REPOST: Amazon and Google's rumored moves may be ill-advised

The article below debates whether or not Amazon and Google’s rumored new ventures would make sense in the business outlook of both tech behemoths:  

Image Source: finance.yahoo.com

 Amazon is setting up a retail store in a San Francisco mall for the holidays. The company has confirmed a report from GeekWire on Monday, which said that Amazon will open a "pop-up" store in San Francisco as well as one in Sacramento. The news is the first acknowledgement that Amazon is expanding beyond its online roots.

It’s a day of wild stories in the tech sector, with Amazon (AMZN) reportedly looking to open a huge chain of stores and Google (GOOGL) said to want to compete with Uber in the ride sharing market.

Neither blockbuster story has been confirmed. Amazon isn’t commenting on the report that it might want to take over stores from near-bankrupt RadioShack. And Google is indirectly denying the report it would take on Uber, a company it has backed via its venture capital unit.

But would either move make sense? Both are certainly debatable and full details obviously are not available. There’s a strong case to be made that Amazon should stay away from opening physical stores (Sprint's reported interest in the stores makes much more sense.) And Google probably has enough on its agenda right now, both in its business and with regulatory issues, without trying to bust the taxi business.

Brick-and-mortar Amazon shops

Rumors of Amazon opening stores are nothing new. The company was said to be looking for stores back in 2012 and again, last fall, when it leased office space in midtown Manhattan, though neither story quite panned out. That doesn’t mean it’s a good idea now.

First, Jeff Bezos typically looks for strategies that can scale, meaning businesses that become increasingly profitable as they grow. That was the basis of his original “Everything Store” concept and newer businesses from electronic books to Internet cloud services. Chains of thousands of small retail stores don’t scale – just the opposite. RadioShack is going bankrupt for a reason. Keeping all those stores open is expensive, whether it’s the long-term leasing costs, employees or inventory.

In fact, one hidden key to Amazon’s business model is that it mostly collects money from customers who buy something before it has to pay the suppliers of those items. But physical stores have to stock lots of goods in inventory and wait for a customer to come along.

Just compare the operating cycle of Amazon and a generic retailer, say, RadioShack five years ago when its business was much healthier. Back in 2009, it took RadioShack, on average, 124 days to get paid, as products moved through inventory and into the hands of customers. By contrast, it had to pay its suppliers every 32 days. Other retailers are quicker, but almost all end up paying for goods well before they get cash back from customers.

At Amazon, the cycle is reversed because it can collect orders online before it has to pay for any merchandise. Over the past five years, it has averaged getting paid within 42 days and paying suppliers after 91 days. (All data is from FactSet.)

Surrendering that advantage, which generates capital for operations and reduces financing costs, seems like an excessive price to pay to raise brand awareness or act as a depot for pick-ups and returns, the supposed benefits of a physical store move.

Another rationale for the Amazon store initiative would be to copy Apple (AAPL) and push more of its home-grown products, particularly the failing Fire phone. If this is the case, Amazon investors should be very concerned. The Fire phone didn’t fail because customers couldn’t get their hands on it. It failed because it was a buggy, overpriced product in a crowded market with better choices.

As Bezos has said in the past, Amazon shouldn’t open stores if it doesn’t have a unique offering.
“I get asked this question a lot and the answer is we would love to, but only if we could have a truly differentiated idea,” Bezos told Charlie Rose back in 2012. “If 100 companies are doing something and you’re the 101st, you’re not really bringing any value to society. And typically the business results aren’t very good for something like that anyway, either.”

Finally, with the odds of a national sales tax at a low point, it would make little sense for Amazon to surrender its tax advantage now. Amazon is required under current law to collect sales taxes in states where it has physical offices and operations. A study last year found that customers quickly shifted online purchases away from Amazon in states where it began collecting sales tax. Going national with a chain of retail outlets would subject all Amazon customers to sales tax at a time when customers of other online-only retailers would still be exempt.

An unnecessary distraction

Google taking on Uber by going into the ride-sharing logistics business isn’t nearly as bad an idea. But the timing doesn’t seem right. It’s also important to note that Google already appears to be denying the report, at least on Twitter. “We think you’ll find Uber and Lyft work quite well. We use them all the time,” the company tweeted.

Eventually, when Google’s self-driving cars are ready (and legal) to drive around on their own, there may be some synergies for the company. But there are a couple of reasons why the search giant shouldn’t go there.

First, Google’s venture arm is one of the top investors in Uber. It's close to the company and can observe without putting much at risk -- or risking its previous investments.

Taking on Uber would also be a huge distraction at a time when Google already has several critically important challenges on its plate. The Android mobile operating system has grabbed huge market share, but it's being challenged at the low end by Asian phone makers eschewing Google’s apps and services and at the high end by Apple. Meanwhile, people are increasingly conducting online activity via mobile apps, leaving Google’s hyper-profitable search engine out of the loop.

It's true that Uber already relies on Google’s mapping technology and, coincidentally, is working on its own self-driving car drive effort. But as Google already owns a chunk of Uber via Google Ventures, it may make more sense to wait and let others do the hard work of getting customers and regulators in line.

Douglas Anderson is the CEO of Wall Street Capital Partners, a venture capital and investment firm providing financial literacy and resources to investors seeking to accelerate their business through investments, financings, mergers, acquisitions, and dynamic growth strategies. Click here to discover how you can quickly and economically meet your investment goals through the company’s financial tools and expertise.