Amazon recently released in a current report Form 8-K(1) on February 2nd, 2021, that Jeff Bezos “plans to transition to the role of Executive Chair in the third quarter of 2021” and that “Andrew R. Jassy, currently CEO Amazon Web Services, will succeed Mr. Bezos as Amazon’s Chief Executive Officer and President in the third quarter of 2021.” This was unexpected news no doubt and worth a lot of attention.
In that same report, however, the company also announced record breaking sales and a higher profitability margin amid an economically devastating pandemic.
Amazon’s sales increased 38% in 2020 and its net income increased about 84%. To give context on how exceptional this was, the S&P 500 generated around 11-12% average annual returns from 1926-2019. So in a non-pandemic year we would expect on average for profitable corporations to generate a return of about 11-12%. So an 84% increase in net income is very very high compared to the average.
On top of that the United States expected real GDP decreased by -3.5% in 2020, compared to an increase of +2.2% in 2019. This means that in 2020 there was lower total wealth available to go around in the U.S. compared to 2019. We might assume from Amazon’s earnings then that a higher percentage of total wealth in the United States went to Amazon.
On the flip side, many small business owners and the people who work for those businesses have had a tremendously tough year. In some cases losing their life’s savings and their life’s work through no fault of their own and purely as a direct result from this pandemic. It’s hard to find a data driven prediction but I am estimating that something like 30% of small businesses across the country either have or expect to have to shut their doors for good. Government intervention destroyed small businesses and funneled customers and sales towards big tech companies like Amazon.
This is important because if you follow the money, the shutting down of small businesses and the propping up of large businesses could look like market manipulation.
Amazon and other corporations make large campaign contributions to politicians which directly affect their livelihood. Politicians who might have received campaign contributions from companies like Amazon, unevenly championed verdicts to shut-down small businesses who were not paying political contributions. At the same time they issued orders that benefitted big corporations by directly and indirectly encouraging customers to buy from them.
Here is a hypothetical example: A small gift store who made no campaign contributions was required to shut down from March through November 2020. Amazon who sells similar items online was not ordered to shut down and was free to continue selling to customers. The government shut-down Amazon’s competition in the small gift store space while leaving Amazon free to conduct business and take customers who would have otherwise bought from a small business.
I also want to talk through some interesting aspects of Amazon’s profitability and how it differs from their public announcements of “helping” small businesses. It is important to look behind the advertising campaigns and public relations that companies pay millions of dollars for to see what’s really going on.
One particular phrase that Amazon used in their press release was that they “helped” small businesses in 2020 by allowing them to sell items on their platform. Let’s examine the word help and what that makes people think and the actual actions that Amazon took. Help makes people think of an altruistic action that did not benefit the person performing the action, but Amazon DID benefit. Amazon charges businesses who sell items on their platform a host of different fees that can deduct anywhere from 20% to more than 40% of total revenue. Let me explain what that means:
If a small business sells an item for $10 in their store and receives cash, the business can keep the entire $10 of revenue. If a small business sells an item on Amazon for $10, Amazon takes from -$2 to more than -$4 away and the business is left with $6-$8. So Amazon is NOT HELPING the business, they are CHARGING the business to sell on their platform.
So if politicians take away storefronts where businesses have the opportunity to keep the full $10 and businesses then move to Amazon to sell their inventory, then politicians are essentially taking $2-$4 away from the small business and handing it to Amazon.
I actually recently brought up this subject in a Clubhouse room. Clubhouse is a new social media app where people can discuss a variety of topics with each other (if you are on Clubhouse then follow me @sampson12). In the room we discussed ways that Amazon might have actually done something that could be perceived as “helping” businesses, because charging businesses a significant margin to sell their products is not helping them. We discussed one option could have been waiving some of their fees for businesses who were forced to shut down their physical stores. To be fair this still wouldn’t really be “helping” small businesses because Amazon would make a handsome profit even with a little lower fee income but at least it would look a little more like a gesture of goodwill. Please keep in mind though that I do not know if Amazon did WAIVE fees in bulk for small businesses who had to shut their physical storefront in 2020 without expecting repayment of those fees in the future. I also did not ask anyone at Amazon for a comment.
I have been looking forward to seeing Amazon’s earnings report since mid-July when it was clear that many small businesses were required to shut-down while Amazon was allowed to continue operations. From a market share standpoint, Amazon couldn’t have asked for better help from the politicians that made those decisions. In 2020 Amazon was able to get a greater percentage of total market share in a variety of industries because government officials shut-down their competition for them. In exchange, Amazon didn’t have to buy out their competition or increase marketing or improve company operations or improve customer service. In conclusion, Amazon’s higher profitability in 2020 was impacted by political decisions made during the year and so was the devastation to small businesses across the country.
References
“Amazon.com, Inc. Form 8-K date of report February 2nd, 2021.” EDGAR. Securities and Exchange Commission, 2021, https://www.sec.gov/cgi-bin/browse-edgar?CIK=1018724&owner=exclude
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