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The Amazon Story: Don’t worry we’ll make it up with volume

24 Jun 14

The announcement of the new Amazon Fire phone is certainly not a surprise as it was rumoured for some time.

I saw a headline about the shopping machine and thought really?

Will this new phone, should it sell in a very dynamic marketplace, really change people’s perception of competitive price shopping?

Price comparison is already easily done and part of the normal shopping process for savvy consumers. I see more hype than reality amongst the news and reviews of the device.

A new mobile phone is not going to solve the fundamental issue at Amazon.

Amazon is however truly amazing. Quarter after quarter, year after year, this innovative company generates a huge return on investment.

The stock price has been on a meteoric rise since 2009 so I just assume that there is a return. Wait, what? I must be confused.

Oh that’s right they don’t do this, the profit is reflected as the red bars in the chart below. Well, maybe someday. If you have read my blog before you won’t be surprised that I don’t see it as a retailer.

They sell products sure, but to be a retailer you have to make some profit.

It is not innovative or challenging to grow revenue by dropping prices to undercut competition. I wonder what the sales line would look like if the retail business was required to generate a return?

Sorry to say that while it has elements of convenience if prices were based on a positive margin requirement revenue growth (from consumer sales) would slow considerably.

The truth is that quarter after quarter the market has let it off the hook because some new gadget overshadows the truth. Earnings much lower than expected; just talk about delivery by drones. It’s more interesting than those pesky numbers.

But then again once it gets large enough Amazon will be able to stop the price cutting right? Today well over 80% of US retail sales are executed in store through multichannel retailers.

Just a rough calculation of puts Amazon is somewhere around 1.4% of US retail sales. How big do they have to get to stop relying so heavily on discounted prices?

I know the argument well; so what we are losing money, we’ll just make it up in volume.

By Robert Hetu - Analyst, Gartner