Sunday, November 5, 2017

The River of No Returns?

Most of you will recognize that as a common nickname for Amazon, the biggest online shopping force there is, for its history of raising stock price while never paying returns (dividends) to investors.  Full disclosure: I don't own Amazon stock, but I'm a Prime subscriber, which means it seems like a good enough deal to pay for.  At least for the last couple of years.  Whether or not that continues is a subject for another day.

One reason Amazon comes to mind this weekend is because while we took a look at Elon Musk's Tesla Motors and its financial woes Friday, we also hear that Jeff Bezos is the richest man in the world, thanks to Amazon stock holdings.  Today's news is that Jeff sold $1.1 Billion worth of stock yesterday; I guess he needed some new slipcovers for the couch or something.

It might be reasonable to ask exactly what Jeff Bezos has done for the world to warrant being the richest man.  Has he invented anything, developed a new drug, a new alloy, or something that makes life better?  Has he made life better by composing new music or created a new comedy?   Well... maybe he's helped make it more convenient in an era of decreasing leisure time.

Unlike Bill Gates, who was the wealthiest man for a long time, Bezos didn't really invent anything new that I can tell.  It has probably been over 30 years since Gates ever slung code, but he did at one time.  Microsoft has arguably created wealth in the sense that it created new products from the intellects of its engineers.  Think of developing code as refining ideas akin to refining ore out of the ground into metals.   Amazon, by contrast, has made shopping more convenient in some ways, and helped define ways that online shopping works, but their main product seems to be convenience.  A few months ago, Mrs. Graybeard and I needed a covered butter dish.  After forgetting it during a Walmart run, we added a "two-fer" pair of Rubbermaid butter dishes to an Amazon order for something else, knowing that because of our Prime membership we'd have them in a few days.  Instead, a small delivery service - probably formed for such contracts - laid them on our doorstep early on Sunday morning - two days later.

As equal time might warrant, after looking critically at Elon Musk my same source, Bill Bonner's Diary took a look at "The World's Favorite Stock".  Some of what he said surprised me.
Two friends and colleagues (both former Wall Street insiders), Rob Marstrand and David Stockman, examined Amazon carefully and independently. They came to the same conclusion: The company loses money in its core retail business.

It disguises the losses with low taxes, capital leases, and accounting tricks – but the losses are real… and unavoidable.

And since that business model requires super-low prices, there is no way for the company to fatten its margins. It can’t make up on volume what it loses on each sale.

In other words, the business model is a failure.

That is no sin… and perhaps no surprise; lots of businesses never make money.

But there is something about the Amazon phenomenon that is truly remarkable – like a plant that needs no light… or a mammal that needs no air.

Amazon is one of the strangest creatures ever to lurk in the capitalist ecosystem.
The second reason Amazon comes to mind is this article that a friend sent me from CNBC: "This 28 Year-Old's Company Makes Millions Buying from Walmart and Selling on Amazon".  To be honest, the fact that it was on Amazon and not eBay was the only thing that struck me about this.  He's doing things with Amazon that I had no idea were available options for a small business.

When 28-year-old Ryan Grant was at Winona State University in Minnesota, he came up with a side hustle to make ends meet.  Twice a year, he organized textbook buyback events on campus.  He listed the books on Amazon and shipped them out to customers around the country for a profit of up to $10,000 a year.  He could use an Amazon provided app to determine what to pay for the used books and list them for sale.  All fine.  The problem was it was very labor intensive packing and shipping books around the country.  The duplex he was renting was full of books and hard to walk around in.

Enter Amazon again.  Their fulfillment services meant Grant could ship all the books in bulk using preferred UPS rates to an Amazon warehouse, where, for a fee, the online retailer handled processing and shipping out each individual order. It made his side hustle more manageable, time-wise.

After graduating, Grant started working in accounting.  He eventually became discouraged with that career field and while trying to think about a new career got the idea to renew his side hustle, only this time with a bigger focus than just textbooks.
After work and on the weekends, he scoped out the clearance aisles at Walmart, scanned a few items using Amazon's app and bought up toys, games, and home improvement items he realized he could re-sell for a profit. A receipt from his early days shows a variety of purchases, everything from vacuums to Barbies, LEGO sets to stainless steel flatware.
The article goes on to describe how he turned part time work on the side, pocketing about $1000 per month quit his accounting job in 2013 and developed an $8 million/year business.  
"I went from just me in this business doing around three-to-five thousand dollars in sales per month and now, four years later, we're a team of 11 and we're doing well over $200,000 in sales per month," Grant says. The team had to move to a warehouse that's over five times as large as their first this past July.

Since he started selling on Amazon, Grant says the business is on track to top $8 million in total sales by the end of this year. Profits are heavily reinvested back into the company, though Grant was still able to take a salary of around $150,000 when he was working for the venture full time.
(Ryan Grant - CNBC photo)

And more power to him.  I have absolutely no problem with someone buying at Walmart and selling on Amazon: willing buyers and sellers and all that.  If you shop around and buy it at what you think is the best price, why would you care if he's buying it on clearance and selling it for a profit?  It's especially ironic considering the online "e-tailer wars" between Walmart and Amazon.  It's no secret Walmart is trying to be the dominant e-tailer.  Walmart is trying to vanquish Amazon and hear the lamentations of their women. 

As I said, the only thing about this that really surprised me is that the "side hustle business" was on Amazon and not eBay.  Over the years, eBay has turned from a place where people sell their leftover Beanie Babies or Pez dispensers (how it started) to a 24/7 flea market populated by a lot of small businesses.  Sure, you can buy someone's old Tee shirts, their ham rig, guitar, bicycle or what have you, but when you search listings, you find a lot of small businesses.  I think some buyers just prefer to buy from a shop over Some Dood selling his stuff.  We have known people who hustled around town to buy things and sell them on eBay.  On the other hand, we've bought some tools and other small things from an eBay seller after comparing them to Amazon or other suppliers we know and had the item arrive here in an Amazon fulfillment box.

How do these stories tie together?  Could it be that the most important thing Amazon has done is sell its fulfillment services and their app that helps find prices to help small business people figure out a market? 


  1. Infrastructure and operational expertise is my guess.

    Bezos is playing a very long game, using tax code, depreciation schedules and the productivity gains and side sales of automation advances Amazon develops for leverage.

    Amazon loses money on sales - although not always, thanks to "dynamic pricing" - but if they can at least break even on fees for their processing costs for warehousing and shipping, they're not losing anything on someone else's merchandise Amazon didn't have to buy, just store and ship.

    What concerns me is the deleterious effect Amazon is having on the entire retail industry. Small outfits, unless they partner with Amazon, or another big retailer/shipper (like Walmart, maybe Target (if Dayton can ever figure out e-retailing), maybe Home Depot in their niche, somebody new, etc.) that offers market access advantages, will find themselves economically on the outside looking in, maybe far outside.

    As example, I didn't renew my Brownells Edge subscription last week; $49/year for free shipping (including on returns) isn't a bad deal, except....Brownells takes 8 days to get my order to me, a lot of what they sell is now available at or through Amazon - for which Prime provides free shipping no matter where it comes from - and much of it arrives in 2 days. I'll still order from Brownells, but I'll keep a list and bundle stuff whever they offer "free shipping on orders over $50" and none of it will be stuff I need in 2 -3 days.

    1. I think Amazon's plan is to be the place you go to for everything, and that's the reason for their linkages to the other sellers. Ultimately, it's probably the reason this guy has his $8Million/year business.

      When I needed parts for the oiling system in my CNC mill conversion, I didn't expect to find them through Amazon, but I did.

      When I bought LEDs to replace the halogen bulbs for my kitchen, I bought the first few from a large seller (1000Bulbs); the rest were bought from the same seller via Amazon Prime because I could get cheaper shipping through Amazon than through their own web site, even though they were shipped from the same place both times.

      In both cases, the items were "sold by XXX", not Amazon itself. They acted as agent to set up the sales.

      I was looking for the rifle cleaning patches I like a few months ago. Turns out they're apparently not made anymore, but Amazon had the same basic patches from a different maker.

    2. I'm kinda a cash and carry guy. Whatever it is that I want I want it when I buy it. I am looking for a few things right now that are indeed available on Amazon. Can't find them locally but eventually I will. Could have bought them and received them already through Amazon but it just goes against my grain to buy something sight unseen and wait and wait never knowing if you will get it, if it will be what you thought you bought or if it isn't can you return it.

  2. Amazon stock is expensive because investors don't do the math.

    Amazon is the dominant player in an industry that is growing at a maximum of 3% a year. Like the water lily that doubles in size every 24 hours it is going to run out of pond...and then what?

    And if you take two or three steps back, is there anything that Amazon does that a me-too cannot replicate? It seems inevitable that Amazon will end up chasing higher margin content while abandoning lower margin goods to hungry competitors. Just like McD abandoned cheap hamburgers to Hot 'n Now and Steak-n-Shake and Wally World abandoned low margin merchandise to the swarms of dollar stores.

    Customers cannot stick dollars in your pocket when you are walking away from them.

  3. Amazon does a lot of IT-related defense contracting, particularly for the US Navy and the US Geospacial Agency.

    1. Suggests that amazon is profitable because web shopping isn't their only core business. Bonner analysis is carefully misleading to not mention this income source, and conclusion is wrong.

  4. Amazon sells one thing above all others: convenience. If you want it but are indisposed to get into the car and look for it at the local shopping center, or if the local shopping center is unlikely to stock it, the odds are good that Amazon carries it and will provide it to you at an acceptable price.

    Amazon also sells security. Its online payment processing system has never been successfully penetrated. Other eTailers either can't say the same or haven't yet been in business long enough to rival Amazon's record.

    Finally, Amazon sells reassurance. If there's a problem with the product, Amazon will almost certainly take it back and refund you the purchase price. Add to that the growing number of aftermarket service providers whose services can be purchased through Amazon, usually at the point of sale, to assemble, install, and repair whatever Amazon sells.

    Amazon exemplifies the IBM approach to marketing: Don't own the product; own the customer. If you can't be the leading-edge developer, and you can't be the low-price champion, you can always represent to the customer that you're there for him no matter what. It made IBM dominant for decades. It made Michael Dell very rich. And it's made Jeff Bezos a hero to tens of millions.

    1. This is all right and well argued. I only mentioned the convenience aspect, but all of those except the last paragraph almost made it into this piece.

      We've bought things from Amazon instead of other places online because of how strong they are at reassurance. We know that they're excellent at support if something goes wrong.

      I've noted that with the vast array of companies that have been hacked, they haven't. Perhaps it's a matter of time, because being the biggest store online, all the people intent on breaking in are targeting them. Still, their security has been exemplary.

  5. Amazon is selling TIME. I can order something, having found the exact part needed, whenever I want too. It will arrive sometime in the next couple of days. All I have to do is open the front door and bend over. The shortest possible trip to the mall here is 40 minutes, assuming I can find a store that has what I want.

    Since most of what I buy is commodity or something very non-consumer, most malls don't even HAVE any of the things I buy.

    If I can get the soap I like for a minutes spent, and not think about it again until it arrives, that is a HUGE saving of time over going to a specialty store. Add in that I won't be making any impulse buys in the checkout lane, and I save that money too.

    One other thing that fits with the reassurance aspect is the "what others have purchased after looking at this item" and the reviews from actual buyers. I always look at the "what others bought" on something I've never bought before or am otherwise unfamiliar with. It does reassure me that I've made a good choice, or helps me feel like I need to make a better one.

    The last consideration is the safety and security aspect. It seems that most malls are full of "urban youths" who sometimes flash riot, engage in fighting, or swarm retailers. Not my idea of a good time. The mall is one place where I'm happy to take the advice "just don't be there."


  6. From my point of view, investors are pricing Amazon as a tech company, not a logistics company. Yes, Bezos is playing a long game. Also yes, he is building infrastructure, both for hardware (stuff) and for software (communications, cloud, etc).
    One thing often underappreciated about him is that Elon Musk with Tesla & SpaceX, he has build his company on tax breaks and special government connections - for example, when the Post office started Sunday delivery over the holidays, for years it was only for Amazon items; even now it is only for certain select retailers. When Amazon looks at locations for their warehouses, they play states and municipalities against each other to get special treatment, much of which economists say local governments will never get back. A recent study says that each Amazon package is subsidized, on average, $1.46 by US government entities.
    As was mentioned above, Amazon is playing a game with tight margins; as Walmart and others are getting their game together, Amazon is starting to get squeezed - for example, notice how they reduced their total required for free shipping after raising it multiple times.
    This article posits that Amazon is actually in a tough position and weaker than many people think:

  7. In April Bezos said that he plans to sell $1 billion worth of Amazon stock every year to help fund his spaceflight company Blue Origin. There's a Blue Origin manufacturing plant on Merritt Island scheduled to open by the end of the year.