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  • purple_martin_man purple_martin_man Jul 8, 2006 9:03 AM Flag

    Amazon Food Scoop

    Amazon Food - WSJ pB16 has fed its customers' minds with books. Now it wants to fill their stomachs. Amazon began selling thousands of grocery items in bulk recently, putting it into competition with cash-and-carry retailers like Costco Wholesale. For Amazon shareholders who've lost almost a quarter of their investment this year, that could be a recipe for further pain. But it may be that Costco's membership model is what Amazon needs to emulate.

    Amazon's business isn't scalable in the same way as other Internet giants, like Google or eBay. The cost of mailing goods for free obliterates profits, even as sales grow. Last year Amazon's sales rose 23%, while income from operations didn't budge.

    Strangely enough Costco, whose shares are up 14% this year, also has wafer thin margins. In its last quarter, Costco sold $13 billion of stuff. But subtract costs and it collected just $100 million of operating profit. So how did it squeeze out $236 million in net income? Almost all of it came from membership fees.

    That's no aberration. Last year, Costco's $1.1 billion of net profit matched the income it made from charging families $50 to $100 a year for the privilege of entering its warehouses. These fees provide the kind of pure profit Amazon could use to offset the costly addiction its customers have to free shipping. In fact, Amazon seems to be on this track already. Last year it launched "Amazon Prime," a $79-a-year membership offering unlimited, and accelerated, free shipping.

    The trouble is the company has left shareholders in the dark over Amazon Prime's performance. In its past two earnings releases, Amazon said membership doubled from November to December, and then posted strong growth this year. Yet it's hard to judge these claims. Amazon won't disclose how many paying members it has. Now that Amazon has leapt into Costco's territory it should provide shareholders with more information about its business. Who knows, they might even like what they see.

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    • >>>Who knows, they might even like what they see.<<<

      This is a very bullish article.

      Monday, Amazon will realease the number and the stock will pop $4.00 or more.

      Rocket's denture will fall out.

    • ...unlike Costco (where the customer shows up and drives home with the goods)Amazon is offering free shipping on goods with no margins to cover the shipping costs...and they are doing it during a period of mounting fuel surcharges by UPS.

      ...smells of desperation.

      • 2 Replies to rosiescenario
      • Seems to me that this food model only works at the very high end. Those that shop for food at Marshall Fields (Chicago) and Harrods (Londen). I assume AMZN will price the food such that the free shipping makes a profit, and that the customer does not care as long as he gets his special olives in a day or two. Saves calling the chaffeur to get the Rolls out of the garage to drive to town.

        Now AMZN has the problem of hiring a staff that understands this market and which will stock items that will sell. Mistakes sit on the shelf until they expire. Something that books don't do.

        I think they are not competing with Costco but with Marshall Fields (Which is going out of business).

    • Costco's membership fees are pure profit -- there is little or no corresponding cost. Not so with Amazon Prime. The free shipping could well cost AMZN much more than the $79 membership fee annually in shipping costs. I wouldn't think anyone would join the Prime program unless they expected to incur more than $79 of shipping each year. If the Prime program breaks even (which I doubt it does), AMZN's only profit source is the razor-thin margins mentioned in the article you quoted.

      $29 by August 11. Sub-$20 longer term.

    • thanks for the article. No way will groceries enhance this over-valued stock. It is on the way down to sub-$20s. Simple as that. Just a matter of when. I believe for sure in the next 6-12 months. Sub-$30s within 2 months.

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