My brother asked me the other day whether Amazon is profitable. Well, yes, it is. In fact, it's been profitable for eight consecutive quarters and it has reported an annual profit for 11 of the past 13 years.
But Amazon is not very profitable, which may be why it can't shake the money-burning image of its dot-com infancy in the mind of a computer technician who doesn't pay much attention to business news. Amazon's net income on $136 billion in revenue last year was less than 2 percent. Retailers tend to shave it fine: Wal-Mart Stores Inc. had net profit of almost 3 percent on 3.5 times Amazon's revenue. Apple Inc. earned almost three times as much as Wal-Mart and Amazon put together with a margin above 20 percent.
This is an Opinion
While Amazon is not a money-losing experiment, it certainly is an experiment, one that I don't think most people — even those of us who are trying — have fully grasped. Our online editor, the incomparable Lance Turner, pointed me to Stratechery.com, where blogger Ben Thompson walked readers through the evolution of Amazon's vision statement.
Back in 1997, Amazon aimed "to be the leading online retailer of information-based products and services, with an initial focus on books." By 2003 Amazon wanted to be "earth's most customer centric company; to build a place where people can come to find and discover anything they might want to buy online." And now the statement has been whittled down to something infinitely larger (and more grammatically correct): "We seek to be Earth's most customer-centric company."
As the announced deal to purchase Whole Foods underscores, Amazon no longer limits its vision to online sales. Thompson paraphrased: "Amazon's goal is to take a cut of all economic activity." And if it manages that, it will be hugely profitable indeed, which explains why Amazon's market capitalization is twice that of Wal-Mart, the bigger and more profitable entity that was the retail industry's frighteningly efficient disrupter three decades ago.
It's been 11 years since a journalist named Charles Fishman published "The Wal-Mart Effect," an enlightening book that is about much more than the Bentonville corporation. It's about the ripple effects — intended and unintended — from a company's sole focus on driving down the cost of consumer goods in order to gain market share.
Wal-Mart had an obvious impact on consumers and competitors, but the real Wal-Mart effect of Fishman's title was that of tiny increments multiplied millions and billions of times. It literally changed the American landscape, recreating shopping habits. It changed how and where goods are produced or grown, the materials they contain, the way they are packaged, how they are warehoused and how many units consumers buy at a time.
By shifting the focus from price alone to total consumer experience, Amazon is having its own effects — and in some cases, its ripples seem to be crashing into Wal-Mart's ripples. Wal-Mart maximized real estate — cavernous Supercenters and wholesale warehouses — and minimized packaging. Amazon (for now) has limited its real estate to highly efficient distribution centers, and retail real estate is feeling like a shakier investment. Meanwhile, NBC News reported last week that online retailing (led by but certainly not limited to Amazon) has added so much brown cardboard packaging that "it's actually changing the very color of material collected at our recycling facilities."
Wal-Mart's "Always Low Prices" philosophy and price-match guarantee — its very DNA — is similarly bouncing off an opponent that certainly includes price as a "customer-centric" factor but subtly discourages comparison shopping, at least by people who have paid for Amazon Prime membership. As Thompson explained: "Thanks to its reliability and convenience (two days shipping, sometimes faster!), plus human fallibility when it comes to considering sunk costs (you've already paid $99!), why even bother looking anywhere else? With Prime Amazon has created a powerful moat around consumer goods that does not depend on simply having the lowest price, because Prime customers don't even bother to check."
What ripple effect will Amazon's acquisition of Whole Foods have? Thompson speculates that it will make it feasible for Amazon to deliver groceries, including perishables, any way the customer wants. Whole Foods will become the biggest customer of the division Thompson refers to as Amazon Grocery Services, justifying the expense of building out a business that can also deliver to restaurants and individual homes — and take a cut of all that economic activity.
(Gwen Moritz is editor of Arkansas Business. Email her at GMoritz@ABPG.com.)