Seeking Alpha
, Think Finance (769 clicks)
Long/short equity, arbitrage, event-driven, research analyst
Profile| Send Message|
( followers)  

"In Wine, there is the truth"

Last week, the WSJ presented the news that Amazon (NASDAQ:AMZN) was, once again, planning to sell wine online. This was not Amazon's first, or even second, attempt at doing so. This constituted its third attempt, and the details of this new push bring with them some very interesting conclusions.

First a bit of history

In 2000, Amazon bought a 45% stake in WineShopper.com. Wineshopper.com then merged with Wine.com, but the dotcom bust intervened and wine.com went bust during 2001, with its assets being bought by eVineyard. Since then, wine.com lives on but with different owners, putting an end to Amazon's first attempt at selling wine online.

Back in 2009, again Amazon.com tried to enter this business, setting up meetings with producers and lining up a distribution partner. However, the ambitious expansion plans were too much for this logistics partner, New Vine Logistics. The logistic partner went under and that put the kibosh on Amazon's second attempt.

So here we are today, and yet again Amazon is meeting with producers and ready to launch its third attempt at selling wine online. This repeated insistence is not a surprise, since wine is reputedly one of the "not available" products which shoppers most frequently search for on Amazon.

The third attempt

Amazon's third attempt at selling wine online has a couple of interesting details which form the basis of this article. These are:

  • The producers will pay a sales commission of 15% of the sales price;
  • The producers will handle shipping.

What's so interesting?

Back in 2009, Amazon was expected to pay the wineries 47% of the selling price. It would thus retain 53% of the selling price for margins, distribution, returns, etc. This number shows us how hard it is to distribute physical goods, because right now Amazon is willing to take only 15% of the selling price as long as it gets rid of the shipping and associated hassles and costs.

Take a minute to let that sink in. The whole story for Amazon's recent earnings weakness is this incredibly massive investment in physical distribution capacity. Yet, as Amazon prepares to expand into a new business, the defining characteristic of that expansion is for Amazon to not use its own distribution infrastructure in it! That's the truth the wine is revealing to us. That quite possibly, whatever little money Amazon makes today, it's making it in the stuff third parties sell through its website but Amazon doesn't ship, not on the stuff Amazon sells and ships, and where it's plowing billions into infrastructure investments.

This has another obvious consequence. If Amazon is reliant on third parties selling and shipping, then it's no use for Amazon to spend huge amounts of money trying to have an excellent fulfillment service, because the fulfillment quality will unavoidably be inconsistent, since Amazon.com won't be providing a lot of it.

Conclusion

Amazon's third attempt at expanding its business to selling wine online brings with it a few truths. Namely:

  • Amazon recognizes that selling stuff online but not handling the shipping might be better for its profitability. It's thus better for it to just charge a sales commission on third parties' sales, and then let them handle shipping;
  • Amazon thus shows that the huge investments in fulfillment capacity are probably misguided and won't thus be very helpful for profits;
  • And finally, Amazon makes it impossible to compete on service, since a good part of the fulfillment service will be provided by third parties whose quality consistency Amazon has no way of controlling.


Finally, Amazon trades at 365 times 2012 estimated earnings and its earnings are falling. It's also likely that 2013 estimates will continue to be revised lower. At its present valuation, Amazon is a bubble.

Source: In Vino Veritas: Third Time Not The Charm For Amazon