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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%.
- 8166284 10y ago
  You're desperately trying to contrive a scenario that does not exist, the rate on buying merchandise and selling it in groceries is still 1.7%. Borrowing money and playing with the time window does not change this.
  - ryanworl 10y ago
    I'm not going write a long explanation about this, but "borrowing money" and "playing with the time window" is the foundation of so many different kinds of businesses I can't list them all.
    - CodeWriter23 10y ago
      Float doesn't change the profit MARGIN.
  - SomeCallMeTim 10y ago
    Real estate appreciates at 4% (on average, but let's say it's constant for the sake of argument). I buy a house that costs $100,000. My down payment (cash out of pocket) is $20,000. I pay 3.5% interest on $80,000 as I'm paying down the loan, plus property taxes and insurance, and it comes to $546.74/month [1]. The rent comes in at $550/month, pretty much canceling out the mortgage. Am I making 4% per year on my investment, then, because that's the amount the real estate appreciates? No, I'm making 4% of $100,000 per year, or $4,000, on my $20,000 investment. That's 20% per year. [2][3] Leverage properly applied can raise your net profit. You're welcome. [1] http://www.mortgagecalculator.org/ http://www.mortgagecalculator.org/ [2] The numbers can realistically be much better than this, given the right circumstances. I am personally using this as an investment strategy, and yes, it doesn't just work this way "in theory." [3] I'm ignoring repairs and vacancy rate for simplicity. Those obviously hurt profitability. But as I mentioned in [2] above, if you pick your investment property strategically, your margins are much higher, so that's your cushion.
mediaman 10y ago
It sounds like there's a lot of confusion here between ROI and margins. ROI is not margin. And there are different types of margin. "Net margin" is the profit from revenue net of not only the cost of merchandise, but all the overhead costs: the cashier, the retail leases, the buyer, accounting staff, management, etc. "Gross margin" is (roughly) the amount made for every additional sale. If you buy apples for $0.80 and sell them for $1, your gross margin is 25%. This gross margin must pay for all the overhead expenses mentioned above. Based on the total number of apples you sell, you may figure you have to cover $0.18 of overhead per apple sold, leaving you with a net margin of 2%. But the important thing to understand is that you aren't actually paying $0.18 more in overhead per apple for every extra apple sold: you're making $0.20 and paying nothing in extra overhead. So increasing volume of sales can substantially improve net margins, if it doesn't take extra overhead. "Return on investment" (ROI) relates to how much capital is required to generate net margins. You absolutely can run a low net margin business that has high ROI. How? You turn inventory like crazy, or better yet, don't have inventory (think drop-shippers). Or you take a long time to pay suppliers, reducing the amount of capital required by the business, and get paid up front by customers. Amazon's market model for third-party sellers ("FBA")would be high ROI even if it were low margin because they do not own the inventory, get paid up front by customers, and then sit on the cash for 90 days before paying the FBA vendor. Hell, I suspect the total capital required for that business is negative. No wonder they're so focused on expanding it! You don't need high margins if your business model throws cash at you. Just keep net margins above zero and you'll be swimming in cash. (Hint for startups: find a business model like that. You won't need VC and you'll get vastly personally richer than one with high margins, but which requires massive capital, and therefore dilutes you as the founder to a pittance.) It is also possible to have a business with high margins but low ROI, if it is extremely capital intensive relative to profits, such as a big manufacturing plant in an industry where it takes them a long time to get paid. I'm not sure what Amazon's plan is. But the fact that the grocery business has low net margins is not a reason not to get into it. It all depends on the economics, which is more complicated than just "low margin."

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%.

8166284 10y ago
You're desperately trying to contrive a scenario that does not exist, the rate on buying merchandise and selling it in groceries is still 1.7%. Borrowing money and playing with the time window does not change this.
- ryanworl 10y ago
  I'm not going write a long explanation about this, but "borrowing money" and "playing with the time window" is the foundation of so many different kinds of businesses I can't list them all.
  - CodeWriter23 10y ago
    Float doesn't change the profit MARGIN.
- SomeCallMeTim 10y ago
  Real estate appreciates at 4% (on average, but let's say it's constant for the sake of argument). I buy a house that costs $100,000. My down payment (cash out of pocket) is $20,000. I pay 3.5% interest on $80,000 as I'm paying down the loan, plus property taxes and insurance, and it comes to $546.74/month [1]. The rent comes in at $550/month, pretty much canceling out the mortgage. Am I making 4% per year on my investment, then, because that's the amount the real estate appreciates? No, I'm making 4% of $100,000 per year, or $4,000, on my $20,000 investment. That's 20% per year. [2][3] Leverage properly applied can raise your net profit. You're welcome. [1] http://www.mortgagecalculator.org/ http://www.mortgagecalculator.org/ [2] The numbers can realistically be much better than this, given the right circumstances. I am personally using this as an investment strategy, and yes, it doesn't just work this way "in theory." [3] I'm ignoring repairs and vacancy rate for simplicity. Those obviously hurt profitability. But as I mentioned in [2] above, if you pick your investment property strategically, your margins are much higher, so that's your cushion.

mediaman 10y ago

It sounds like there's a lot of confusion here between ROI and margins. ROI is not margin. And there are different types of margin. "Net margin" is the profit from revenue net of not only the cost of merchandise, but all the overhead costs: the cashier, the retail leases, the buyer, accounting staff, management, etc. "Gross margin" is (roughly) the amount made for every additional sale. If you buy apples for $0.80 and sell them for $1, your gross margin is 25%. This gross margin must pay for all the overhead expenses mentioned above. Based on the total number of apples you sell, you may figure you have to cover $0.18 of overhead per apple sold, leaving you with a net margin of 2%. But the important thing to understand is that you aren't actually paying $0.18 more in overhead per apple for every extra apple sold: you're making $0.20 and paying nothing in extra overhead. So increasing volume of sales can substantially improve net margins, if it doesn't take extra overhead. "Return on investment" (ROI) relates to how much capital is required to generate net margins. You absolutely can run a low net margin business that has high ROI. How? You turn inventory like crazy, or better yet, don't have inventory (think drop-shippers). Or you take a long time to pay suppliers, reducing the amount of capital required by the business, and get paid up front by customers. Amazon's market model for third-party sellers ("FBA")would be high ROI even if it were low margin because they do not own the inventory, get paid up front by customers, and then sit on the cash for 90 days before paying the FBA vendor. Hell, I suspect the total capital required for that business is negative. No wonder they're so focused on expanding it! You don't need high margins if your business model throws cash at you. Just keep net margins above zero and you'll be swimming in cash. (Hint for startups: find a business model like that. You won't need VC and you'll get vastly personally richer than one with high margins, but which requires massive capital, and therefore dilutes you as the founder to a pittance.) It is also possible to have a business with high margins but low ROI, if it is extremely capital intensive relative to profits, such as a big manufacturing plant in an industry where it takes them a long time to get paid. I'm not sure what Amazon's plan is. But the fact that the grocery business has low net margins is not a reason not to get into it. It all depends on the economics, which is more complicated than just "low margin."