More on Amazon and Wal-mart

I know, I know, I’ve become tireless on this Wal-mart and Amazon idea of mine. Nevertheless, it was interesting to see Wal-mart come up in the Amazon quarterly conference call tonight. Mind you, it wasn’t a favorable mention — and it was one that went against Amazon in an interesting way:

Mark Rowen – Prudential – Analyst
Okay. My other question is for Jeff. Jeff, you have said for a long-time that your model is more efficient than the traditional retail model because you don’t have to invest in real estate, which always goes up. Instead you can invest in technology, which goes down. But if I add up all of your expenses as a percent of revenue and add in free shipping, which you sort of view as a marketing expense, I think in 2005 it was a little over 20% and in the fourth quarter a little over 19, which is 200 or 300 basis points higher than a company like Wal-Mart. So could you sort of just give us an idea why that is such a paradox? Why is it that we are not seeing more efficiency if, in fact, the model is more efficient?

Jeff Bezos – – Founder & CEO
Well, I think one thing to keep in mind is that if we were not investing in some of these new initiatives such as digital and Web Services, our cost structure would be different today. So if we were totally optimizing our cost structure for a kind of a steady-state business, you would see a different cost structure. Other things that we talk about that you may remember are, if you look at the return on invested capital, the dynamics between our business and traditional retail are very different in large part because of the efficiency of our capital model, high inventory turns, low PP&E.

How fun. In other words, a technology-centric online retailer like Amazon does have better economics than does Wal-mart — except, of course, for all the spending required for that pesky technology stuff.


  1. If efficiency is costs / revenue, perhaps Bezos also could have argued that you see the ratio high not so much because the numerator is higher, but because the denominator is lower. That is, if Amazon passes efficiency gains on to consumers in the form of lower prices, then you won’t see better efficiency in the costs / revenue number for Amazon. Bezos is probably right that Amazon is more efficient than Wal-Mart for getting a certain set of products into my hands. Whether he can get that to show up in his income statement is an important but slightly different question.

  2. Brent Buckner says:

    Perhaps the posited efficiency really is visible in ROIC, per Bezos’ comment. An expense ratio is a pretty limited score-keeping measure/overall efficiency indicator for a business (anyone for ROE? residual income?)