Amazon will eat your children
Businesses make choices that affect how they are able to compete. And each choice often involves a trade-off between what value you can deliver to a customer and what price you can deliver that value at.
Looking at online retail specifically, we know there is a trade-off between flexible shipping policies and cost. If you want to offer free shipping on most orders, you are likely to have to charge more for the items themselves.
Similarly, a permissive returns policy and a good customer service system usually increases costs. Having warehouses around the country to ship orders fast, is really, really not at all cheap. That would seem to leave space for a company with fewer warehouses to undercut prices.
Despite each of the decisions, however, Amazon often has the cheapest prices on the internet from a retailer you’ve heard of. They are premium in most of the ways an online retailer can be premium in that they offer a wide selection, a good return policy, fast and often free shipping, and accessible customer service, but they still often have low prices.
Accordingly, Amazon doesn’t make any money. Not any money. In 2012, its net income was a negative $39 million–essentially zero for a company that did $61 billion in sales. This is intentional on the company’s part. Bezos speaks on conference calls of occasionally “checking in” with Amazon’s ability to make a profit. Bezos cares that Amazon be capable of running profitably without caring so much that it actually turn a profit.
The explanation for this is that the man is running a long con. Of course, if you’ve ever seen a long con depicted, you know the satisfaction comes not from knowing that a long con is going on but from seeing how all the pieces fit together. And given we don’t know how Amazon seeks to compete, we are in the dark. But I can guess: Amazon seeks to become a sufficiently large business that it cannot be undercut on cost even by a company that specifically seeks to minimize its costs by avoiding all the expensive choices Amazon has made along the way. It seeks to do this by the following
- having enough volume that it can squeeze suppliers
- developing its Amazon Basics brand so it can squeeze suppliers further
- automating the hell out of its warehouses a decade in advance of when it is economically justified so that it can survive $25/hour wages better than any competitor
These aren’t conventionally smart choices. If you are a robotics supplier and want to sell systems to a retailer, you ordinarily have to demonstrate an appropriate return on investment for what you are selling within the first two to five years. Amazon, however, will beat on your door regardless of whether it makes short-term sense.
These decisions cost Amazon money. But they are building a business that will brook no competition either from above from competitors who might seek to offer better service or below from competitors who would like to offer lower prices. Once construction is complete, they will check in with their profitability one last time and never check out again.
Disclaimer: This is not investing advice. I have no position in Amazon, Walmart, or Overstock.
Photo credits: Deviantart users sirjoepanzer and todshi, Wikimedia Commons, and Flickr user jurvetson