Saturday, October 27, 2012

I doubts Amazon.

So Amazon announces lower than expected earnings, and profit losses last quarter.

Ho, hum, never mind their sales were enormous, and they'll just make bigger profits down the road.

'Cause they are taking over the world, baby.

I think I must be the only person in the world who thinks trying to do this is a bad idea -- at least in the long run.  (Yes, H.Bruce...I'm aware of the Keynes quote:  "In the long run, we'll all be dead.")

I hope I'm alive long enough to see if my instincts are right.

See, I think it's a dangerous plan to keep plowing your money into bigger and bigger infrastructure, and never really attempt to pull out the profits that are possible in the short run.

Because what if something comes along and subverts that infrastructure?

Are we headed to a world where bigger is better? Where retail consists of Walmart, and Amazon, and a few other ginormous boxes?

Or we headed into a world of local, with more and more fragmented markets, where the cost of energy makes local cheaper, where China decides it wants to pay its workers, where any number of small outlets may have a hidden genius -- the guy who will come out of nowhere and turns it all upside down.

In fact, I think that's more likely than not.

There is always the next guy.   Just ask Montgomery Ward, Sears, and General Motors. New technology is right around the corner, just ask Blockbuster.

Amazon may construct a hugely intricate and impressive infrastructure and have it all not matter in the least.

The world is a very unpredictable place.  But I will predict that that "hidden genius", hell probably several of them, is bound to come up with an idea or a plan that makes all your glorious size meaningless.  

How much real profit has Amazon made over the years?  How does it compare in percentage terms to other large retailers?  How much return on the dollar has been accomplished?  How much of the value of Amazon is in its stock, and how much is that stock value at the mercy of perception? (Well, the answer to that is, "All of it!")

So my own experience is tiny, tiny -- but if you scale it up, I think the example is valid.

I had near exponential growth in sports card sales for 6 straight years.  Literally, more than a million dollars flowed through the cash register during those years.

To my mind, it was all about market share and sales, not about profit. Profit would come later when I had established myself in Sisters, Redmond and two stores in Bend.

I think I probably did have a lion's share of the sales there during those years.

I won't go into all the reasons that collapsed -- just that, in hindsight, my very success was sure to attract competition in every direction and in unforeseen ways.

So those hundreds of thousands of dollars that was spent growing -- all my profits and more -- and worse borrowed money -- became meaningless.  All the money that flowed through the cash register that last year -- hundreds of thousands of dollars -- none of stuck.  In fact, we ended up losing money, and being stuck with 2 dysfunctional stores that were cash flow negative.

What would have happened if I hadn't been so aggressive, and had instead taken a higher percentage of profit out each year?  What would have happened if I hadn't cared about market share, only in making the share I had work for me?

I would have made profits during those six years, and I would have been better prepared for competition, but most importantly I wouldn't have built up this big, impressive infrastructure that in the end proved to be useless.

The bigger you get, the bigger the fall.

Ironically, Amazon is doing a pretty good job of killing off the dinosaurs in the meantime.  Best Buy and Barnes and Noble and all those ponzi scheme big boxes.  (Not coincidentally, examples of huge infrastructures that becomes obsolete almost overnight.)

I think the future belongs to the local, the small, and the nimble.

4 comments:

Anonymous said...

Duncan,

And exactly how many of the products made in your store are manufactured in Bend?

The local is cheaper only really applies to products that are manufactured locally.

mugmkr said...

Great post Duncan. Can't tell you how many times people have talked to me in terms of being a real success when I have grown to have 10 or more employees, as if that expansion would equate to success, rather than my one person web store which brings me just enough income to pay my bills and invest in my retirement funds with the occasional vacation thrown in the mix as well. The only potential downside that I see to staying small is that when I want to retire in 15 years or so I won't be able to sell my company for as much as I would be able to if it was a bigger operation. But, not having the headaches and sleepless nights that are sure to go hand in hand with trying to get bigger is worth it to me. And yes, I am glad to report that everything I sell is made right here in my studio in Bend, Oregon.

H. Bruce Miller said...

"How much of the value of Amazon is in its stock"

Current market cap is approximately $107 billion and P/E ratio is 294.1, which is very high. But the five-year average return on equity is 16%, which is very respectable. (Full details: http://finapps.forbes.com/finapps/jsp/finance/compinfo/Ratios.jsp?tkr=AMZN)

I don't think comparing your small business (or any small business) to the likes of Amazon is valid. They're operating in a whole different universe from a little single-proprietor operation. Yes, the stock value depends largely on perception, but that's true of any publicly traded company.

H. Bruce Miller said...

"Yes, H.Bruce...I'm aware of the Keynes quote: "In the long run, we'll all be dead."

And before he dies Jeff Bezos will make a shit ton of money. Which is really what it's all about at that level, not how long the business survives.