Amazon: Trouble in River City?

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Or Wall Street’s Magical Leprechaun

\"RRJeff Bezos does have that “Leprechaunish” look about him. Wall Street certainly bought into the fable that Mr. Bezos (symbolically toiling over his “shoe making”) would deliver a pot of gold at the end of some yet to be defined rainbow. For 17 years, the Street has believed in his magic ever since he wrote in his SEC filing in 1997: “The Company believes that it will incur substantial operating losses for the foreseeable future, and that the rate at which such losses will be incurred will increase significant from current levels.” He also stated that he wouldn’t run the company to make profits, rather he would pour investment into growing the business to “get big fast.” Wall Street took a deep breath and bought into his strategy, hook, line and sinker. The Street believed that at some unknown distant point in time, and at the end of some rainbow, the Leprechaun would magically deliver his pot of gold.

Well, talk about “substantial operating losses” (which Amazon has lived up to for these past 17 years), this recent second quarter earnings report, revealing a net loss of $126 million, takes the cake. Worse, Amazon rather flippantly, with no explanation as to why, says it will lose between $410 and $810 million in the current quarter. Pot of gold? It’s more like a pot of coal.

The pain sure sent Wall Street into a selling spin. Even with a healthy 23% sales increase, Amazon’s huge drop in earnings hammered its stock, down 10.2% to $322 a share in late trading the day of the announcement. So is the “foreseeable future” now seeable as a time for a major course correction? Is there something Wall Street sees in Amazon’s long-term strategy that all of a sudden doesn’t look so positive? Is this the tipping point at which Mr. Bezos is going to have to begin making some money and delivering more profitable growth like the so-last-century traditional retailers such as Macy’s, Walmart and all the rest? God forbid. Or is this just a one-off bad quarter that Bezos will just “giggle” away and regain Wall Street’s delusional support in the hopes that one day, in the not so foreseeable future, the Leprechaun will eventually put something substantial into their pots?

The Foreseeable Future is Now

Amazon and the Leprechaun’s “Pickle”

Getting bigger faster couldn’t have been faster for Amazon, growing at a 20% to 25% blistering clip every year as it expanded into a multitude of unrelated product and service businesses. And therein lies the problem.

First of all, to achieve 20% plus growth “faster” becomes a huge compounding goal to reach. Almost out of necessity, Amazon, with an ever-increasing degree of urgency, needed to acquire and/or create new businesses. Accordingly, it also had to invest in the ability to operate and service those businesses, including organizationally and heavily building distribution centers and supply chain capabilities.

Just this year, Amazon introduced unlimited e-book rental and streaming services, and a set-top box. A big deal was to be its Fire smartphone launch. Analysts expected the Fire to follow the Kindle launch- pricing model of undercutting Apple and Samsung’s prices to quickly capture market share and establish Fire as a contender. Amazon debuted Fire with similar pricing. Go figure.

A big first mover in cloud computing, Amazon’s AWS (Amazon Web Services) quickly scaled to a dominant position in that space. But like every new space in the “Internet of things,” competitors, some of them appearing out of thin air, rapidly chased after the first mover. So not only are Google and Microsoft threatening Amazon’s position, a whole slew of small, niche players are entering the space for a piece of the action. Much of this quarter’s miserable earnings news was attributed to a slowdown in AWS growth, stated by Amazon as affecting financial results in a “meaningful way.” This is serious as it portends more competitive battles in a space where Amazon had great future expectations, having long said that its cloud computing services would one day be as large as its core business of selling stuff. While not broken out in its financial reports, analysts projected Amazon’s cloud sourcing business would reach between $5 and $6 billion in annual sales next year, about 5% of Amazon’s roughly $90 billion in total revenues.

Had Amazon’s meteoric growth been accompanied by growing profits (or less steep losses); and if Amazon were not such a hodge-podge of different businesses, products, services, all competing in different markets; and if the vast enterprise were not so fragmented organizationally, with its many leaders operating with the single dictum of getting bigger faster (with blatant disregard to making money and establishing pricing many times below costs as a weapon of choice for gaining share) Amazon would not be in the pickle I now predict it is in.

This pickle is exacerbated by competition, the very challenge that drove Bezos’ mantra from “day one” to “get big fast.” The threat of more and more competitors chasing Amazon is getting bigger and bigger. Furthermore, it is not just the giants such as Google, Microsoft, Apple, Samsung, eBay and the thousands of small e-commerce niche players attacking specific pieces of the Amazon pie, it’s also the so-last-century traditional brick-and-mortar retailers like Walmart, Macy’s, Nordstrom, and on and on, all of whom are getting their acts together on the omnichannel strategy. Therefore, the traditionals will most assuredly reclaim some of the chunks of business Amazon stole from them and will likely beat Amazon in the race into many new markets.

In fact, for my take on how Walmart has it sights set on Amazon and views it as a direct competitor, check out my previous article Walmart Can Crush Amazon. 

Speed Kills

I have often invoked the warning that “speed kills” when I look at what Bezos is masterminding. Eventually the speed needed to add on to compounding revenue growth (with disregard to profits and often giving stuff away for market share) leads to short-term tactical decisions that in Amazon’s case may now find itself at an undesirable strategic tipping point at which it will have to step back, come back down to earth, and reboot to a more focused, disciplined and profitably run business. A business that can compete in the real world.

The big questions are: does Jeff Bezos believe it’s time to do so; and if so, is he, as one of the most brilliant entrepreneurs of this century, capable of implementing such an interventionist and completely opposite strategic direction?

Let me underscore what “one of the most brilliant entrepreneurs of this century” really means. As a retailer, Amazon has been the single biggest disruptor in the industry since Sam Walton built his first store. Bezos has singlehandedly changed consumer behavior by making consumers comfortable with e-commerce, and as a result, the way every brand now does business. He changed the world, which is exactly what he set out to do. While doing all this, he raised the bar for competitors and increased consumer price sensitivity, which has gradually made the environment even more difficult for Amazon as well.

Finally, the other, and perhaps most decisive question at the end of the day (or the rainbow so to speak) resides in the actions of Wall Street. If the Street decides that Bezos is no longer the magical Leprechaun who is able to deliver a future pot of gold, and the stock continues to tank, Bezos may have no choice other than to “get profitable fast.”

Will Bezos have the last laugh? Mischievous Leprechauns usually do.



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