Wulfraat Says: |
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| Since companies are in business to make a profit for their shareholders, this ultimately is the bottom line and it is the only real statistic that matters at the end of the day. |
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What Do You Say?
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In 1859, the novel A Tale of Two Cities by Charles Dickens was published. It went on to sell well over 200 Million copies. The opening paragraph (abbreviated below) is timeless:
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It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity … |
These words can easily be applied to the current turbulent world of retail and to illustrate this point I thought it would be pertinent to portray two retailers with very different business models: Amazon and Target.
Why is it relevant to compare these two companies? For starters, at the end of 2013 they were similar in size in terms of top-line revenue, therefore it is interesting to understand the high-level numbers that describe these two companies. The big picture synopsis is below. It tells a very interesting story.
As at Fiscal Year-End 2013 |
(T)
Target |
(A)
Amazon |
Difference
(T – A) |
Consolidated Global Sales ($US Million)(1) |
$72,956 |
$74,452 |
-$1,496 |
Cost of Sales (Cost of Goods and Services Sold) |
$51,160 |
$54,181 |
-$3,021 |
Consolidated Global Profits Before Provision for Income Tax ($US Million) |
$3,103 |
$506 |
$2,597 |
Net Earnings: Global Profits After Provision for Income Tax ($US Million) |
$1,971 |
$274 |
$1,697 |
Net Earnings as a % to Sales |
2.70% |
0.37% |
2.33% |
Inventory Assets ($US Million) |
$8,766 |
$7,411 |
$1,355 |
Inventory Turnover |
5.8 |
8.9 |
-3.1 |
Employees (Average) (2) |
366,000 |
117,300 |
248,700 |
Employees (Peak)(3) |
416,000 |
221,400 |
194,600 |
Retail Store Square Feet |
240,054,000 |
0 |
240,054,000 |
Distribution Center Square Feet |
54,785,000 |
75,451,000 |
-20,666,000 |
Total Square Feet (Excludes Corporate Office Space) |
294,839,000 |
75,451,000 |
219,388,000 |
Notes of Clarification:
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1. |
Target sales revenues are now 100% retail sales and no longer include credit card revenues. Amazon sales revenues consist of $60,903 Million of product sales and $13,549 Million of services sales (i.e. sales from non-retail activities).
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| 2. |
Employees during average conditions include full-time and part-time employees as per public statements published by Amazon and Target.
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| 3. |
Employees during peak conditions include seasonal employees. Target publishes this figure in their annual statements but Amazon does not. We calculate seasonal employees at Amazon as per the following data: USA (70,000); Germany (14,050); UK (15,000); France (4350); Italy (600); statistics unavailable for Canada, Spain, Czech Republic, China and Japan. |
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Discussion
First off, Amazon is not a pure retailer which makes this a distorted comparison. Amazon is made up of many different businesses (kindle, book publishing, etc.). For example, Fulfillment by Amazon (FBA) is technically a third party logistics service that Amazon provides to other companies. FBA revenues are derived from fulfillment services as opposed to product sales. This of course makes any type of operating expense comparison difficult since Amazon incurs fulfillment expenses without corresponding product sales revenues. Along these lines, these days it is becoming increasingly difficult to compare meaningful data across different retailers because of gasoline and pharmaceuticals sales revenues which add significantly to top-line revenues but which also significantly distort traditional retail expense to revenue ratios. So we preface this discussion by acknowledging that this is an imperfect comparison.
Having said this, the data in this table strikes a chord for a number of reasons.
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Amazon started its business in 1994 in Seattle. Target’s history dates back to 1902 when a Goodfellow Dry Goods store opened in Minneapolis which went to become Dayton-Hudson Corporation which eventually became Target Corporation. In other words, it has taken Amazon 20 years to build a business that is now bigger than Target which has been 112 years in the making.
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| 2. |
Target’s e-commerce sales are estimated to run at slightly under 2% of total sales. This is actually quite typical for large brick and mortar retailers who have established an online presence. Amazon’s product sales are 100% online and therefore there is no real requirement for retail stores. The fact that Target requires 219.4 Million square feet of additional space to run its business as compared to Amazon is stunning to say the least. For Target, the capital investment required to equip its stores and distribution centers generated a $2.2 Billion depreciation and amortization expense in 2013 which accounts for 3.1% of sales revenue. The recurring operating expenses associated to leasing and operating this space is over and above that amount. This represents a significant cash flow burden to the business, particularly if long-term lease commitments prevent the closure of under-performing stores.
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The manpower story is also very interesting in that Target requires 248,700 more regular employees throughout the year than Amazon does (during peak periods we estimate that this figure drops to 194,600). It should be noted that Amazon’s peak staffing periods typically run 6 – 8 weeks in November through December where it is not unusual for head count in the fulfilment centers to increase by a factor of 1.7. This story is interesting for two reasons:
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The sheer number of people required to support Target’s business versus Amazon’s business – throughout the normal course of the year, Target pays for more than double the number of employees than Amazon. Note that the wages and salaries for employee resources are not the same therefore the cost relationship is not equivalent to the head count relationship.
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Amazon’s peak season hiring requirements are a reflection of the incredible spike in online sales that happens in the weeks between Thanksgiving and Christmas. We estimate that Amazon had to add more than 104,000 temporary seasonal workers to its global fulfillment centers in late 2013. By comparison, Target ramped up with only 50,000 associates across all of its retail stores and distribution centers. The human resource stress level at Target is high, but it is only half of what Amazon contends with. Amazon’s strength as a company is weakened by its needs to attract and recruit such a vast number of people for such a short time period year-in and year-out. This partly explains why the company is making a concerted effort to deploy Kiva robots to diminish its reliance on human resources within its fulfillment centers.
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Amazon turns over inventory assets 3.1 times more than Target over the course of the year. The data indicates that Target has to consistently finance 3.12 weeks of inventory over what Amazon has to finance (Amazon carries an average of 5.84 weeks of supply versus 8.96 at Target based on $). Thus the cash flow required to finance this inventory contributes in part to the net interest expense of the business which was $1.126 Billion for Target in 2013 (1.55% of sales). By comparison, Amazon’s 2013 net interest expense was $103 Million.
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Target supports its retail stores through a network of 41 distribution facilities across North America (Amazon currently operates 55 fulfilment centers in North America). Target delivers merchandise to the stores in full truckloads with dedicated trucking resources to ensure a consistency and reliability of customer service. Yes the company has recently had issues in this regard in Canada, but this is an anomaly that they will eventually overcome.
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On the other hand, Amazon is exposed to a major weakness within its supporting logistics systems which is the company’s reliance on third party transportation companies to perform outbound delivery to the consumer. This represents one-half of the fulfilment obligation and it is the most fragile aspect of the company’s ability to excel at customer service. Until recently, the delivery function was completely out of Amazon’s control and yet it is a critical component of the customer’s satisfaction level. This is one of the reasons why in future we will see Amazon move in the direction of taking far greater control over the delivery function by moving closer to major metropolitan markets.
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Despite everything said, Target generated $1.7 Billion more profit after taxes than Amazon and this happened during an off-year for the company (Target’s profits dropped by $1.1 Billion over 2012). Since companies are in business to make a profit for their shareholders, this ultimately is the bottom line and it is the only real statistic that matters at the end of the day.
The question of course is where is all of this going to? Will Amazon revenues continue to rapidly escalate or will they taper off as the competition for online market share heats up? Will Amazon suddenly increase in profitability when its investment frenzy starts to decelerate? Will traditional retailers increasingly leverage their stores to fulfill same day customer orders and better compete against Amazon? Will online sales reach a peak and stabilize in the foreseeable future?
Or maybe Charles Dickens said it best back in 1859: Are we living in an epoch of belief? Are we living in an epoch of incredulity? |
