Well, break out the bubbly. Amazon.com, “new economy” poster child and latter-day punching bag, has turned a profit and its stock is up 20% this week.
With almost two years gone by since the market took away the Kool-Aid and began insisting on seeing real live profits from Internet companies, this looks like an inflection point. Is it safe to go in the water again?
Let’s see. Amazon CEO Jeff Bezos is older and wiser, having given up the chase for the business model du jour. He has, for example, caught on to the fact that books and DVDs sell online, and 12-inch gangly wrenches and 100-pound bags of Kennel Ration don’t. He has learned his lesson about the perils of banking on big splashy deals. (Who can forget him grinning with Sotheby’s CEO Diana Brooks at the inception of their ill-fated online partnership?)
What’s more, Mr. Bezos knows he is a lousy venture capitalist — witness, ahem, Drugstore.com and all the other companies he helped fund. He is not getting into the energy trading business. And with his own misbegotten adventures with creative accounting already part of the history books, he knows that generally accepted accounting principles do matter. He was appropriately chastened by his sale of roughly $1 billion in bonds, instead of equity, which left the company saddled with a lot of debt.
He looks, in fact, like a model corporate citizen. And lo, Amazon is finally profitable. Right?
That, in a way depends what your definition of “is” is. At the end of the day, in the egg-nog-addled, everyone-buy-a present-for-someone fourth quarter, it made $5 million on $1.12 billion in sales. That’s under half of 1% profit margin, and it still lost $45 million for the year. Sales in 2002 are expected to be up 10% to around $3.4 billion and pro forma operating profits of $30 million or so. So Amazon ain’t exactly up to Microsoft standards of profitability.
But, to be fair, it is progress. Back in the heart-stopping days of the Internet bubble, the online retail business was based on CPR: convenience, price and (customer) relations. Amazon wiped out most competitors by pampering its customers. Buy.com, which founder Scott Blum just took private for pennies on the dollar, focused on price to the exclusion of everything else. eToys couldn’t ship on time. Barnes & Noble couldn’t have its sites undercut their stores.
Since then, Amazon has made real strides in cleaning up its back office. Inventory turned over 16 times last year, 24 times on an annualized basis in the last quarter. Believe it or not, that’s the kind of statistic that makes retail folks giddy. A high rate of turnover means lower costs for financing goods lying around in warehouses. As a basis for comparison, Kmart’s inventory turn is under five and super efficient Wal-Mart’s is no more than eight.
But while Amazon has plenty of material from which to draw cautionary tales, there are relatively few shining examples to guide it going into the future.
Successful Internet companies like eBay focused on community, and cleaned up on it. But while Amazon would doubtless kill to have the kind of auction marketplace that eBay controls, the model doesn’t seem to transfer. Amazon’s 25 million customers are a huge community, and they are leveraged by creating lists and suggestions, but I always feel shallow when they tell me, “Customers who bought this book also bought ‘The Queen and Di: The Untold Story.’”
Yahoo! used to be a model to aspire to, with those high margins from advertising. But new CEO (and former movie mogul) Terry Semel needs to learn how to sell before he’s going to generate any more excitement with his exclamation point. A push into job listings just doesn’t sell itself like a good car chase.
The real story is that the new economy Schadenfreude is over. If your friendly neighborhood ponytail-wearing, latte-slurping Webmaster doesn’t own a professional ball team, he is probably managing a Dairy Queen. But having the Nasdaq careen to 1700 from 5000 only cut off the easy credit supplied by stock offerings. Those with the right business model and perseverance will come out of this recession with a stronger business than the one they went in with.
The losers will still be those companies that stood around and smirked that they didn’t need no stinkin’ Web site. Internet traffic growth is still tripling every year. Even if surviving dot-coms aren’t profitable enough to pay for Super Bowl ads, you can’t put these new ways of doing business back in the bottle. Internet access is extending to phones and personal digital assistants. All I need is a bar code reading attachment and I’d buy everything online.
The fact that Amazon reported a profit the same week that Kmart filed for Chapter 11 is no coincidence. A $37 billion retailer with 2,015 stores was affected by a $3 billion nuisance. It seems hard to believe, but high margin consumer electronics and the ability to turn inventory make or break retailers. Shampoo and white socks don’t.
Wall Street is fickle, but it gets what it wants in the long run. In Amazon’s case, a low stock price cut off cheap financing and forced the company to operate more efficiently, pick its power alleys and at least pretend to make money. The future of retailing is still online. The high inventory turns make it a better way of doing business. The model will approach half of retail margins in the next decade, and the survivors will be provided capital to pursue it.
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Posted by: Nike Free Run Sko | September 13, 2012 at 11:53 PM