Amazon: Money and Fulfillment Costs Essay

Submitted By natalia215
Words: 1173
Pages: 5

The first problem that Amazon.com is facing is its business model focused on growing quickly to build long-term competitive edge while sacrificing its ability to be profitable in the beginning stages.
The first problem can be analyzed by looking at amazon’s assets and debt load. From 1999 to 2000 owned assets increased from $133.3 Million to $822.4 Million. That is a growth of 144.21% in owned assets for one year’s time while sales only grew by 50.99% over that same time period which caused over 70% overcapacity in infrastructure. Over capacity shows growth in infrastructure that exceeded the sales demand which caused inefficiency and money loss. To achieve growth, they seem to have taken on more debt with a 36.8% increase in current liabilities which also contributed to higher interest payments. Long term debt in 2000 was $2.127 billion while sales were 2.761 billion, this equates to 77 cents of every dollar earned. Having this kind of debt could make it difficult to secure loans and financing in the future. Interest payments as a result of this debt reached $130 million in 2000 which hurts the opportunity to generate a profit.
Solutions for the company’s rapid growth and over capacity issues can be found by adjusting the business plan. Amazon did well by being among the first to arrive in the market place back in 1994 and spent large amounts to establish its brand. The company is focused on growing too fast and should consider retracting some of the distribution centers and staff. Since Amazon’s business model was to quickly develop and grow as quickly as possible, it tried to expand beyond its customer demand level. Amazon needs to scale back and allow for natural growth which follows its sales growth. By taking on additional debt, Amazon has hurt its goodwill and financial standing which lowers the stock prices and hurts owner equity. Amazon should sell some of its assets that are part of the unused stock and warehousing to eliminate some of this crippling debt.
The second problem facing Amazon.com is the large quantity of operations expenses which is eating into cash flow.
To analyze the second problem, the income and financial statements are used. Amazon’s operating expenses in 1999 increased by 51.6% in 2000 to $1.5 Billion, this caused the total income loss from operations to hit $863.88 Million. Money spent on fulfillment, technology, amortization of good will, and restructuring led to this huge increase in operating expenses. Technology expenses have been increasing steadily as the company invests in its IT infrastructure. Money spent on web design and data storage may be outpacing demand which is causing undue expenditures and decreasing profits.
Solutions to the second problem involve decreasing operations costs relative to sales. Amazon needs to address its fulfillment costs. This can be achieved by reducing staffing and distribution centers to more closely match the demand. With more than 70% of their capacity going unused, cutting back in these areas should help the company come closer to reaching profitability. Technology and content dollars spent should also be analyzed and likely reduced. With the company being more established as a brand name, additional features on the web interface can likely be held back for a while to allow for profit growth. Restructuring should be done with greater care going forward since the 2000 restructuring costs reached $200 million up from $8 million the year before. Amazon should be mindful of contracts and other expenses that may exist before they restructure parts of their operations to avoid being stuck with paying for things no-longer being used by the company.
The third problem Amazon.com is facing is struggling business lines and products when the original business lines should be further enhanced.
The third problem analysis comes from an in depth look at the company’s business segment analysis. Fulfillment costs have been increasing rapidly from 1997-2000 with…