McNellis on Amazon’s Global Designs

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Same-day delivery could turn out to be the greatest need none of us knew we ever had. Or it could fizzle. After all, who really doesn’t have time to wander over to Costco on a Sunday afternoon to visit with the rest of the town and sample that free ravioli? Who wants to be even more isolated, staring ever longer into the abyss of a computer screen? But since few companies have ever gone broke inventing needs for the American public, let’s put sociology aside and focus on the money.

[contextly_sidebar id=”ec4bc87cf0aacc91af9698d6bb993b9a”]Amazon’s vision—delivery to every consumer’s door—has to be exponentially more expensive than having those millions of consumers spend their time and gas money driving themselves to a warehouse store. Who will pay for that added cost? If the consumer has to pay it, will she still love Amazon? Amazon is not Apple—it has no status symbol product for which it can charge whatever. Amazon is a discounter that must live and die by its prices.

If Amazon were to force its manufacturers and sellers to subsidize this added delivery cost, how long would they survive? For that matter, how long can Amazon continue to survive without making a profit? Amazon’s gross revenues have risen to perhaps $75 billion in the last fifteen years, but the company isn’t making any money. It posted a $39 million loss for all of 2012 and it just lost $41 million in the third quarter of 2013.

Amazon now has nearly 25,000 employees and has spent almost $14 billion since 2010 on warehouses alone. In its more purely electronic days, the company barely eked out a profit when it had the advantages of very low overhead and the ability to avoid paying state sales-taxes. Will it make a profit now?

Wall Street thinks so. Thus far, Wall Street has given Amazon more than a free pass on profitability, it has handed the company a blank check. Amazon’s stock is up 60 percent this year and 393 percent in the last 5 years. Its enthusiastic supporters extol Amazon’s wisdom in foregoing profit while investing billions in fixed overhead and insist the company could turn a profit any day it wants to by simply ceasing to reinvest every penny it earns.

Wall Street may be right or, like Rommel running out of oil in North Africa, Amazon might burn through all of its patient money before completing its global conquest. Ask yourself this: when has a quest for world domination ever really worked out?

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