The title of this post was inspired by a famous Mark Twain quote, credited to the author back in 1897. I’m at the cutting edge of pop culture here, people.
On April 26th, after the stock markets had closed for the day, Amazon (AMZN) released earnings for their first quarter, which ended on March 31st. The online retailer’s revenue rose 34% year over year, from a little less than $10B to more than $13B. The stock surged, rising more than 16% in trading the next day. The market loved the results, they beat analyst projections, and the stock soared as a result.
Once you did deeper into the numbers though, it’s a little puzzling why the market reacted so strongly. Compared to the same quarter last year, Amazon’s numbers were weaker in just about every way. Sure, revenue was up, but profit was way down, dropping from 44 cents per share to 28 cents per share. Gross margins were basically flat (dropping from 24.1% to 23.9%) but operating margins got crushed, falling from 2.02% to 1.45%.
Amazon’s margins fell for two reasons. They’re investing in some new distribution centers, a short term cost that hopefully has long term benefits. The other is because of the increase of sales in the Kindle Fire, Amazon’s answer to the iPad. The Fire is widely speculated to sell at a loss, something Amazon hopes to make up by the profits on the e-books Fire owners will buy. It’s a model that’s popular in the video game and printer world, so it’s not like Amazon is blazing a new trail.
Amazon has been fighting a full scale war with traditional bricks and mortar retailers. Amazon has the advantage of not having physical stores, which have a way of increasing operating costs. The stock price of traditional retailers sure is giving you the message that Amazon is winning the war. Over the past year, Best Buy (BBY) shares are down 32%. Radio Shack (RSH) has seen its shares decline 68% over the same amount of time. Even book retailer Barnes and Noble (BKS) was struggling until fairly recently, when Microsoft announced they were buying Barnes and Noble’s e-reader business, which sent the stock soaring.
I know what you’re thinking, and I know it’s dirty. STOP THAT. I also know what you’re thinking about electronics retailers. They’re getting their asses kicked by Amazon, because electronics have turned into a commodity, where the lowest cost retailer wins. There’s no need to go into the store and go check out all the new TVs, since all the TVs these days are the same. Who needs to go into a store to test out an iPad, when your friends already each have one? I do, but that’s because I have no friends. Sad face.
For these reasons, many people have started on a campaign almost celebrating the end of traditional retail as we know it. Why would anybody go to the store? With Amazon, you can compare all the options while sitting on your ass, and have your purchase shipped right to your house. It’s the lazy man’s way of buying, and it’s only going to get more popular.
Or is it? As you can probably guess from this awkwardly titled post, I don’t agree with the assertion that traditional retail is basically dead. Here’s why.
Sales Tax Advantage
One of the big advantages Amazon has over traditional retailers is Amazon doesn’t charge local sales taxes. This is changing, as Amazon has recently announced deals with California, Texas and Nevada to start collecting and remitting state sales taxes, starting this year. This erases a 5-8% advantage Amazon had on retail prices compared to regular ol’ stores.
Amazon had revenues of $48B in 2011. If we assume the average sales tax is 7%, that’s almost $3.5B worth of sales taxes that the states are missing out on. You better believe, in today’s world of tight government budgets, the states want a piece of that pie. Suddenly, Amazon’s cheaper price has become just a little more expensive for consumers.
For the most part, baby boomers aren’t very good at the internet. You have to show them how to cut and paste. They download all sorts of stupid toolbars and they still use Internet Explorer. And, for the most part, they don’t buy anything from Amazon.
Older people are much more likely to go buy their electronics at a Best Buy or Walmart than they are to spend that cash online. It’s the way they’ve bought things their entire life, and they’re not about to change. Also, older people still believe some ambitious hacker is just waiting to steal their credit card information if they post it online. You buy all your electronics online. Your parents don’t. Don’t underestimate the amount they spend or their reluctance to change.
Where’s The Growth?
Amazon took the e-book business and turned it from a cottage industry into the next big thing, and has leveraged that into massive success. Where’s the next big thing for Amazon?
They’re not going to expand into furniture, or appliances, or even groceries. There’s rumblings they’re going to get into the daily deals business, (like Groupon) but there’s no way that’s a game changer. What can Amazon get into that’s going to fuel the next stage of growth? What can online retailing in general get into that’ll expand their overall presence in any significant way? I have no idea.
People Don’t Want To Wait
Approximately 40% of Best Buy’s retail purchases are picked up in the nearest store. People go online, buy what they’re looking for, and then head on over to the nearest store and pick it up. That’s a niche that Amazon will never be able to capture from Best Buy or any of their traditional retailing cousins.
We’re an impatient society. How many times have you clicked on a Youtube video, and then got pissed off when you had to wait longer than 5 seconds for it to start playing? I know I have. Some people are willing to wait for Amazon to ship. Some people aren’t. There’s a market created by these people.
Look, I’m not arguing that online retail isn’t here to stay, or that it isn’t a huge drag against companies like Best Buy and Radio Shack. Amazon is doing their best to drive prices down, yet traditional retailers are still holding their own. If you look past Best Buy’s recent write-offs, their margins are actually better than Amazon’s.
Amazon is the giant gorilla in the room. I’m not that excited about Best Buy’s shares at this point, I think there’s a lot more pain before things get better. Radio Shack, on the other hand, is much more interesting. Look for a much more detailed post on Radio Shack at some point in the future. In the meanwhile, just remember that traditional retail isn’t going away. Feel free to go to the store and browse. Oh, and buy something too.