Amazon’s Local Services Market Place Will Add Much-Needed Margin to the Bottom Line
Summary
- Amazon already runs a market place with more than 2 million third-party vendors.
- Amazon needs to increase margins or they will continue to be punished by investors.
- Their product market place has reduced the impact of losing the sales tax exemption.
- A local service market place would add value to the current market place without significant risk or capital investment.
Amazon.com, Inc. (AMZN) has capitalized on their retail success by creating a massive third-party market place. The market place has over 2 million different third-party vendors. Amazon has utilizes the market place to sell third-party items alongside their own items. This has made Amazon the default website for online shopping. Why go to several different websites? When Amazon allows consumers to search for new or used products and purchase them through countless third-party vendors.
The market place is a great service for customers and is highly profitable for Amazon. Third-party items are subject to referral fees and closing fees. The majority of the market place’s revenue comes from referral fees. A referral fee can range from 6% to as high as 25% of the items selling price. For a company infamous for thin profit margins, the market place is an operating segment producing significantly high margins.
The market place is so profitable because it requires little capital and risk. Unless fulfilled by Amazon (fee required), third-party vendors are responsible for storing, processing, and shipping items. Unsurprisingly, Amazon is trying to expand the market place into other business areas. According to Reuters, Amazon plans to open a local market place for professional services. The market place has been extremely valuable to Amazon’s business but the market place’s value may become even more important in the future.
Amazon Needs To Increase Margins
Over the years, Amazon has been able to rapidly increase revenue but operating profit growth has been an issue. For the Q1 2014, Amazon’s operating profit margin was .7%. This is razor thin even for the retail industry. In Q1 2014, Wal-Mart’s operating profit margin was 5.4%. Additionally, Amazon’s margin problem is occurring in an area with the most potential growth. Amazon’s United States profit margin was 4.7%, for Q1 2014. This is comparable to Wal-Mart’s operating margin. However, Amazon’s international profit margin was negative, for Q1 2014. This isn’t good for a company in need of operating income growth.
Also, Investors have started to punish Amazon for their lack of operating profit. Amazon’s stock has fallen from over $400 to around $325. The decline started because Amazon missed analyst’s net income estimates by $0.15, for the 4th quarter of 2013. The earnings miss resulted in a one-day decline of over 10% on January 31, 2014. This shows investors aren’t satisfied with just revenue growth but need to see significant revenue growth.