Commercial real estate investors warily watch Amazon as they should—who knows what long-term effect they will have traditional brick and mortar retail. But we bet you don’t know Amazon as well you think you do; here are 4 common misconceptions from Chain Store Age, reported by Jeremy Hanks.
They’re An E-Commerce Giant
Sure, everyone knows that. But Hanks reports “Amazon’s most profitable and fastest-growing division is actually Amazon Web Services, its secure cloud services platform that offers database storage, content delivery, and other functionality to businesses”. In fact, says Hanks:
According to Josh Olson, an Amazon analyst with Edward Jones Research, AWS made up “roughly one half of the overall operating profit for first quarter 2017, so it remains a significant driver of profitability.” In fact, Amazon recently reported AWS posted sales of $3.53 billion in revenue for fourth quarter 2016, but more than $300 million up from third quarter 2016.
That’s an almost $15B business, growing at nearly 10% quarter-over-quarter.
They’re a Long-Tail Offeror
Lots of people also think Amazon specializes in long-tail offerings (wide range of products, small individual volumes). This isn’t true either. As Hanks explains:
…what it offers is a marketplace for third party merchants to sell long-tail products. Amazon, meanwhile, only focuses on directly selling and fulfilling high-demand products, leaving all the costs of curating an endless aisle of products to its independent sellers to deal with.
Frankly, they know what sells well. Hanks says that’s because “Amazon is a massive company with access to large amounts of aggregated retail data and advanced machine learning algorithms”. He feels that if they don’t sell it, they have a good reason.
They’ve Pretty Much Always Made a Profit
According to Hanks, nothing could be further from true. He notes that Amazon has only had “7 quarters of straight profits in its entire history”. In fact, he quotes a Wall Street Journal piece that says:
…with $89 billion in sales last year [2014], Amazon has grown to monolithic proportions, but that same timeframe also saw the company lose $241 million overall due to massive operating expenses.
Sellers Aren’t Required to Collect Sales Tax on Out of State Orders Fulfilled by Amazon
Hanks feels sellers aren’t well-informed about their duty to collect sales tax. He says one study found that 90% of FBA sellers reviewed have had FBA inventory pass through 14 states. These movements could incurr sales tax liability.
His position is that:
FBA [fulfilled by Amazon] sellers might find that they are actually responsible for collecting sales taxes in more states than other online sellers. This is especially true considering the fact that Amazon has cut deals with 30 states such as Utah that allow it to keep a portion of the tax revenue it collects, giving it an incentive for increasing the number of sellers with tax liabilities.
His advice to retailers is to “focus your efforts on developing your own strengths, not just copying Amazon. These might include enhancing your physical stores to offer experiences and not just products, offering better curation of content and improved customer service, and deepening of niche market know-how”.
Read the full post here.
At Pacwest Commercial Real Estate, we work closely with clients to help them understand the quality of tenants when they’re considering investment in retail property. You need that kind of expertise in your corner; you’ll find it with René Nelson and the staff of friendly professionals at Pacwest. Give us a call today at (541) 912-6583.
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