Early last week the Wall Street Journal published an article on how the Amazon was struggling to increase income at the same rate as its expenditure. This move, according to the article, was putting a strain on the company finances.
Although the company revenue was increasing, the spending and expenses were also increasing. For example, the income margin of the company increased by 35 % in the last quarter of last year, but its overheads increased by 38% from last year with a profit decline of 43%. This is because it may not be making money as much as it is spending it. This lavish expenditure is made on technological enhancement and warehouse development among others. Amazon share trading is also affected as it is falling up to the margin of 8.
8%. The shares moved from $194.44 to $177.31 in a single day. Amazon Company has been experiencing high sales volume accompanied by spending of similar magnitude.
It is dreadful news to the retailer because as it continues to spend, its revenue is not reciprocating in the same speed. Some attribute the losses the company is making to its involvement with Prime. The company is willing rather to lose millions of dollars than abandon the program. They claim that the program is extremely profitable and in the end will be worth it, but some business analysts disagree with this idea, especially since Amazon has kept the prices of services offered on Prime constant in order to retain their loyal customers. This could be business suicide especially with the economic crises facing America as well as the rest of the world. Another reason attributed to this is the fact that the company uses third parties to make sales.
Although this boosts revenue, the sales are not as profitable as if the company sold them directly. Finally, analysts believe that Amazon is overinvesting instead of focussing on the already existing programs. The out-of-control growth the company is experiencing has put an enormous financial strain on it. Some may refer to it as the ruin of expansion. These include: investing in unprofitable markets and spending excessively on growths that are not certain.
In conclusion, a cash cushion is one of the most crucial pillars of a sound business operation, something Amazon is lacking. Business cycles must be analysed critically. Amazon did not learn from the recent financial global recession. If not cautious, it is heading for even a bigger downfall.