There is a lot to like about Amazon (NASDAQ:AMZN) from both a consumer and investor point of view. But one key insight reveals that Warren Buffett may never consider owning a stake in the beloved retailer.
The surprising comment
When discussing Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) and its decision not to pay a dividend, as well as his general thoughts on dividends overall in his 2012 Letter to Shareholders, Buffett concluded his commentary by saying:
Above all, dividend policy should always be clear, consistent and rational. A capricious policy will confuse owners and drive away would-be investors. Phil Fisher put it wonderfully 54 years ago in Chapter 7 of his Common Stocks and Uncommon Profits, a book that ranks behind only The Intelligent Investor and the 1940 edition of Security Analysis in the all-time-best list for the serious investor. Phil explained that you can successfully run a restaurant that serves hamburgers or, alternatively, one that features Chinese food. But you can't switch capriciously between the two and retain the fans of either.
And Buffett's last two sentences are what really stood out to me considering Amazon, and bear repeating:
Phil explained that you can successfully run a restaurant that serves hamburgers or, alternatively, one that features Chinese food. But you can't switch capriciously between the two and retain the fans of either.
You see, the retail side of Amazon has an incredible retail business model that is on pace to revolutionize how Americans buy pretty much everything. As John Maxfield notes in his excellent article:
In short, by laying siege to local marketplaces with fulfillment centers, it isn't unreasonable to conclude that Amazon is in the process of erecting an impenetrable moat that could last for generations.
In addition, Amazon offers incredible customer service, which Buffett has noted is one of the keys to success for any company in the retail industry.
But all the examples of Amazon branching out into various different business areas makes me wonder if in the name of novelty and innovation, it is overstepping its bounds.
The curious decisions
The recently announced Echo is the latest example of Amazon's foray into products that seem to run completely counter to the things which have made it so successful. It of course follows the Fire Phone was met with much fanfare, but thus far could not be considered a success.
In October we learned Amazon charged off $170 million worth Fire Phones and it carried another $83 million worth of inventory on its books. And that is to say nothing of the money poured into advertising as well as research and development.
Of course, there is also Amazon Local Register or Amazon Storybuilder, the company's odd attempts to nudge its way into industries that were almost entirely unrelated to its core competencies and what has made it so successful.
But the status of the October 2009 product Amazon PayPhrase, an attempt to allow customers easy and succinct way to pay online -- similar to the newly announced Visa Checkout -- is perhaps the most deflating of all, as its website now shows:
Although none of these will likely impact the bottom line of Amazon, one has to wonder if resources are being dedicated to things that they simply shouldn't be.
Of course, companies like Google, Facebook, Apple, and countless others have all had product launches that have been remarkable failures. And they too have undertaken products and services that often navigate into uncharted and somewhat murky waters.
It is also naïve to suggest everything Amazon has done outside of its core retail business model has failed. The Kindle has been a wildly successful product. And its offerings for Prime customers -- of which I am gladly one -- like its music and video options aren't exactly the best on the market, but they are by no means busts either.
Yet with those, when you take a step back and consider what Amazon is really doing, clearly those are efforts made to further expanding its moat and continue to build upon the remarkable success of its core retail operations. Not steps taken in an entirely different direction to what has made it successful.
What Buffett may think
When discussing how he and Charlie Munger decide what Berkshire Hathaway will invest in, Buffett noted in this year's letter to shareholders, "It's vital ... that we recognize the perimeter of our 'circle of competence' and stay well inside of it."
All businesses make mistakes -- and so too does Buffett -- and I am not attempting to suggest in any way Amazon is a failure. I think it is just the opposite, in fact. And in no way am I suggesting attempts at innovation are bad things. If Amazon is able to continue to build upon the success of its retail business, it could be one of the most valuable companies on the planet.
But with its various moves into areas that seem to be entirely outside of its circle of competence, I worry, if in some ways Jeff Bezos' company is trying to serve both hamburgers and Chinese food.