How does Amazon make a profit
Why Amazon Doesn't Make Profits -
and still wins.
Almost everyone has seen this chart in the past few months: while Amazon's sales are growing exponentially, the company is still not making a profit even after 20 years. That is true, but it belies what is really happening. Benedict Evans from Andreessen Horowitz dismantles Amazon's balance sheets and sifts out the value-driving parts (in the original: here).
Profit or Cash Flow?
*) The sales growth is mainly driven by the sale of general merchandise in North America. And in this product category, various products with different margins are sold to a wide variety of target groups.
*) Amazon is organized into independent units by country and product category. And while some of these areas are already established and profitable, others, like the internal startups, are still burning money.
*) The Amazon marketplace also distorts the picture: Amazon does not book the sales of the more than 2 million third-party providers here, but its own commission as sales.
The statement that can be made on the basis of the chart is that Amazon spends everything it deserves. If, however, the strategy is to reinvest achieved margins in the customer experience for the benefit of growth, then the success of this strategy is not reflected in profits, but in cash flow.
Profit is opinion, cash is fact.
The shift in perspective from profits to cash flows then paints the following picture:
*) The operating cash flow return on sales moved steadily between 2003 and 2014 between 6% and 8% - at its peak even 13% in December 2009 (Kindle?).
*) While Amazon invested roughly proportionally to sales until 2009, since 2009 an even larger part of sales has been reinvested in growth at the expense of free cash flow.
*) These funds are mainly invested in two areas: (1) in new warehouses and (2) in the Amazon Web Services area and indeed - but we already knew that above - to an extent that no profits are generated.
And how long will it go on like this?
Jeff Bezo’s view is pretty clear: keep investing, because to take profit out of the business would be to waste the opportunity.
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