Amazon: Pricing Advantage? What Pricing Advantage?

Jun.21.12 | About:, Inc. (AMZN)

The public generally holds two beliefs regarding (NASDAQ:AMZN):

  • One is that has less overhead than other retail companies because it has no physical stores;
  • The other is that, having lower overhead, can charge less. So's prices are lower.

I have already shown how the first of these beliefs is basically false in my article "Is Amazon The Next Netscape?" After all,'s (operating costs ex-cost of sales)/revenues come to 22.5% of sales (Q1 2012), whereas Wal-Mart's (NYSE:WMT) are 19.2% (2012 FY), and Costco's (NASDAQ:COST) are 9.5% (Q1 2012).

Regarding the second belief, I have already said that there are some indications that might have started raising prices to fight margin erosion. I did this on my article "Is Pulling A Bait And Switch On Its Customers?"

Two days ago, though, we got further confirmation that might not be so price competitive as thought. Kantar Retail published a study comparing Wal-Mart supercenters to and This study included comparisons for 36 national brand-name items, and what did it conclude? That by far and large, shopping in Wal-Mart supercenters is significantly cheaper than shopping at, with the basket being a full 20.5% more expensive than Wal-Mart supercenters, as well as 12.6% more expensive than's.

Indeed, either Walmart supercenters or were the cheaper alternative in every sub-basket considered, giving even more credibility to the notion that has been increasing prices to counteract its margin losses.

There are reasons to believe that is slowly losing its pricing advantage, perceptions might lag behind at this point but they will catch up, and when perceptions do so,'s revenue growth will be threatened. This has an aura of inevitability, because as long as isn't a cost leader, you can't expect it to compete on price for long.

Other large general merchandise mail order houses from the distant past, such as Montgomery Ward or the Sears Catalog, also went through a similar process, where they lost pricing advantage against traditional retail and then slowly withered away.

Why is this important?

The pricing and cost advantage myths are just two of many other myths revolving around Other myths include the theory that has seen margins plunge because of its heavy investment. Or that is an asset-light business with no debt. Or that is somehow a factor in the App business because it has an app shop. Or on the online music business, for that matter.

All these myths are used to justify's lofty valuation (it trades at 179 times forward 2012 earnings estimates) in spite of plunging earnings, earnings estimates, margins and cash flow.

Yet, here again I was able to show this pricing and cost advantage, too, rings false. Were so good as is commonly accepted, it wouldn't be so easy to show time and time again that we're facing one myth after another.

Disclosure: I am short AMZN.