Many people were surprised in 2006 when WSJ pointed out that being on the intranet does not lower capital investment costs. According to the article (Jeff Matthews’ notes are very good here)
“What does this have to do with Google? Well, Google management highlighted big capital expenditure plans at last week’s analyst meeting—which at a minimum would equal 19% of net sales.
Just for comparison’s sake, Caterpillar Tractor’s capital spending amounted to roughly 8% of sales last year.”
Google doesn’t sell any physical goods, yet their capex is incredibly high. This is not just true of Google.
A recent Fortune article on Amazon Chief Jeff Bezos highlighted the fact that being internet based does not mean lower costs or higher margins.
Amazon has long shown a willingness to cut prices, and plow money into R&D – taking less profit now, that is, to drive sales over the long term. Critics say there’s no reason the company can’t grow while maintaining healthier margins. For instance, in 2007 Amazon’s operating margins were 4.4%; by comparison, Wal-Mart’s were 5.8%. (Wal-Mart’s fiscal year ended on January 31.)
So the largest internet retailer, which should benefit from economies of scale, doesn’t seem to. In other words, old brick and mortar stores STILL beats Amazon on margins. Maybe Amazon can make it up on volume…
Posted: April 17th, 2008 under Americas, Equities, General.
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