Please ensure Javascript is enabled for purposes of website accessibility

Does Have a Leg Up on Competitors or Not?

By Travis Hoium - Dec 1, 2015 at 2:58PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A look at where each dollar of Amazon's sales ends up shows that it doesn't have a lot of room to make money.

The retail industry has always been full of cutthroat competition, and today, online retailers like (AMZN 0.25%) are taking market share and building massive businesses to compete with brick and mortar. Standing in the way are established discounters Walmart (WMT 0.11%) and Target (TGT 1.26%), who have dominated retail until the rise of online shopping -- and aren't going to give up their place without a fight.

How do we judge who is winning this battle? Let's let the numbers speak for themselves.

How to build a retail giant
If you're going to build a major retailer, you have to do something better than competitors. What Walmart was able to do was use technology (it built the largest private satellite network in the 1980s) to lower operating costs and inventory sitting in warehouses. To this day, it uses those savings to offer lower prices than competitors.

Target used its scale to buy at low prices, like Walmart, but it combined that scale with a little style that allowed it to command higher prices. As we'll get to in a second, that resulted in a higher gross margin than its discount competitor. Both models worked until the rise of online retail. 

The Kindle has helped draw customers to Amazon, but it hasn't helped the company make money. Image source: Amazon.

Is Amazon winning online?
The threat most people see from online retailers is that they can reduce operating costs because they don't have to run stores. They can use this to lower prices and steal market share. But is that really happening?

One good way to analyze retailers is to look at where each dollar of revenue goes. There are three main costs associated with running a retail company: cost of goods sold, operating costs, and non-operating costs (like interest expense and taxes).

If we look at third-quarter results from Amazon, Walmart, and Target side by side, you can see where they spend their money. As I mentioned above, Walmart makes less in gross margin on each sale than the other two, while Target generates slightly higher margins while spending more on operations. Amazon has the highest gross margin, which actually makes sense because studies have shown that its prices are higher than Walmart's and Target's on average. Amazon's figures also still include the high-margin AWS business, which isn't fully broken out in financial results, helping the margin figure.






$25.36 billion

$117.40 billion

$17.61 billion

Cost of Goods Sold

$16.76 billion 

(66.1% of sales)

$87.45 billion

(74.5% of sales)

$12.44 billion

(70.6% of sales)

Operating Costs

$8.20 billion

(32.3% of sales)

$24.25 billion

(20.7% of sales)

$4.30 billion

(24.4% of sales)

Non-Operating Expenses

$327 million

(1.3% of sales)

$2.41 billion

(2.1% of sales)

$327 million

(1.9% of sales)

Net Income

$79 million

(0.3% of sales)

$3.30 billion

(2.8% of sales)

$549 million

(3.1% of sales)

Sources: Company SEC filings and earnings releases.

What's shocking here is that Amazon spends far more on operating costs than Walmart and Target. Hidden in the operating cost line is shipping, where Amazon spent 12.7% of revenue last quarter. Even if we pull shipping out (which is an absolute necessity for an online retailer), Amazon spent 19.6% of sales on operating expenses, nearly as much as Walmart.

Today, Amazon's real advantage is that it generates a higher gross margin than its brick and mortar rivals. That's the only reason it's not losing money right now. But operating costs will remain higher than both Walmart and Target because of high shipping costs, something Amazon won't ever be able to eliminate from its business.

What's ahead for Amazon?
Amazon has certainly built a big retail business and is now worth $312 billion versus just $45 billion for Target and $189 billion for Walmart. But it isn't profitable, and to change that, it will need to lower one of the major costs in its business that I've outlined above.

The biggest opportunity I see to lower costs and increase profits is in operating costs, particularly shipping costs. But when your business is built on shipping every order to a customer's doorstep, there may not be many options to cut costs. It's something to think about when deciding whether is the right stock for your portfolio.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned, Inc. Stock Quote, Inc.
$2,151.82 (0.25%) $5.44
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
$119.20 (0.11%) $0.13
Target Corporation Stock Quote
Target Corporation
$155.36 (1.26%) $1.93

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/21/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.