Why doesn't Amazon.com make money?

[furryman]

Why doesn't Amazon.com make money? I mean book stores make money, music stores make money, toy stores make money, even video game stores make money. Yet Amazon, which is a combination of all these things can't make money. This doesn't make sense.
Another question is: How cam Amazon continue to stay in business if their losing money?

[The Mick]

because most would rather go to a real store where they can see what they're buying, what condition it's in, and not have to worry about getting their credit card info stolen.

[Johnny L.A.]

Heck if I know. They get lots of my money!

If you're selling something you need to sell it for the acquisition cost plus enough to pay for rent, electricity, taxes, employees, profit, etc. If you do volume business you can lower the selling price and pay for the overhead with smaller markups. If you are selling in low volumes you need to have a higher markup. The main appeal of amazon is its low prices. Either their prices are too low to make a profit, or their volume is not enough to make up the difference. To become profitable they need to sell more at a small markup, raise their prices, or cut expenses.

If they raise their prices they will lose customers like me. Why buy online and wait for a delivery when you can get the same item for the same price at a "brick-and-mortar" store?
If they raise the volume of sales, they can keep low prices. I think part of the problem might be that people (or at least I) buy specific items from them. When I go to a book or video store I browse and tend to buy more books and DVDs than I would if I were shopping for a specific title. I buy electronics I like to see them in person and compare different models IRL. I understand their electronics sales are doing well, but I prefer to see before I buy. I don't know how they can increase their sales.

Cutting fixed costs is a common option. Rent can be lowered by relocating to a less-expensive area. Where are they? Seattle? High rent. If they moved to Bellingham they could save a lot of money on rent, but I don't know how big the UPS operation is up there. Smaller towns are good for saving money on buildings, but they need the infrastructure to support them. I think a smaller town (like Bellingham, e.g.) does have the infrastructure to support them, but many people don't want to live in a small town. Also, there are expenses involved in relocation. These expenses may or may not be outweighed by the cheaper rent and lower taxes.

Electricity prices (outside of California *L*) are fairly stable, so they would have to conserve the power they use. But how much can they save and not compromize safety?

Employees are a big expense. But you need to have enough employees to handle the business. Too few, and shipments slow down. Slow shipments can cost them customers. Again, relocating to a smaller town can help, because the cost of living is lower and employees can be paid less. For example, my 1-BR apartment in Los Hideous is $711/month. My best fiend rents a 2-BR house with a yard and a garage in Bellingham, WA for $750/mo. I could live almost as well up there as I do here on half what I'm being paid now. But there is a certain amount of "prestige" in living in a "hip" place like Seattle. Many employees would not want to relocate. (But they can be replaced by lowe-paid locals.)

I don't know why amazon is not making money, but they need to make more. (I've heard that they're improving, BTW.) They need to increase sales or lower costs. I don't know how they would increase sales, so they might need to relocate, reduce their workforce, and employ people in the new, cheaper location at a lower salary than they are paying the people in the old, more expensive location.

Just a guess. (I am not an economist.)

[stolichnaya]

Well, The Mick may be right, the jury's still out on that. Amazon is essentially selling below cost to create a dependance on their service and to build market share. Presumably, through a combination of economies of scale and raising prices Amazon will eventually reach profitability.

[kunilou]

Sure it makes sense. Once it turned out that consumers expected online shopping to be either a lot cheaper or offer a lot bigger selection than the neighbrohood Borders or Circuit City, online stores realized they needed a huge and expensive infrastructre, which turned out to be not a lot cheaper than bricks and mortar. Add to that the marketing costs in getting their name established and you have a guaranteed formula for losses (at least) the first few years.

How can they stay in business? Apparently there are still enough investors or lenders who believe in the company's business model to keep giving them money in hopes of future profits.

[xizor]

Originally posted by furryman
Another question is: How cam Amazon continue to stay in business if their losing money?

With investment capital. They are not making money selling books, but they are making money by selling stock and accepting new investors who think that they will eventually make money.

[Bosda Di'Chi of Tricor]

Overpackaging is part of the trouble, right there.

Have you seen how these guys pile on the carboard & plastic wrap? It's silly! And raises shipping & handling costs.

More generic/cheaper packaging would cut costs. And, perhaps reduce losses due to theft during shipping. After all, a plain box doesn't tell you if what's inside is worth stealing, but an Amazon box might have movies or music CDs in it.

[johnson]

The main appeal of amazon is its low prices.

Huh? Go here and see how often Amazon.com has the lowest price. Not often (as in almost never), I've found, and they often miss by a wide margin.

[headshok]

FTR, Jeff Bezos has promised that Amazon will be profitable by the fourth quarter of this year. To that end, they're laying off workers and closing distribution centers and whatnot. They're also using an unconventional "pro-forma" accounting method, which many analysts criticize as a mirage, because it allows companies to exclude "irrelevant" costs in order to post a profit.

But hey, at least they're trying.

[lucwarm]

Well, most new businesses lose money at first. The question is whether they will eventually become profitable. As suggested by the other posters, Amazon faces many obstacles in the path to profitability.

Here are a few of my own thoughts on the subject:

(1) It is difficult for Amazon to underprice B&N or Borders because Amazon and/or the customer has to pay to transport books over the last two miles. That adds a buck or two for each book, I suspect.

(2) Retail stores have an advantage in that customers can pick up, look at, and fall in love with items that they would never have considered mail-ordering or internet-ordering. Often, these impulse buy items carry a high markup yielding big profits for the retailer. This allows them to discount more heavily.

(3) Many customers want instant gratification. Many customers therefore stay away from Amazon.

[SmackFu]

The standard Amazon answer is "because they don't want to".
The idea is that it's the expansion into new markets that really drains the cash, and they could stop that at any point. But if they stop expanding, they will stop attracting investment capital, and they will stagnate. So they keep expanding into every known sector, and the startup costs are enormous, and the cut-rate prices they need to offer to attract customers just burn cash.

Useful fact: I heard that their book division is actually profitable nowadays. Go figure.

[handy]

In what way do you mean they don't make money? Sure they do in some ways.

They do make money for the people who work there, those people have salaries & they make money.

Amazon was discussed quite a bit before, however, try to remember they spent a lot of the incoming money on buying up smaller competitors too.

[Hello Again]

When Amazon started, they used Ingram -- the largest book distributor in the US -- as their "warehouse" figuring that if they didn't do distribution, they could pass on the savings to customers in the form of 30%+ discounts. (no inventory risk, fewer people to pay, no capital expenditure, etc.) Groovy, right? Everyone's happy, since the 30% discount offsets the shipping charge of $3.95 or so.

Well, as the business grew, they wanted more control and to carry a larger number of items than Ingram had available. PLus they wanted to ship more quickly than the 2-3 days Ingram could turn around. Plus, the big booksellers join the fray and they already had distribution available. So, all of a sudden they're pouring big bux into distribution facilities, and staff but yet, customers are still expecting their discounts.

Over the past year they have gradually scaled back their discounts, couponing, marketing, etc. They've also closed some of their distribution or "given the staff the summer off."

okay, I'm running out of steam here... Its actually incredibly complicated. Amzn raised money through stock offerings, junk bonds, and other such means and they have a great deal of debt. When the market and AMZN stock tanked, all of a sudden investors -- who up to that point had not cared about the actual profits the company was making -- started raising a stink.

[Little Nemo]

Another possiblity is that Amazon is looking at the long term picture. It's true that their discount pricing policy is costing them current profits. But it's also hurting their competitors. If Amazon's pockets are deep enough to allow them to maintain their current policies, they may succeed in driving their competition out of business. And then Amazon can change over to more realistic (ie higher)pricing policies which will make itself profitable.

[Johanna]

I buy practically all my new books & CDs from amazon. (Browsing used book stores and coming home with tons of stuff is a different scene altogether.) I love to go hang around in Borders and Barnes & Noble. What I do there is browse and identify exactly what I want, then go home and order it from amazon. I wait until I have enough specific things in mind, then order a bunch all at once to save on shipping costs.

I hardly have to spend anything at amazon any more, since I got the amazon NextCard. It accumulates rewards points which I cash in for amazon merchandise. One point per dollar on your card, three points per dollar spent on amazon. 1000 points gets you a $20 gift certificate. It's almost too easy!

[gazpacho]

In my not so humble opinion amazon investors ruined amazon. I think amazon could have been a nice little business. People however bid the stock up to the point where it was worth a whole lot more than a nice little business. Amazon management then got caught up in the internet hype and tried to become the walmart of the net, borrowed more than 2 billion dollars most of which is gone. They used this money to build warehouses fund other dot coms sell stuff for less than they would otherwise.

They just did a deal with AOL to sell more stock for 100 million dollars. Unless they get their act together this 100 million will only stave off bankruptcy for 6 months.

Even now amazon is worth more than Borders and Barnes and Noble combined. Even though Amazon has less sales those sales are growing slower than the regular book stores. It boggles my mind.

[Hello Again]

Gazpacho, I think you are right on. Can you say overextended?

FYI, There's a clause in the AOL deal that allows AOL to buy AMZN in its entirety. Wouldn't that be interesting.

[shelbo]

I think Amazon should charge a premium. You can browse and order stuff from your desk at work, you don't need to hassle driving and parking. And they have EVERYTHING. (Well, compared to your run of the mill mall book or music store they do).

[Cervaise]

Small nitpick:

(Johnny L.A.) Rent can be lowered by relocating to a less-expensive area. Where are they? Seattle? High rent.

Actually, Amazon (working with mega-property-mgmt firm Wright Runstad) got a somewhat shady sweetheart deal for the property. So high rent isn't an issue, though other related expenses still figure into the accounting. Seattle's business taxes, for example, are on the high side, but the city has a history of waiving them (or big percentages of them) to woo or retain desired companies.

[BingoBurringo]

What about the dough they make on auctions and straight selling used books? I would assume Amazon often makes a larger profit taking the commission (99 cents plus 15% of total used sale per item) from the online seller than they do selling a new book.