Saturday, February 04, 2012

The Trouble with Amazon

Amazon: the new Montgomery Ward
Amazon (let's be honest) is a company in trouble. Oh, its financials are fine. It's profitable, even. It's growing. By all normal metrics, it's not in trouble at all. But common sense says the spit's about to hit the fan. Amazon is on a collision course with destiny—the destiny of all companies who ever tried to do too much (Kmart, Federated Dept. Stores, Montgomery Ward, Allied Stores, Southland Corp., Ames Department Stores, The Circle K Corp.. Carter Hawley Hale Stores—the list goes on). Let's be blunt: Amazon is just another department store, except they have no physical storefront. But lack of a physical storefront doesn't mean they won't suffer the fate of all the unwieldy, poorly managed department store chains that have gone before. History has a way of dealing with do-too-much retailers (and now, e-tailers).

Amazon's business model is a model of confusion. Their business is really three businesses: eRetailing (what Amazon calls EGM: Electronics and General Merchandise), publishing, and cloud services.

According to Amazon's 10K filing, EGM currently accounts for 60% of the business. And that's precisely where the big trouble lies.

Recent indications are that Amazon has reached a tipping point. For 2011, Amazon's net income was a paltry $631 million on net sales of $48 billion. Compare this to 2010's net income of $1.152 billion on $34.2 billion in net sales. Basic earnings-per-share has gone from $2.58 (2010) to $1.39 (2011).

Basically, Amazon has become a logistics company without wheels. To survive in its present form, it badly needs to acquire an Airborne Express (except that AE has already been acquired by DHL), or maybe a railroad and a package delivery company. Ideally, it also needs to acquire a payment-processing system (a PayPal). Why not just admit the obvious? Amazon needs to acquire eBay.

The alternative is to join the long list of department stores that tried to be all things to all customers (and ended up broke).

Amazon claims it will enjoy greater efficiencies (going forward) by opening more fulfillment centers and putting pressure on suppliers. But their story, frankly, is starting to sound old and is (how shall we say?) at this point painfully unconvincing. Inefficiencies are rising faster than efficiencies, at Amazon. That's what the numbers show. And that's the real point.

You don't have to be a numbers guru to see where Amazon is headed, though. Just look at what Amazon is trying to sell, and draw your own conclusions. The following list was taken directly from the pulldown menu on their U.S. website:

Amazon Instant Video Appliances Apps for Android Arts, Crafts & Sewing Automotive Baby Beauty Books Cell Phones & Accessories Clothing & Accessories Computers Electronics Gift Cards Grocery & Gourmet Food Health & Personal Care Home & Kitchen Industrial & Scientific Jewelry Kindle Store Magazine Subscriptions Movies & TV MP3 Downloads Music Musical Instruments Office Products Patio, Lawn & Garden Pet Supplies Shoes Software Sports & Outdoors Tools & Home Improvement Toys & Games Video Games Watches 

I've highlighted certain items that are emblematic of Amazon's ongoing megalomaniacal bid to be everything-to-everyone. Amazon is trying to out-Sears Sears. But we all know what's happening to Sears. And it ain't pretty.

Amazon's legacy: empty strip malls everywhere.
Amazon hasn't been completely ineffective. For every one of Amazon's 69 fulfillment centers, there are probably five to ten Staples stores out of business, ten or twenty Barnes & Nobles stores gone, a dozen hardware stores gone, several pet supply stores, and maybe a Toys R Us or two. To see the devastation wreaked by Amazon, you have only to cruise the half-empty strip malls in your local neighborhood. Amazon is sucking $50 billion a year out of local economies, worldwide.

Where Amazon excels, of course, is in book reselling, e-book publishing, and Kindle sales (although they are rumored to be taking a $15 hit on every Kindle Fire sold). This is where Amazon's monopoly power lies. This is where they have the power to dominate, not merely decimate.

Amazon also does well as a cloud-services provider. They can legitimately claim some high ground here.

But in patio, lawn, and garden equipment, sports equipment, kitchen and bath fixtures, and numerous other areas, they're never going to have monopoly power.

In short, the parts of Amazon that deal in electrons are doing well. The parts that deal in protons are not doing so well. That's the crux of the matter.

One day, Jeff Bezos is going to have a Bain Capital moment and recognize that he's in way over his big fat head. There'll be a sudden "huge restructuring" of the business. Big writeoffs will be taken. Apologies will be issued. The stock price will plummet. And Amazon will emerge a much smaller (but more profitable) company.

Either that, or (if Bezos continues to think like a megalomaniac) Amazon will simply hit the wall, hard. And the smoking shards will blanket the earth.

I wonder if they sell hard-hats?

Disclosure: The author has no stake (long or short) in Amazon stock.