Amazon Thrawn for a Loop?

By Nick Slepko - May 2, 2012 | Tickers: AMZN, AAPL, BBY, COST | 0 Comments

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Despite what the Seattle Times writes in “Part 3: Pushing Back on Sales Taxes – States fight back against Amazon’s tax deals” the lack of sales tax on Amazon (NASDAQ: AMZN) products in most states is not its only advantage of consequence. The estimated state sales taxes that would have been owed over the last five years are less than half of Amazon’s profits during the same period. Investors should consider Amazon’s service, quality, and, above all, the mediocrity of many of its competitors.

Besides probably still existing next year, a major advantage Amazon has over Best Buy (NYSE: BBY) is service and reliability. Best Buy still struggles with even basic issues surrounding shipping, in-store pick-up, and has only gradually been moving away from its Kafka-esque returns experience (though the same cannot be said of anything to do with in-store product assistance – yet their phone support is good once you get to a human). Even when Best Buy sheds all these hurdles, it still has not done well. Best Buy vending machines have become (at best) expensive billboards in 200 airport locations – despite Bellevue, WA-based Coinstar and its continuing success with Red Box and other Japanese-inspired vending ventures that are endearing these machines to American consumers. Sadly, while the poorly-executed Geek Squad could have been the tip of a reorganized strategy, Best Buy customers find the squaddies’ quality varies wildly from location to location, often has significant delays in being able to perform services and repairs, and are beset with ham-handed, aggressive up-selling directives verging on bait-and-switch.

Less ridiculous, Target and Wal-Mart still have spotty online interfaces which often lack information with which to base decisions on all but the most familiar household items. Incidentally, they would do well to avoid emulating the heavily cluttered and overly busy interface to which Amazon continues to cling (and learn from the problems it has had had with its international portals). Still, Target and Wal-Mart have given customers better, more reliable experiences than Best Buy, and Amazon’s strengths in every other area of the shopping experience evidently balances out a highly-flawed website that most have grown used to over the years.

Costco (NASDAQ: COST) has probably done the best job in providing a straightforward and reliable online experience that also includes enough information to make virtual decisions – however, its liberal return policy and strong track record of offering selective, quality products is really what gives online shoppers a peace of mind when using Costco.com. Costco’s online sales are equal to one top warehouse’s sales, and if travel and other digitally-delivered services are calculated, that figure rises to at least 13 warehouses.

While Costco is the only major retailer that has margins as tight as Amazon’s, it is far less experimental or diverse as Amazon – of course, the continuing transition from its founder CEO to an almost equally experienced home grown CEO is also confirming that it has a management team that is more interchangeable and less likely to be severely rocked by the loss of one or even three of its major executives. It is not clear that the relatively young and hyper-involved micro-managing Bezos can offer the same peace of mind to Amazon’s shareholders and customers.

Yet, the Seattle Times and other detractors seem to believe that taxes are the holy grail for Amazon’s success. In yet another unstartling revelation the Times writes, “Taxes were on Jeff Bezos' mind right from the beginning of Amazon…He once told an interviewer he'd thought about founding his Internet bookseller startup on a California Indian reservation to escape taxes. When that proved impractical, Bezos settled on Seattle, in part because Washington's relatively small population effectively would leave more Amazon sales untaxed.”

While Amazon’s tax edge is helpful, from “Day One” Jeff Bezos has been committed to tight-margins based on efficiencies beyond simple tax advantages. He knows that ultimately consumers are practical and most of what they want are simple commodities and easy to use services. So, when given the option of what critics are characterizing as a soulless shopping experience, consumers will still flock to Amazon in droves for low prices rather than have pop hold them down while mom takes every last cent with her mark-ups. Working people from small towns have no illusions what it’s like when their local options are Hogged by an elite few.

Last November, Wired gave Jeff Bezos a chance to make the case for Amazon being in a better position than Apple (NASDAQ: AAPL) in the coming decade:

Apple is fundamentally a hardware company—91 percent of its revenue comes from sales of its coveted machines, compared to just 6 percent from iTunes. The iPad’s design, marketing, and product launches all emphasize the special character of the device itself, which the company views as a successor to the PC—complete with video-chat capabilities and word-processing software. Amazon, on the other hand, is a content-focused company—almost half of its revenue comes from sales of media like books, music, TV shows, and movies—and the fire-sale-priced Fire is designed to be primarily a passport to the large amount of that content that’s available digitally...Indeed, Bezos doesn’t consider the Fire a mere device, preferring to call it a “media service.”
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The glory of the iPad, as well as the iPhone, is its operating system; Apple’s proprietary iOS is one of the main selling points…Bezos seems to believe that people should care less about what their OS can do and just be able to stream the damn movie.

In 2007, Jeff Bezos announced at an all-hands meeting that if something could be digitized then in the fullness of time it would be free. One Amazon refugee noted that it felt like his time was just there to prepare the engineers and servers for an even grander campaign – and on the Ides of March this year, non-media became the majority share of Amazon’s product inventory. However, the real question remains, can Amazon keep its employees in stock?

Next: Amazon is a Harsh Mistress
Previous: A Wrinkle in Amazon Could Lead to a Swiftly Tilting Tax Bill of $2.1 Billion

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