Dueling Fools
Rumble in the Jungle
The Bear Rebuttal
By
Paul Commins (TMF Buster)
Boy, do I feel like a dork. Jeff calls me "thoughtful and deliberate" and promises a strong argument, and I respond with a laundry list of well-worn Amazon cheap shots. The pressure is on to step up my skills in this rebuttal.
By the way, what'd you think of those cheap shots, anyway? Pretty compelling, eh? Pop, pop, pop. It was like shooting fish in a barrel, I tell ya...
Ooops. Sorry.
As I hinted in my bear argument, Jeff and I actually agree on a lot when it comes to Amazon, and I am in agreement with the main point in Jeff's bull argument: It's time to sit back and watch for a while.
As the plot continues to thicken, then, what should we be looking for? Here's what I'll be watching:
Light before big
Make no mistake about it: Amazon is still richly priced. For a retail operation to justify this kind of premium price, it will have to grow into something fundamentally different from anything we know today. Big isn't different.
Amazon should be at the very head of the charge when it comes to virtual retailing, but it's not. The whole idea -- the fundamentally new idea -- is to keep the business as light as possible, by outsourcing everything but the brand, the online interface, and the customer relationship. If you control these, you control the game, and collect a sizable piece of the action on top of very little investment.
This was the promise of Internet retailing, and this bear agrees with discussion board contributor BillParham: Amazon has strayed from this path. The perceived "Internet land grab" begat such a time-constrained frenzy for growth that Amazon plum forgot, it appears, that they are supposed to be writing a new story. Category and revenue growth is not a new story.
The recent deal with Toys "R" Us is a good first step backward, toward the fatal fork where Amazon went astray, eventually stumbling on lawn tractors and home furnishings. But Amazon is still a long way from the front of the pack when it comes to Net retailing.
As Amazon continues its move into electronic gear, they're sure to come up against Dell (Nasdaq: DELL), a company that is already the virtual retailer that Amazon should have become by now. While Amazon was building warehouses, in conflict with the Internet vision, Dell was building partnerships, not only with suppliers but with shippers and other fulfillment functions.
The ideal virtual retailer exists entirely independent of the product flow. Goods move from supplier to assembler to customer, without ever physically passing through the retailer. Only information, knowledge, and the customer relationship move through the retailer. Now that Amazon has outsourced toy inventory, perhaps it should complete its self-removal from the flow of goods by outsourcing the fulfillment of Toys "R" Us orders.
Measuring light before big
It's time to focus on the essence of what makes Amazon different: high sales volume relative to invested assets. One of our most thoughtful discussion board contributors, howardroark, suggests that we benchmark this progress by the ratio of net sales to net fixed assets (net after depreciation; excludes goodwill, equity investments, etc.). The higher, the better. Here's the score for the last six games, relative to Wal-Mart and to stellar virtual retailers Dell and Cisco (Nasdaq: CSCO):
Net Sales/Net Fixed Assets
Quarter AMZN WMT DELL CSCO
Q2 00 1.7 1.3 8.7 4.0
Q1 00 1.7 1.3 9.1 4.2
Q4 99 2.1 1.6 8.9 4.3
Q3 99 1.6 1.3 10.1 4.2
Q2 99 2.0 1.2 10.2 4.3
Q1 99 4.8 1.4 10.3 4.4
The early numbers show the Internet advantage: more sales per fixed-asset dollar. Recently, some of Amazon's advantage has evaporated. I'll be watching to see if the gap begins to widen again or gets narrower.
Yes, Jeff, the Amazon arguments are getting stale, but the day is still young, as you Foolishly remind us. Myself, I plan to follow the action faithfully, but I won't be paying for my seat. I recommend standing room for this one, unless you've got money to burn. Save your high-risk money for the next revolution.
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