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Author: swapusa Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 18683  
Subject: Crosspost: Amazon is In Real Estate Business Date: 1/30/2013 3:34 AM
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I posted this to the paid SA Amazon board and repost it here:

First the obvious: Most of the investments Amazon has made in the last couple of years has been to build more warehouses to get closer to population centers and its customers. of course, having more warehouses in more states means that they are collecting and paying sales taxes in more and more states, but the benefits of being able to deliver most orders within one or 2 days while shipping with ground transportation or using cheaper local delivery guys provides Amazon with not only more customer satisfaction on delivery speed, but also saves them tons of money on shipping costs as we just witnessed in their earnings report that shipping cost as a percentage of sales went down. And that is what the Wall Street big shots and analysts see.

But that is not the whole story and there is more than meets the eye in all these gigantic investments that Amazon is making in acquiring land close to major cities and building their giant million square foot plus warehouses. With all their gigantic warehouses that they own, Amazon has really become a mega monster 800 pound gorilla of the real estate industry. Amazon now owns more than 80 such warehouses and some of them and almost all the new ones are over 1 million square feet each. See this:

http://twistedsifter.com/2012/12/inside-amazons-chaotic-stor......

Amazon now owns a warehouse footprint of almost 80 million square feet and growing fast. By comparison, one of the world's largest commercial shopping center landlords, DDR (publicly traded on NYSE as DDR), owns about 116 million square feet of shopping center property.

Here is the kicker that the analysts don't see: Amazon is collecting gigantic amounts of rent from 3rd party merchants that use their FBA warehouses to fulfill their merchandise. Sellers like us are shipping ever increasing amount of merchandise to all these Amazon warehouses and we all pay warehousing fees that are orders of magnitude higher than the cost of paying rent to our own landlord to store the same merchandise in our own warehouses. In other words, in effect, 3rd party merchants are bearing the cost of all these warehouses and then some and although Amazon does not release specific numbers in this regard, it is easy to make an educated guess. Here are some figures to consider:

1- Amazon's warehouses are outside of cities where a typical warehouse rent should not be more than $0.50 per square foot per month for the size of the warehouses they own. Collecting a $0.5 per square foot in rent per month (or $6/SF/Year) should cover the cost of ownership of the real estate (interest & principal, taxes, insurance) and even make them a nice hefty profit as a landlord. In comparison consider that we only pay a monthly rent/sf/month of less than $0.45 for our small 12,000 square foot warehouse in the busy suburbs of north Atlanta where real estate is quite expensive. And don't forget to factor in the preferential tax treatments Amazon gets from localities where they build their giant warehouses. See Loopnet.com below for examples of large warehouss for rent:

http://www.loopnet.com/xNet/MainSite/Listing/Search/SearchRe......


2- Amazon collects from us, the 3rd party merchants, a rent per square foot of merchandise that are stored in its warehouses that is almost $2.25/SF/month, or $27/SF/year. That is more than the annual rent we pay DDR in a nice shopping center in Atlanta where I also own a shop. Here is Amazon's page on FBA Warehouses storage fees that merchants pay:

http://www.amazon.com/gp/help/customer/display.html?nodeId=2......

From above, $0.45 per cubic feet per month for 1st 9 months of the year and then $0.60 per cubic feet per month for the last quarter. The maximum pallet size that we can ship to Amazon is a standard skid that is 48"x 40"x 60"H, or 66.7 cubic feet and we pay $30 per month for storing that pallet of merchandise for 1st 9 months and then $40 per month for the last quarter. That is more than $2.25/SF/Month for 9 months and more the last quarter, giving an average monthly rent of $29.25 for the footprint of a standard pallet that occupies 13.32 square feet of space. Of course, that is also assuming that Amazon does not store merchandise higher than 6 feet and if they do, which I am sure they do, they make even more money from storage fees charged to merchants. Also, you have to account for the fact that not all of the warehouse space is jam packed with merchandise and there are some dead space for forklifts, robots, people, isles, offices, etc. But the images of Amazon's warehouses clearly show that they use every inch of usable storage space.

So, for those of you who are baffled every time an Amazon earning's report comes out and they apparently miss on all metrics yet the stock shoots up, you are not hearing or reading the whole story. Never mind the infrastructure costs of building those giant warehouses. Merchants like us are paying for them and Amazon is becoming a giant REIT in the process of dominating the retail world.

cheers,

Mehran
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Author: FreethinkerKW Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13868 of 18683
Subject: Re: Crosspost: Amazon is In Real Estate Busines Date: 1/30/2013 11:29 AM
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Mehran, you are better than paid analysts for the Too Big To Prosecute shops.

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Author: FreethinkerKW Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14338 of 18683
Subject: Re: Crosspost: Amazon is In Real Estate Busines Date: 3/1/2013 4:33 AM
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This thread is still ongoing on a premium service board.

What I will do over the next few days is post some of the highlights in that thread as I haven't seen Mehran posting over here in a week or two.

This type of critical thinking is what is lacking in most paid analysts. I trust Mehran's vision more than any analyst on the Fool payroll. And his analysis is FREE.

One more note: we've been following the story at Walmart on this board recently. Let Mehran explain who the losers are to Amazon's dominance online:



A certain fool, sandpiper88, asked:

Thanks- great info. Questions: How has affiliation with Amazon affected your revenues and what impact has it had on your own margins? Has it been a win/win for you despite Amazon's higher rent? Also, do you see continued growth for Amazon with respect to smaller retailers like yourself? What types of retailers are most likely to benefit from such an affiliation? Thanks in advance.


It has definitely been a win/win/win situation. Amazon, merchants like us, and consumers are all benefiting from this relationship. The only losers are the big box stores and other retailers like Best Buys, Walmarts, and Targets of the world. It has also been a win for the commercial trucking companies who haul all these merchandise from merchants to Amazon's warehouses. But Amazon's growth is not as much as a win as everybody thinks for UPS and Fedex as the small parcel shipping companies like UPS and Fedex keep losing their more profitable smaller merchants' shipments to less profitable Amazon that pays them a lot less.

The higher rent for storage so far is still worth it for us. When the merchandise is in Amazon's FBA warehouse and they handle everything from packaging to shipping to returns and customer service, it removes a costly burden from our warehouse in form of employees that are needed to pack and ship, packaging material, and also much reduced shipping cost. Due to their size Amazon can ship a package to our customer much cheaper than we could and what we pay them for shipping saves us so much money compared to our own shipping cost that more than pays for the added storage cost.

The only drawback has been that the addition of all these warehouses is increasing our cost of getting our merchandise to Amazon. It used to be than when we shipped say 2,000 items to Amazon and created a shipment on their shipment creation system, it all went to 2 warehouses in the east coast like Kentucky and Indiana. I guess the strategy was to get as much merchandise as possible from 3rd party merchants by keeping our costs low as they build their critical mass of merchandise. But as of last year Amazon drastically changed the way it allocates inventory to its fulfillment centers. Now the same shipment of 2,000 items have to go to 5 or 6 warehouses and as far away as Phoenix and San Francisco and that has increased our trucking cost tremendously. Now that the 3rd party merchants are hooked and are dependent on Amazon, the strategy has shifted to getting the merchandise as close as possible to the buyer. This saves Amazon lots of money in shipping and makes customers happy.

Yes, there was a lot of objection and noise on Amazon's merchant's discussion forums with merchants threatening that they will no longer send merchandise to Amazon, myself included, but, at the end of the day, we decided that the way to cope with that was to ship even more merchandise and expand our product offering. I am sure lots of micro merchants that only shipped a few items at a time folded and went out of doing business with Amazon FBA, but Rather than shouting and pouting, we decided to get bigger instead. We used to sell only gaming products like poker chips and cards, chess and backgammon. But now we also import and sell a variety of fitness products like Yoga mats, dumbbells, jump ropes, and also bamboo cutting boards, and even hammocks and we keep looking for more items to bring in to expand even more. And I see that happening with a lot of other merchants including our competitors. Everyone who is staying with Amazon is expanding the merchandise variety providing even more fuel for Amazon's growth.

But all that said, I know that this can not continue and we can not rely on Amazon in the long term. As Amazon keeps growing, it takes over more and more of the top selling items itself by bypassing the 3rd party merchants like us and going direct to manufacturers. In our case, I saw that happening a few years ago and we switched all of our merchandise from generic non-branded items to our own brand and have them all manufactured for us with our own name on it, so when and if Amazon wants to buy them directly, we will be the one selling them. That will delay the inevitable but buys us much time in the process.

Amazon's Retail World Domination plan continues!!!

cheers,

Mehran

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