If you said Amazon … think again.
Macy’s operating margin exceeds 6%, while Amazon’s operating margin last quarter was only 3.8% …. but the comparison is even more striking if we look at Amazon’s numbers a little more closely.
Amazon’s total revenues last quarter were $51.04 billion and its operating income was $1.93 billion (3.78%).
However, Amazon’s business can be separated into two components: Amazon Web Services (think cloud computing) and everything else (think retail).
If you parse the numbers, here’s what you’ll find:
Amazon Web Services (AWS) had revenues of $5.4 billion and operating income of $1.4 billion (a whopping 25.9% margin).
If you take AWS out of the picture and look at everything else, Amazon’s non-AWS business had revenues of $45.6 billion and operating income of $0.53 billion (a lackluster 1.2% margin).
And this is after almost 24 years in business.
Now, you may be thinking that I’m down on Amazon. Far from it. I’m enthusiastically bullish on the company and its future. It is clear that Amazon is on fire and killing most of its competition.
But the company has a problem, one that must be addressed. Amazon’s supply chain costs are eroding its margins and rising faster than revenues.
As some of you know, I have been a fan of retail “guru” Steve Dennis for several years. He addresses Amazon’s supply chain problems in a recent article. As he points out:
“The structure of Amazon’s Prime program (which recently surpassed 100 million members) essentially encourages customers to overuse “free” shipping for frequent small orders—which generally have low (or non-existent) profits. Amazon also continues to aggressively push same-day delivery, which, at current scale, has terrible marginal economics.”
And to further complicate the problem, as Dennis points out:
“Amazon’s growing success in apparel may be great for the top line, but returns and exchanges tend to be much higher than average, pushing supply chain costs further in the wrong direction.”
Amazon is dealing with this problem, in part by raising its annual fee for Prime subscriptions to $119 from $99 starting mid-June. And while consumers may balk at this increase, by and large they will continue to sign up in record numbers.
If I had to make a choice, would I put my money on Amazon or Macy’s? Clearly, I would put it on Amazon.
But the fact remains that the company will probably never realize strong operating margins without addressing its supply chain issue.
Please email your thoughts. I’d love to hear from you.
For over thirty years, Mike has been actively involved, as a coach, entrepreneur, scientist, business executive and management consultant, in the areas of executive leadership, organizational development and change management, strategic planning and execution, and financial analysis. He has provided strategic, operational and financial leadership to small and medium-sized firms, as well as Fortune 500 companies and large government organizations, in a broad range of industries. Mike holds BS and PhD degrees from the Georgia Institute of Technology and has had additional training in finance and accounting, strategic planning and management, leadership development, and succession planning, from various top-tier institutions.