Tuesday, January 2, 2018

"Your margin is my opportunity" 2.0

An article this week in the Wall Street Journal makes a bold statement on Amazon's growth prospects: it argues that Jeff Bezos' well known mantra ("Your margin is my opportunity") is a double-edged sword that will limit Amazon from achieving the world domination that everyone fears. A section entitled "What Amazon Can't Do" discusses Amazon's inability to compete in high-margin industries, citing Amazon's Fire Phone and Amazon Studios as products that are far behind the premium iPhone and HBO of their respective markets. The article claims that these high-margin industries are where the profits lie (in some form evoking Benjamin Graham's cautionary advice, "Obvious prospects for physical growth in a business do not translate into obvious profits for investors").

But I wouldn't be too quick to write-off Amazon's ability to compete in these high-margin markets. In my opinion the article misses a few key points:

  • Amazon is and has been constructing an infrastructure that allows it to enter new markets much more easily than the average firm. This infrastructure includes (1) its seemingly infinite access to capital: investors that are willing to endure Amazon's losses quarter on quarter in pursuit of long term results and its own diversified set of businesses, as well as (2) its access to high quality data on consumer preferences through its dominance of the e-commerce retail market.
  • It already does have at least one high(er)-margin business: Whole Foods. With average grocery store margins hovering around 1 percent, Whole Foods profit margins at 4 percent are high even if the market is not a glamorous one. More telling in my opinion is the way that Amazon obtained this business: through M&A. I wouldn't underestimate Amazon's ability to use M&A strategically in the future to merge other high-margin businesses to capitalize on its strong fundamentals in physical logistics and e-commerce to compete and compete effectively.

Though "your margin is my opportunity" may originally have applied to Amazon's strategy for the basics (your Amazon Basics, Amazon tablets, and AWS) and not high-margin businesses, having a foothold in those low-margin businesses will allow Amazon to obtain an advantage with high-margin businesses in the future if it so chooses. 

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