobody can compete with them.
55555 10y ago
I am really skeptical of this. Most retail stores sell at a 1.5X-2X markup from wholesale, and the big grocery chains around me have massive private label businesses. This statistic might be missing the extra profits they get from owning their own food brands as those might belong to separate companies?
- adventured 10y ago
  There have been numerous public grocery store companies over the decades, so the financials are very well understood at this point. They're all notorious for very poor margins. Most of retail in general is famous for mediocre margins to begin with, and then inside of retail, near the very bottom, is the grocery business. Take Whole Foods an an example. They're a top tier margin company inside of the grocery business. Their net income margin is typically 3%. That's a good outcome in the business. The net income margin for Sprouts Farmers Markets the last three years: 2.5%, 3.5%, 3.6%. The retail business in the US also happens to pay among the highest corporate income tax levels on the planet. Whole Foods paid 38.6% last year (almost 39% the year before that); Sprouts paid 37.6%. They get squeezed from almost every direction.

lotso 10y ago

From the article >“Amazon wants to be the first thing any consumer thinks of when they need to buy anything,” said Jim Hertel, a senior vice president at marketing technology company Inmar Inc. “Food is the largest retail category. They can’t do what they want to do without grocery and they’re definitely not going to give up.” I'd also imagine Amazon thinks they can do much better than a 1.7% margin by leveraging all of the improvements to their approach outlined in the article.

justaman 10y ago
2030: Government breaks up Amazon into smaller companies.
- losteverything 10y ago
  Judge Greene's grandaughter presides over the case. But. One difference was that At&T got something for agreeing (able to sell computers). What is Amazon prevented from doing?????? [1] The case, one of Greene's first after being named to the bench, resulted in the 1982 consent decree between AT&T and the Federal Trade Commission. The consent decree, later amended and usually called the modified final judgment (MFJ), provided for the Bell System divestiture, AT&T's spin off of the seven Regional Bell Operating Companies (RBOCs). The conclusion of the case freed AT&T to enter the computer industry, from which it had previously been barred
- komali2 10y ago
  Why would that happen? US government appears quite happy to allow massive companies to operate as they please. There hasn't been much "trust busting" since, well, the "trust busting" era, outside of finance anyway.
saosebastiao 10y ago
Wildly overconfident cost predictions are amazon's #1 growth market.

petra 10y ago

Margins don't tell whole story of that business.If you start with $100 and sell $100 worth of products each year, than yes, your profit will be 1.7%. But if sell products fast("inventory turnover - TTM") and re-use the money, with $100, you can sell $1000 of product per year,getting 17% yearly ROI. But of course 1.7% is low so it's not easy staying on the positive side of profit.

strictnein 10y ago
He mislabeled the stat. Grocery profits are 1.7%, not margins. > Net profit after taxes-2015 1.7%
- petra 10y ago
  This is net-profit from revenue, i.e. from those $1000 of sold goods. But you only need to invest $100 to buy them.
  - CodeWriter23 10y ago
    No. Sell them then invest another $100 to restock. ROI remains at 1.7%.
    - ryanworl 10y ago
      Your model is too simplistic here. The actual cash leaving Amazon's bank account may not be due to their supplier until 30 or 60 days after delivery. If it takes Amazon 6 days to sell that $100 worth of goods, they can effectively sell $1000 worth of product before that initial cash is due to the supplier if we're talking net 60. This is how a $100 initial cash investment in inventory can produce $17 worth of cash at the end. You use your leverage with lots of small suppliers to force them into offering generous credit. Note: this ignores the fact that these numbers are based on net profit instead of gross profit which would be the actual relevant number here. And the gross profit in groceries is a lot higher than 1.7%.
      - 10y ago

esMazer 10y ago

would it be possible that if they succeed to create a completely automatic checkout/payment system that the savings would significantly increase the profits in the long run?

Johnie 10y ago

Amazon's business model is all about winning on razor thin margins. They do this by making the cost side more efficient.

ryanworl 10y ago

And why are the net profits 1.7%? What are the major drivers of cost, and how might Amazon be positioned to combat those? Also, Amazon running a business at 1.7% net profit for the sake of keeping existing customers happy and potentially acquiring more of them might be worthwhile.

CobrastanJorji 10y ago

For other companies, I would agree with you, but Amazon is basically allergic to high margin businesses. Their entire business is based around scaling up low margin businesses to be so efficient that nobody can compete with them.

55555 10y ago

I am really skeptical of this. Most retail stores sell at a 1.5X-2X markup from wholesale, and the big grocery chains around me have massive private label businesses. This statistic might be missing the extra profits they get from owning their own food brands as those might belong to separate companies?

adventured 10y ago
There have been numerous public grocery store companies over the decades, so the financials are very well understood at this point. They're all notorious for very poor margins. Most of retail in general is famous for mediocre margins to begin with, and then inside of retail, near the very bottom, is the grocery business. Take Whole Foods an an example. They're a top tier margin company inside of the grocery business. Their net income margin is typically 3%. That's a good outcome in the business. The net income margin for Sprouts Farmers Markets the last three years: 2.5%, 3.5%, 3.6%. The retail business in the US also happens to pay among the highest corporate income tax levels on the planet. Whole Foods paid 38.6% last year (almost 39% the year before that); Sprouts paid 37.6%. They get squeezed from almost every direction.