Grocery net profits are 1.7%.
http://www.fmi.org/research-resources/supermarket-facts
Amazon barely makes money on retail operations. What is their rationalization in getting into this market?
http://www.fmi.org/research-resources/supermarket-facts
Amazon barely makes money on retail operations. What is their rationalization in getting into this market?
>“Amazon wants to be the first thing any consumer thinks of when they need to buy anything,” said Jim Hertel, a senior vice president at marketing technology company Inmar Inc. “Food is the largest retail category. They can’t do what they want to do without grocery and they’re definitely not going to give up.”
I'd also imagine Amazon thinks they can do much better than a 1.7% margin by leveraging all of the improvements to their approach outlined in the article.
But. One difference was that At&T got something for agreeing (able to sell computers). What is Amazon prevented from doing??????
[1] The case, one of Greene's first after being named to the bench, resulted in the 1982 consent decree between AT&T and the Federal Trade Commission. The consent decree, later amended and usually called the modified final judgment (MFJ), provided for the Bell System divestiture, AT&T's spin off of the seven Regional Bell Operating Companies (RBOCs). The conclusion of the case freed AT&T to enter the computer industry, from which it had previously been barred
But if sell products fast("inventory turnover - TTM") and re-use the money, with $100, you can sell $1000 of product per year,getting 17% yearly ROI.
But of course 1.7% is low so it's not easy staying on the positive side of profit.
> Net profit after taxes-2015 1.7%
This is how a $100 initial cash investment in inventory can produce $17 worth of cash at the end. You use your leverage with lots of small suppliers to force them into offering generous credit.
Note: this ignores the fact that these numbers are based on net profit instead of gross profit which would be the actual relevant number here. And the gross profit in groceries is a lot higher than 1.7%.
I buy a house that costs $100,000. My down payment (cash out of pocket) is $20,000.
I pay 3.5% interest on $80,000 as I'm paying down the loan, plus property taxes and insurance, and it comes to $546.74/month [1]. The rent comes in at $550/month, pretty much canceling out the mortgage.
Am I making 4% per year on my investment, then, because that's the amount the real estate appreciates?
No, I'm making 4% of $100,000 per year, or $4,000, on my $20,000 investment. That's 20% per year. [2][3]
Leverage properly applied can raise your net profit.
You're welcome.
[1] http://www.mortgagecalculator.org/
[2] The numbers can realistically be much better than this, given the right circumstances. I am personally using this as an investment strategy, and yes, it doesn't just work this way "in theory."
[3] I'm ignoring repairs and vacancy rate for simplicity. Those obviously hurt profitability. But as I mentioned in [2] above, if you pick your investment property strategically, your margins are much higher, so that's your cushion.
ROI is not margin. And there are different types of margin.
"Net margin" is the profit from revenue net of not only the cost of merchandise, but all the overhead costs: the cashier, the retail leases, the buyer, accounting staff, management, etc.
"Gross margin" is (roughly) the amount made for every additional sale. If you buy apples for $0.80 and sell them for $1, your gross margin is 25%. This gross margin must pay for all the overhead expenses mentioned above. Based on the total number of apples you sell, you may figure you have to cover $0.18 of overhead per apple sold, leaving you with a net margin of 2%. But the important thing to understand is that you aren't actually paying $0.18 more in overhead per apple for every extra apple sold: you're making $0.20 and paying nothing in extra overhead. So increasing volume of sales can substantially improve net margins, if it doesn't take extra overhead.
"Return on investment" (ROI) relates to how much capital is required to generate net margins. You absolutely can run a low net margin business that has high ROI. How? You turn inventory like crazy, or better yet, don't have inventory (think drop-shippers). Or you take a long time to pay suppliers, reducing the amount of capital required by the business, and get paid up front by customers. Amazon's market model for third-party sellers ("FBA")would be high ROI even if it were low margin because they do not own the inventory, get paid up front by customers, and then sit on the cash for 90 days before paying the FBA vendor. Hell, I suspect the total capital required for that business is negative. No wonder they're so focused on expanding it! You don't need high margins if your business model throws cash at you. Just keep net margins above zero and you'll be swimming in cash.
(Hint for startups: find a business model like that. You won't need VC and you'll get vastly personally richer than one with high margins, but which requires massive capital, and therefore dilutes you as the founder to a pittance.)
It is also possible to have a business with high margins but low ROI, if it is extremely capital intensive relative to profits, such as a big manufacturing plant in an industry where it takes them a long time to get paid.
I'm not sure what Amazon's plan is. But the fact that the grocery business has low net margins is not a reason not to get into it. It all depends on the economics, which is more complicated than just "low margin."
Take Whole Foods an an example. They're a top tier margin company inside of the grocery business. Their net income margin is typically 3%. That's a good outcome in the business. The net income margin for Sprouts Farmers Markets the last three years: 2.5%, 3.5%, 3.6%.
The retail business in the US also happens to pay among the highest corporate income tax levels on the planet. Whole Foods paid 38.6% last year (almost 39% the year before that); Sprouts paid 37.6%. They get squeezed from almost every direction.
Also, Amazon running a business at 1.7% net profit for the sake of keeping existing customers happy and potentially acquiring more of them might be worthwhile.