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Low margins, per se, isn't a strategy. Amazon is pursuing a cost advantage [1], and it's choosing to keep its prices very low, hence the low margins. With a cos

by mjfern 14y ago

Low margins, per se, isn't a strategy. Amazon is pursuing a cost advantage [1], and it's choosing to keep its prices very low, hence the low margins. With a cost advantage and low prices, Amazon gives away a lot of value to customers (instead of capturing a lot of value for itself in the form of profits). Its primary objective is to gain market share (i.e., both new customers and a greater portion of existing customers' everyday shopping). With an increase in market share, Amazon can further reduce its costs through economies of scale (i.e., spreading its fixed costs, such as infrastructure and R&D, over a greater number of customers served and products sold). Amazon's cost advantage and low prices explains why most other online retailers have been unable to gain significant market share and why Amazon is posing an increasing threat to companies like Wal-mart, Target, and Costco. - [1] I'd argue that Amazon is actually pursuing a dual advantage, both a cost and value advantage (at least for customers that favor convenience over impulse buying). The value advantage stems from the ability to shop at home, its product reviews, its excellent customer service, extensive selection, etc.

fspeech 14y ago
No Amazon does not have a cost advantage over Costco. It is operational cost is FAR higher than Costco: 18% vs 10%. It is easy to see why. Costco thrives on high volume/low count of SKU and customers pay for delivery themselves. Costco's gross margin is 12% vs 23% for Amazon. Amazon's cost advantage over WalMart is only marginal. About 1 pt lower on the SG&A and 2.5 pts lower on gross margin. But Walmart is a lot more profitable. The advantage of Amazon vs WalMart is really in the long tail. It can keep more SKUs than even the largest WalMart Supercenter could hope for and still turn its inventory over much faster. And for items you can wait for you get them delivered to the door. My own family's shopping behavior is consistent with the data: we buy from Costco if it carries them, esp recurrent consumables; my wife occasionally goes to Target if she needs something soon; for things that we can take time to shop and do some research on I buy from Amazon, sometimes for price but mostly for convenience of not having to go to the store.
- deleted 14y ago
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- mjfern 14y ago
  Great points on SKU counts and the long-tail. However, can you tell me the source of your financial data? I had a quick look at Google Finance (Financials, Annual Data) and I see the following for 2012: Amazon's total operating expenses as a percentage of revenue was 98.2%. Costco's was 97.2%. Wal-mart's was 94.1%. Based on this data, you might argue that Amazon has a cost disadvantage relative to both Costco and Wal-mart. But before reaching any conclusions you would need to back out Amazon Web Services and the Kindle (from Amazon) [1]. As a quick and dirty analysis, we can back out the $2.909b Amazon invested in R&D in 2012. Note, neither Costco nor Wal-mart have a line item for R&D. In this case, Amazon's operating expenses as a percentage of revenue is 92%, or about 5% less than Costco's and 2% less than Wal-mart's. [2] - [1] You might also want to back out Sam's Club from Wal-mart. [2] Given Amazon has revenues that are just 11% of Wal-mart's, you could argue that Amazon's cost advantage will likely increase as it further scales revenue and operations.
  - fspeech 14y ago
    I had these in a spreadsheet a couple of years ago when I was studying retailers. I think I got the data from Yahoo Finance like this: http://finance.yahoo.com/q/is?s=AMZN+Income+Statement&annual http://finance.yahoo.com/q/is?s=AMZN+Income+Statement&an... which breaks out Cost of Revenue and SG&A. I was quoting AMZN for 2010, which had been pretty stable -- in 2011 it looks like that it kicked up spending quite a bit. You made very good points w.r.t. Sam's Club for Walmart or Kindle for Amazon. One needs to adjust the data in order to be precise. The effect though is probably second order and shouldn't change the picture that much. At least it seems consistent with my own anecdotal experience. It is also that possible Amazon's expense is exaggerated by accelerated depreciation. In the expansion phase if your facility is not fully utilized you get dinged again on appreciation. WalMart owns a lot of real estate and has capitalized lease as well I think so some of the operational cost may show up as interest expenses. To get a true picture one needs to account for all those as well. The beauty of Amazon's model is that it uses little to no capital (all operations can be funded by negative working capital and other liabilities incidental to operations), so it can expand unconstrained by capital needs, as long as it can find new customers.

by mjfern 14y ago

fspeech 14y ago

No Amazon does not have a cost advantage over Costco. It is operational cost is FAR higher than Costco: 18% vs 10%. It is easy to see why. Costco thrives on high volume/low count of SKU and customers pay for delivery themselves. Costco's gross margin is 12% vs 23% for Amazon. Amazon's cost advantage over WalMart is only marginal. About 1 pt lower on the SG&A and 2.5 pts lower on gross margin. But Walmart is a lot more profitable. The advantage of Amazon vs WalMart is really in the long tail. It can keep more SKUs than even the largest WalMart Supercenter could hope for and still turn its inventory over much faster. And for items you can wait for you get them delivered to the door. My own family's shopping behavior is consistent with the data: we buy from Costco if it carries them, esp recurrent consumables; my wife occasionally goes to Target if she needs something soon; for things that we can take time to shop and do some research on I buy from Amazon, sometimes for price but mostly for convenience of not having to go to the store.

deleted 14y ago
[deleted]
mjfern 14y ago
Great points on SKU counts and the long-tail. However, can you tell me the source of your financial data? I had a quick look at Google Finance (Financials, Annual Data) and I see the following for 2012: Amazon's total operating expenses as a percentage of revenue was 98.2%. Costco's was 97.2%. Wal-mart's was 94.1%. Based on this data, you might argue that Amazon has a cost disadvantage relative to both Costco and Wal-mart. But before reaching any conclusions you would need to back out Amazon Web Services and the Kindle (from Amazon) [1]. As a quick and dirty analysis, we can back out the $2.909b Amazon invested in R&D in 2012. Note, neither Costco nor Wal-mart have a line item for R&D. In this case, Amazon's operating expenses as a percentage of revenue is 92%, or about 5% less than Costco's and 2% less than Wal-mart's. [2] - [1] You might also want to back out Sam's Club from Wal-mart. [2] Given Amazon has revenues that are just 11% of Wal-mart's, you could argue that Amazon's cost advantage will likely increase as it further scales revenue and operations.
- fspeech 14y ago
  I had these in a spreadsheet a couple of years ago when I was studying retailers. I think I got the data from Yahoo Finance like this: http://finance.yahoo.com/q/is?s=AMZN+Income+Statement&annual http://finance.yahoo.com/q/is?s=AMZN+Income+Statement&an... which breaks out Cost of Revenue and SG&A. I was quoting AMZN for 2010, which had been pretty stable -- in 2011 it looks like that it kicked up spending quite a bit. You made very good points w.r.t. Sam's Club for Walmart or Kindle for Amazon. One needs to adjust the data in order to be precise. The effect though is probably second order and shouldn't change the picture that much. At least it seems consistent with my own anecdotal experience. It is also that possible Amazon's expense is exaggerated by accelerated depreciation. In the expansion phase if your facility is not fully utilized you get dinged again on appreciation. WalMart owns a lot of real estate and has capitalized lease as well I think so some of the operational cost may show up as interest expenses. To get a true picture one needs to account for all those as well. The beauty of Amazon's model is that it uses little to no capital (all operations can be funded by negative working capital and other liabilities incidental to operations), so it can expand unconstrained by capital needs, as long as it can find new customers.