In a recent article on Slate.com, Amazon has been compared to a charitable organization. Despite sales in the billions, Amazon’s profits tumbled by 45 percent. How in the world does this happen and why aren’t investors up in arms? The answer may lie in the fact that Jeff Bezos is looking at the big picture, not immediate wealth. So where are those billions going?
1.New Facilities
In January, Amazon announced the building of its third fulfillment center in California. The new one million-square foot facility will create hundreds of full-time jobs for local residents in Tracy, California. Not only will the facility create jobs, but those jobs will pay 30 percent above the national average for similar retail positions. In early 2014, Amazon also plans to open a new fulfillment center in New Jersey.
2.Fresh Food
For five years now, Amazon has offered grocery-delivery in the Seattle area. Still in the test phase, AmazonFresh delivers food overnight to 80 zip codes in the region. Distribution centers are expected to be built in San Francisco and New York City now that Amazon has figured out how to collect sales tax without charging customers more. Why so long in the test phase? Because selling fresh food to the masses is an expensive undertaking. Amazon has prided itself on competitive pricing in the past. Grocery delivery demands warehouse space, delivery trucks and more workers.
3.Product Development
Do you think that you’re settling with a Kindle Fire when you could have spent a hefty chunk of change on a “better” iPad? Don’t. Kindle Fire’s are so cheap because they don’t make a profit for the company. When you pay for a Fire, you’re paying for the hardware; period. But why does Amazon sell what could be their biggest profit maker for cost? Because they plan to make a profit with application and streaming video sales. If you’ve got a Fire, it’s doubtful that you won’t add to it, be it with apps, videos or audio downloads.
4.Business Accruement
The next time you shop online, ask yourself who you’re buying from. Amazon owns many sites that don’t carry its mega name. For example, Amazon has acquired Zappos, the huge shoe retailer. If you’ve shopped at Zappos in lieu of Amazon, your money is going to the same place. As Amazon grows, it continues to acquire smaller, similar businesses. This has lead to Amazon being compared to big-box giant Walmart; much to the chagrin of shoppers everywhere.
5.Product
The purchases that you make from Amazon have to come from somewhere. Amazon, itself, is not a manufacturer in the broad sense. Sure, they make and sell eReaders and tablets, but those clothes, pet items and books that you buy are all bought and resold. Just as big box stores have to invest profit in buying more product, so does Amazon. In order to widen its customer base, Amazon must continue to branch out into other areas.
It amazes many that Amazon can report losses yet still see its stocks sore. It remains to be seen how long investors will be satisfied with Amazon’s business model. Whether the bottom drops out or Amazon will continue to gain new investors is something to keep an eye on.
Writer Jena Daniels is an avid business blogger. Interested in running your own business? You may be interested in the mba program offered through universities such as Pepperdine University.
