Latest Brick-and-Mortar Pacts Make Amazon America’s Middleman

AMZN stock investors have for years focused on the e-commerce juggernaut's growth rate and cash flow

One thing that distinguishes Amazon.com (NASDAQ:AMZN) from its Chinese doppelganger, Alibaba Group Holding (NASDAQ:BABA), is the latter’s larger retail footprint.

Latest Brick-and-Mortar Pacts Make Amazon America’s Middleman
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While Alibaba has been buying supermarkets and shopping malls, and stuffing them with branded technology and services, Amazon has only bought Whole Foods, an upscale food store that still operates with a degree of autonomy.

The infrastructure that Amazon is most devoted to isn’t in retailing, but delivery. Some see that changing. Kohl’s (NYSE:KSS) is making all its stores into Amazon drop-off locations. Rite Aid (NYSE:RAD) has launched a pilot making its stores Amazon package pick-up locations.

Rite Aid hopes people picking up Amazon packages will stay to get prescriptions filled. Kohl’s hopes people dropping off packages for Amazon will stay to try on some clothes. But what’s in this for Amazon?

Amazon is Infrastructure

Amazon has hurdles in the way of getting a greater share of the American wallet and making more than a retailer’s profit on that share.

Thieves steal packages from stoops. Many of my neighbors have had this happen. Returns are a hassle. I have a package of stand mixer beaters on my desk I need to send back … and it’s gathering dust.

Amazon’s fulfillment system lets retailers absorb its inventory risk. The beaters on my desk come from a Florida retailer called Goodman’s.

But Amazon’s retail operations aren’t where it makes its money. They’re a source of cash flow used to invest in cloud computing centers, warehouses and delivery vehicles. The computers make money. The other infrastructure doesn’t. This is partly because the computers run without people. The warehouses don’t. People like to be fed.

Analysts assuming Amazon will now buy Rite Aid, or Kohl’s, are missing the point. Amazon doesn’t see itself as a retail company. It never did. Amazon is, was, and always will be an infrastructure company.

Warehouses are infrastructure. Delivery vehicles are infrastructure. Clouds are infrastructure. Broadband, too, is infrastructure. If Amazon can build out a constellation of 3,256 satellites and cover the world in broadband, as it’s proposing, it can offer that infrastructure to competitors and make a profit from them.

Amazon doesn’t have to own the merchandise it sells you, although policing merchants is increasingly expensive. The aim is to make itself essential, not in the way Walmart (NYSE:WMT) is, more in the way FedEx (NYSE:FDX) is.

Retail mark-ups look fat but even the best-run retailers only bring about 3% of that volume to the bottom line … and that’s in a good year. That’s why Kroger (NYSE:KR) is worth just $17 billion, less than one-tenth last year’s sales of $121 billion.

Infrastructure profits are far more certain. If Amazon can drive the cost of its infrastructure below that of rivals, it can replicate the success its Amazon Web Services has had. During the first quarter of this year AWS had operating income of $1.4 billion on revenue of $5.44 billion. The rest of the company made less than $1 billion on sales of $45 billion.

Bottom Line on Amazon Stock

For Amazon, retailing is a means to an end.

The end is the margin Amazon makes from its infrastructure. By cutting the cost of getting merchandise from factories to your front door, and by running its own retailing at break-even, Amazon hopes to become America’s middleman.

Amazon next reports earnings on July 25, with net income of $5.28 per share of AMZN stock expected on revenue of $62.51 billion. That’s a year-over-year growth rate of 18% on the top line, but barely more than the $5.15 per share earned a year ago.

The point is that for years investors focused on Amazon’s growth rate and cash flow. The Amazon stock investment thesis from here on will be watching its middleman margins grow.

Dana Blankenhorn is a financial and technology journalist. He is the author of a new environmental story, Bridget O’Flynn and the Bear, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN, BABA and KR.


Article printed from InvestorPlace Media, https://investorplace.com/2019/07/latest-brick-and-mortar-pacts-make-amazon-americas-middleman/.

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