Amazon’s Balance On A Razor’s Edge

I’ve criticized Amazon in this blog on a few occasions. Most of that criticism centers on what appears to be a groping, fitful and, at times, inexplicable strategy behind its search for new hit products and services.

I’ve thought more about the company this week following a must-read story courtesy of The New York Times that peers unflinchingly at the upside and downside of the hyper competitiveness of its workforce and news that the Amazon was parting ways with “dozens” of engineers. There are always two sides to every story, but the Times piece was especially harsh.

At its core, the problem leading to what I’ve described as groping and the extent to which employees feel mistreated may just be Amazon’s razor-thin profit margins.

For all of its proliferation of new products and services, it remains primarily focused on e-commerce and selling goods that are broadly available on countless other sites. Amazon is leading a race to the bottom that rewards offering the lowest price.

The result: Amazon’s profit margin has hovered between 1% and -2% since June 2011. By comparison, Walmart’s profit margin regularly clocks in at around 3%. Amazon also competes for a much smaller piece of the total retail pie than its brick-and-mortar competition. That’s because e-commerce, for all its growth, still accounts for only 7.2% of total retail sales.

Consequentially, Amazon has little margin for error. It has to find ways to encourage consumers to buy more stuff, hence the failed Fire tablet and smartphone – devices the company anticipated would make it easier for consumers to buy more stuff from Amazon – thought to be behind the layoffs.

It also explains the company’s attempt to sweeten the appeal of its Prime service by adding TVs and movies, including several of its own production.

In other words, all its maneuvering outside of its core retailing business really is just an attempt to grow core revenues, since the only way to accrue significant wealth at such low margins is through massive volume.

In such an environment, a sustained period of declining profitability or stalled revenues could cause severe damage, especially if a significant portion of its workforce stays with the company in spite of lousy conditions in the hopes of cashing in on stock options.

It also stands to reason that it would impact hiring, work-life quality, and firing practices, too. When you’re so close to the red, it puts enormous pressure on finding the right people and squeezing out of them everything they have.

I’ve worked for companies facing stiff headwinds. Every day felt like an exercise in emergency room triage. Those same sorts of pressures may be at the heart of what really drives Amazon today.


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