Post of the Day
April 6, 2000

Board Name:
Amazon.com

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Subject:  Amazon to Spin Off Warehouses?
Author:  readyteddy

Let me see if I have this right. Amazon is thinking about spinning off their "order fulfillment" business and just keeping their...brand? (SEE http://biz.yahoo.com/mf/000404/plate_000404.html)

Hmmm...this might work. "Spinning" is what they do best!

You know, my dear departed father was a materials management (that's order fulfillment) specialist. He learned warehousing while working for General Motors in the 1930's. During WWII, he traveled the country setting up warehouses and ordering systems for Army Ordinance. In those days, they had to track tens of thousands of items, (where is the item stored, how many to have on hand, at what level should they reorder, how should draw downs of inventory be "fulfilled"), all without computers! Suffice it to say, order fulfillment was an art and a science, and in those days, if you got it wrong, somebody somewhere ran out of bullets.

The point here is, "order fulfillment" is not exactly a new thing; its been done by many for many years and one has to think that many do it far better than Amazon.com does, given their track record and lack of experience. Speaking from experience here, neither my Dad nor anyone else I have ever heard of made the big bucks on warehousing. It's, like, not a glamorous, high margin thing. In view of all this, one has to wonder why anyone would want Amazon.com's order fulfillment business and if so, what it would be worth. If spinning off "order fulfillment" was a win - win proposition, the world would be lousy with order fulfillment businesses.

Incidentally, my late father retired early from the materials management biz, and started�hello, a book store. The traditional retail book business and materials management went together like peas and carrots.

See, the edge that retail book sellers traditionally had was that the publishers helped finance their inventory! If a book didn't sell, you sent it back to the publisher and got credit for it towards the next order. In the case of paper backs, you didn't even send the books back (shipping was too expensive). With paper backs, you just tore the covers off and sent them back. The books, you threw out.

Inventory management was therefor quite important. The key to profitability was to keep the inventory turning over. You didn't buy the books COD, so if you had the right ones flying off the shelf you had someone else finance your inventory and also taking the downside risk of the item not selling. Sweet!

You either sold the books or they were "outta there". To do otherwise was to have one's capital tied up in inventory, sitting on the shelves gathering dust. Good old fashioned bookstores succeeded by knowing what their customers wanted to read, not by having every book on earth sitting there in case someone wanted it. If someone asked for something weird, you special ordered it.

In other words, Amazon.com would be a perfect place to direct the weird order, because they are dumb enough to have their capital sitting in a warehouse somewhere in the form of books waiting to be taken off their hands. Now if these guys could do the "just in time" thing in the book business, I would stand up and take notice.

My father's bookstore was both warehouse and retail establishment. It had the same gross operating margins as Amazon.com but was a lot more profitable, despite a "bricks and mortar" store that my father rented and thus could not depreciate. In fact, my father's bookstore was profitable in it's first year and every year thereafter for 25 consecutive years.

My father got out of the business in response to a relatively recent phenomena. He found himself competing with businesses which, for some inexplicable reason, were not required to earn a profit.

It started when some yuppie dentists in the college town my father lived in thought it would be cool to own a Border's type store. Following Border's odd business model, they stocked the shelves with thousands more titles than were necessary (why does Borders feel compelled to carry every single novice user book on MS Windows ever written, instead of just picking the best one and carrying it?).

Given all those books in need of dusting, and shelf space to hold them, the yuppie dentists hired an awful lot more retail help than my father ever needed and rented a lot more space per volume of sales. Also, in keeping with the new paradigm, they discounted best sellers (seriously degrading their gross margins) and advertised heavily.

My father strolled over to this new establishment and checked it out. Since he had over 90% of the book business in the whole town, and knew what rents were like, and how much advertising and wages cost, and what the mark up was on books, my father quickly concluded that the yuppie dentist bookstore could not turn a profit if they had 100% of the business in the entire town! Being a patient type with a loyal customer following, my father decided to wait them out.

The yuppie dentists had deep pockets, but even they must have been astounded when Borders decided to compete for the same business my father had and the yuppie dentists wanted. The Borders store, like the yuppie store, was set up such that it could not make money with all the business in town either!

Weird as it seems, B. Dalton then decided they wanted a piece of the action, too! Their business model was similar to Borders and the yuppie dentists and their store was but 100 yards from the others! We now had three businesses competing vigorously for the right to lose money in perpetuity selling books in a college town.

As if this weren't enough, in jumps Amazon.com to compete with everyone else. Just like the other guys, Amazon.com doesn't seem to have to earn money either. Just to hedge their bets, both Borders and B. Dalton launch unprofitable e-businesses to compete with their unprofitable bricks and mortar stores, lest unprofitable Amazon.com steal their unprofitable book business in a medium sized Midwestern college town. Far out!

Meanwhile, every retail establishment from the drug store to the grocery store to the Wal-mart, now has at least a little carousel of discounted best sellers to siphon off some of the cream of the business. The book almost everyone wants and might even pay a premium for is now available most anywhere at a discount.

I mention this because the latest "brainstorming" by Amazon.com must be seen in context. By getting rid of distribution and focusing on it's brand, Amazon.com is seeking to unload the icky parts of its business, (delivering goods and/or services to others for a profit) and focusing on it's core business (making money through highly inflated stock prices). This makes a lot more sense than competing in what is really a prosaic, fairly low margin and intensely competitive retail business. If they got it all, you wouldn't want to own Amazon.com., but the company, it seems, is far more desirable to its stock holders as a money losing retail business in the making than it would be as a fully realized money losing retail business.

The latest musings from the company are just another jive concept intended to distract us from the fact that their core business, the Internet aside, is not exactly the stuff of dreams. While it is true that Amazon.com would make a lot more money if it didn't have any operations, distributive or otherwise, that isn't really what the game is all about, is it?

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