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Comment by legitster | Hacker News Reader

This drives me mad. I have no idea why Amazon even bothers with the retail side. It barely pays for itself, they are already the biggest player by a mile, and there is no horizon in which economies of scale start paying off (the uptick of demand from Covid probably lost them money!)

The only thing that makes sense to me is some political long play. The Amazon retail operation employs a lot more people in a lot more places than just the coast. I think leadership has realized they need to be seen as a job creator by politicians in order to join the "big boy industry" club. Which is why Amazon doesn't mind paying their warehouse workers more than all the other guys.

To that end, the Amazon.com is just a giant, self-funded employment program designed to make Amazon a bigger company.

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> It barely pays for itself

Because they're constantly reinvesting for even bigger economies of scale.

All investors are well aware that Amazon can start turning on major retail profits at any time it chooses.

But the more it grows first, the more entrenched it is, the fewer competitors remain, and the even larger those future profits will be.

Seeing as AMZN's stock price has increased roughly 25% since COVID started, it doesn't seem like investors think it "probably lost them money".

You don't seem to actually understand Amazon's business model at all, so please don't get too mad about it. :)

"Constantly reinvesting for even bigger economies of scale."

This may have made sense 5 years ago, but this doesn't make sense when their margins have only gotten lower and their number one expense is employees, which is a marginal cost. They are well into the "diseconomies of scale" territory. And there are more competitors now then when they started!

> You don't seem to actually understand Amazon's business model at all

Source: I have worked in and out of the Amazon ecosystem for 5 years.

> Source: I have worked in and out of the Amazon ecosystem for 5 years.

In and out of Amazon or Amazon's eco-system. You should qualify this as they are very different perspectives.

Perhaps Amazon is trying to be the major fulfillment provider as automation of order picking becomes more productive, and those employees are made redundant; a sort of "Netflix for warehouses" model (where Netflix went from mail fulfillment to online).

> But the more it grows first, the more entrenched it is, the fewer competitors remain, and the even larger those future profits will be.

Of course, the longer the time horizon investors are considering, the greater the risk of someone disrupting Amazon's profits in that time frame.

Yeah, Amazon's operating income margin is about 15-20% before R&D expenses.

To GP's point though, there is only so much market capacity for Amazon's growth so there will be a point that investors think that Amazon would best be using it's cash somewhere else, including dividends. It happened to Apple and it can happen to Amazon.

It’s speculative to say that “Amazon can start turning on major retail profits at any time it chooses.” Amazon has not done it yet, so there’s really no proof that it would be so easy, or even possible.

I know the party line, which is that Amazon chooses not to take retail profits because they would rather invest in growth.

But invert that statement to understand it a different way: it implies that when they choose to take retail profits, their growth will slow. (If they could take profits and keep growing they would already be doing that.) How will investors like an Amazon that’s not growing anymore?

Personally I think that the way Amazon’s retail side runs today is the only way it knows how to run, and is how it will always run. The expectation of massive retail profits will always dangle out there in the future like a carrot for investors to chase.

Just look at how much money Amazon is spending on Prime shipping. It's insane. They're never going to turn a profit, because as soon as they stop subsidizing shipping customers will go elsewhere. There is no reason to expect Amazon's retail arm to ever be more profitable than Walmart is.

Isn't the idea behind prime shipping that with enough volume, any product in demand should already be stored close to the customer? Their expanding fleet of aircrafts make me doubt that it works that well but who knows, maybe their air cargo as a percentage of all shipping is decreasing drastically.

In the end, online stores aren't that hard to build and local stores can become competitive if Amazon really decides to cash out. Amazon is growing so fast because they don't really turn a profit, not because they pushed everyone else out of the market.

> Because they're constantly reinvesting for even bigger economies of scale.

Not exactly.

To avoid paying taxes, any extra net income is reinvested. It's like a religion in senior management to avoid taxes. And to lobby for employee non-competes, too.

Also, margins on retail are not the same as pure tech companies, like Google or Microsoft. US grocery stores, like Safeway, have net income in the 1% of total revenue range, so if Amazon can make 10-15% on retail, that's impressive.

Disclaimer: I work at Amazon and own AMZN, but I have no inside knowledge about this and my opinion is my own.

If investments into efficiency and scale can produce AWS, and create an entirely new market segment; couldn't continued investments into efficiency and scale produce the next-AWS?

It could, and finding the next big thing is extremely profitable. But few companies are able to repeat that process. However, with enough money AMZN could become like Microsoft and successfully build their own products if others have shown that it's worth it. Microsoft also uses profits from some business lines to pay for losses in a lot of ventures of which only very few work out.

I think this often too. But my second thought is I have to accept the possibility that Bezos could know something I don't.

A mere 8.5 years ago this question was asked in the opposite direction.

It's way easier to build good tools when your first customer is you. It's also easier to pitch AWS when you can say it works at "Amazon scale".

Great point. Although I am not convinced that in a perfect political vacuum the two companies would not be better off as two separate companies with some joint agreement.

<quote>(the uptick of demand from Covid probably lost them money!)</quote>

I would frequently get deliveries from Whole Foods Market or get stuff off amazon a couple times a week. Due to covid just making deliveries impossible I've cancelled my Prime Subscription and haven't bought anything from Amazon in months. It wouldn't surprise me to see their revenue go down from Prime memberships.

I'm not sure which part drives you mad. That retail is not profitable?

Does people donating to charities drive you mad? That's not even remotely profitable!

Once you've established a monopoly you can raise prices. If they raise prices even 10-20% their margins go up.

It answers the question: What do people want?

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