Is Success Killing Amazon?
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It happens to all great companies. They win. The burger wars, the shoeshine wars, the detergent wars -- at some point, a company clearly emerges as the leader, and its competitors as also-rans. And then, what? What is left after victory? For some, such as McDonald's, (NYSE: MCD) there is no acknowledgement of "victory," but only a single-minded focus on sustaining and improving profitability, as though the company was still number two, forever trying harder. McDonald's expands their menu only slowly, and after extensive test-marketing. When they see an opportunity for easy profits, they move in, as with their McCafe line of coffee beverages. After Starbucks (NASDAQ: SBUX) did the heavy lifting of popularizing lattes and cappucinos, McDonald's piggybacked on their success, simultaneously making a nice profit while undercutting a competitor. But McDonald's still doesn't sell pizza, or tacos. No, they are a burger chain, number one, and very focused on staying there. For others, victory means it is time to move on to new endeavors. They branch out, buying or building new businesses. They diversify, (or lose focus, depending on your point of view.)
The sixties was the high water mark of the conglomerate. Companies bought other companies, oftentimes, lots of them. It didn't matter if they were in the same industry. The idea was to leverage borrowing costs and management -- if a management team could run a tire company, why, they surely could also run a movie theater chain, and a smoked clam cannery, and maybe a map or telescope company, right? Well no; often wrong, actually. Gulf+Western used to own the Miss Universe beauty pageant, the Associates finance company, and the Desilu TV production company, as well as mattress, cigar, sugar, record, publishing, and auto parts businesses, among others. Oh, and also Madison Square Garden, and with it the New York Knicks and the New York Rangers. Today, Gulf+Western is gone, having disappeared piece by piece, as it sold itself off in an ongoing, decades-long attempt to slim down and focus. With just a few exceptions, such as Leucadia National, Loews Corporation and, most notably, Warren Buffet's Berkshire Hathaway, conglomerates such as Gulf+Western are mostly gone, having been dismantled in the 80s, as companies have sold off sideline businesses, and focused on improving core competencies.
Which brings us to Amazon.com (NASDAQ: AMZN). What exactly does Amazon do? Is Amazon losing it's focus? Where are they going? They are the World's number one online retailer, but they are rapidly morphing out of or outgrowing or leaving that business and going into the packing and shipping business as a fulfillment agent for other online merchants. Last quarter their third party shipments increased to 40% of total units shipped from 36% the prior quarter. That is a huge shift. Amazon bulls are, for whatever reason, mostly applauding this move. But if that trend keeps up, and Amazon's units shipped become 50%, 70%, 90% third party, they will cease to be a retailer, becoming something between eBay and UPS a combination internet selling platform and third-party warehouser, packer, and shipper. Is this a good idea? Who knows?
I find it puzzling that Amazon gets credit for displacing bricks-and-mortar retailers even as it transforms itself into a bricks-and-mortar warehouser. This year, Amazon has opened six new fulfillment centers, that is, giant bricks-and-mortar operations, with twelve more in the works. Will these prove a smart investment, or money-hemorraging Taj Mahals tied like millstones around the neck of Amazon's earnings statements? I don't know, and I'm not sure that anyone else does, either.
Amazon is also, for now, a cloud services company, and a portable computer company, with the Kindle Fire. What do these businesses have to do with each other? Yes, I know that people can buy Amazon's online product offerings via their Kindles, but they can also shop Amazon from their laptops and desktops, and smartphones, a business which, incidentally, Amazon is talking about getting into, to further compete with Apple. Question: if it is a good idea for Amazon to start making telephones, why would it not also be a good idea for them to start making computers, and go into business against Dell?
I cannot help but admire Amazon CEO Jeffrey Bezos. He is an example of the ideal self-made man. He could take his billions and retire into a life of consumeristic hedonism, jetting around the globe drinking champagne, collecting houses and art. Instead, he chooses to keep working as hard as ever, in the great American tradition of Andrew Carnegie, Henry Ford, and Steve Jobs. However, I think Amazon may have fallen into the trap of trying to maintain it's growth rate by getting into new ventures. Some say that a company is like a shark -- it has to keep moving or it dies. But there is an obvious danger in growth for growth's sake. If you just move move move, too quickly, you may find that you have moved into a blind alley, and have committed huge amounts of time and money to vast and unprofitable ventures. You may find yourself like some sixties conglomerate, trying to focus on your core competency and shed businesses that only a few years before sounded like such good ideas.
Whither Amazon? They are moving, 'tis true, but where?
boriskabinov is short Amazon via long-dated puts and has no positions in any of the other stocks mentioned. The Motley Fool owns shares of Amazon.com, McDonald's, and Starbucks. Motley Fool newsletter services recommend Amazon.com, eBay, McDonald's, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.