This has always been Amazon's strategy. Amazon is not a server company, an ecommerce company, a grocer, or any of the other seemingly random things they do.
The common thread running though all of their lines of business is to create businesses with complex problems, solve those problems incredibly well, then sell those solutions to other companies. Amazon uses themselves as their first-and-best customer [1]. AWS, Prime and all of their best solutions work in this way. The whole company is organized to support this strategy.
The fact that Amazon is expanding their warehouse capabilities beyond their needs and building deeper into the stack by getting into real estate development is a natural continuation of this strategy.
I’d love to see Ben partner with a smart tax/finance guy.
His analysis is interesting, but very slanted with the tech business viewpoint. The cringy canonization of Uber back in the day is a great example. IMO, these machinations by Amazon are probably more about financial engineering than anything else.
Amazon has a good distribution network, but Shopify, Walmart and Target seem to have found and are competing successfully at Amazon’s weak points. Many people I know pivoted to Target for consumer staples vs Amazon. You can have anything they carry in about 30m. Shopify seems to be the place for sellers who want to protect their brand and avoid being ripped off within days.
Not sure why Ben cares about an Amazon truck vs UPS delivering stuff he’s probably alone in that.
> If both of these stories are true, it makes me wonder why they're acquiring so much real estate.
Most likely a low-cost option to expand at their leisure.
1. In general land will be cheaper now than in 50 years. Even if current prices are high, the fluctuations will look like a blip in a few decades.
2. They can lease the land to minimize holding costs (taxes, etc.).
3. They block out competitors from deals.
4. They can expand their capacity as needed when needed.
I know several wealthy universities I have been affiliated with have done this. Whenever real estate near the university was for sale, they were the buyer. Price really didn’t matter (a “high” price was fine). They left the buildings as they were and used them for the same uses. Then when they wanted to expand for a new facility or whatever, they just wrapped up all the leases, knocked the old stuff down, and built the new thing.
People wonder why they paid so much for the land, but it always looked like a genius move over time.
Part of King Henry VIII's fight with the Catholic Church was due to the amount of rent-seeking that was going on in England. They were such a ridiculously massive land owner by that point that they threatened the Crown.
Little different- the church doesn’t pay property taxes. Amazon does, unless they have a religious investment arm.
If I had to guess, I’d say land purchases are some sort of vehicle to filter profits for tax purposes. There’s a million rules that benefit property owners for that purpose.
Perhaps they are getting tax abatements by bamboozling the local county officials into thinking that there is going to be some huge local economic benefit from their land purchase.
OTOH when amazon wants to build a warehouse, they probably shop around for municipalities that are willing to waive collecting property taxes for X amount of years to get that development and income tax.
Is it a better buy than somewhere else is the big question though. Sure maybe you'd make your money back in 30 years but that's not what gets investors going. Otherwise everything would be powered with nuclear energy by now.
Detroit going bust is bad if all of your property is in Detroit, but if you have property in 100s or 1000s of cities then the individual booms and busts become less relevant.
They could just be leasing out space in locations where they overbought relative to short term needs, but expect to need the capacity later. E.g. project out steady 10% YoY volume growth with a 5-year real estate cycle for warehouse space, and you'd def get some medium-term regional overcapacity/shortfalls.
EX a small brewery building a 20+ barrel setup as that is the predicted need in 3-5 years then leasing or partnering use of half their facility while building their brand and distribution network. Then when ready they have the capacity to 'expand' without the costs of said expansion.
For startups/new breweries it can be a double edged sword leading to high initial debt or overhead costs but with the right leadership/strategy/product it definitely pays out over time.
Amazon thinks long-term. They have a glut of warehouse space at the moment, and it is costing them dearly, but they probably hope to grow back into it when the upcoming recession is over. If Amazon successfully launches their program to buy with Prime from other stores, they could probably fill up their extra warehouse space pretty quickly. Think of Amazon handling logistics for every small retailer and even some big ones, regardless of whether they sell on amazon.com.
They can achieve a faster last-mile experience if their facilities are closer, and this space is now in contention with Walmart already beating them to the punch on drone delivery. To compete with big-box retailers they increasingly have to act like one, which is a very deep change to their e-commerce business. There is a strong chance here that they get outcompeted.
Exactly, the tables have turned and suddenly those large Walmart and Target stores are basically customer-manned warehouses that they can also ship from. Best Buy is in on it, too - order from them and half the time the product will ship from some Best Buy store somewhere instead of from a warehouse.
I bought a device from Best Buy and it arrived on my porch within 3 hours of my purchase. It was quick enough that even if I don't always receive orders that fast, I'm more inclined to check their website now instead of just defaulting to Amazon 2-day shipping.
Even if online sales are slowing overall maybe it is still growing in some areas, requiring more capacity. As for the land purchasing, maybe it is partly an investment to get cash off the books and/or positioning for some long term strategy (this is just a guess, I don't know much about how large businesses operate).
If both of these stories are true, it makes me wonder why they're acquiring so much real estate.
0: https://www.techradar.com/news/amazon-now-has-too-much-wareh...