Will Amazon in USA Crash? How about Amazon in Japan?

UPDATE BELOW!

Recently I have been hearing lots of news from industry insiders that say that Amazon in Japan is on shaky ground and that their share prices in Japan are way over valued when compared to their profit / loss spreadsheet.

Well, I'm not exactly sure about that (not nearly as sure about Amazon as how sure I am that Yahoo Japan is royally messed up) but I do know that Amazon in the USA is not all smooth sailing. One big reason Amazon in the states is in bad shape is because they operate on such a very thin profit margin. This thin margin does not allow for too many mistakes. That's all well and good but there's another huge problem for them and that is sales tax.


In the United States, sales tax is decided by states. Until recently, Amazon has skated around the sales tax problem but, as government budgets get tighter and tighter many states are clamping down on Amazon.


Until recently, if hit with the threat of a tax bill, Amazon would just pull up its roots and close all the businesses operating from that particular state, but now, more and more states are putting the foot to the pedal and demanding payment. How much longer can Amazon keep running away?


Mish Shedlock recently ran a story about this very subject:

Amazon May Cut Ties to California Over Tax Issues; Texas Distribution Site Closed Over Similar Issues Last Month; Litigation Issues Move to Forefront

Cash strapped states are furious with Amazon.Com over sales tax collections. Several states passed laws or have sent Amazon bills. Amazon's response in every case so far is to leave the state.

Online retail giant Amazon.com will close its suburban Dallas distribution center amid a dispute with the state over millions in uncollected state sales taxes, The Associated Press reported Thursday.

The AP obtained an e-mail Thursday sent to Amazon employees by Dave Clark, the company's vice president of operations.

Clark wrote that the center in Irving will close April 12 because of the state's "unfavorable regulatory climate."

Last year the Texas comptroller's office sent Amazon a demand for $269 million in uncollected sales taxes, plus penalties and interest, from 2005 through 2009.

The problem with these Sales Taxes though, is not as simple as it seems on the surface. A lot of this problem is not because of locations of Amazon offices or distribution centers; a lot has to do with locations of Amazon affliliates.  For example, even if Amazon doesn't have a distribution center or offices in, say, California, if an affiliate recommends a book on a blog like this with an Amazon link to buy that book, and that affiliate is located in California, then you can see where the problem begins. The state of California considers that a sale transacted in California.

That's where the trouble starts.

Amazon has had the same problems with North Carolina, Hawaii and Rhode Island. With state governments finding it harder and harder to fill their coiffures and pay their bills, it's only a matter or time before more and more states demand that Amazon start paying the bills. 

Paying those bills will probably kill Amazon as many of them will be past due for delinquent sales tax revenues and the amounts are in the hundreds of millions of dollars. 

The Market Ticker reports in "The Upcoming Crash of Apple and Amazon":

Amazon will also blow up; it shares Netflix's former screwball P/E (currently 101.)

And when both go, and they will, the Nasdaq will collapse since these two stocks are an outrageously disproportionate piece of the index.

Why do I put this forward?

Let's deal with Amazon first, since it's the simpler case.  Amazon's primary "lever" is the ability to play around the edge of the sales tax system.  This gives it an instant 6% (on average) price advantage over everyone else, more than enough to offset the shipping costs (which you pay in any event; whether shipped directly to you or to a retail store, you still pay for it in the product price somehow.)

But that sales tax loophole is going to close.  Over the next few years states will find a way, as the revenue shaft is getting out of hand for them. 

Now here's the problem: Amazon has a 2.58% (ttm) profit margin and a 3.14% operating margin.  This is less than the benefit they get from evading the state sales tax system.

In short, this is a firm that only exists because of its ability to evade that tax structure.  When, not if, that ends the company is a literal zero.

That sounds really bad for Amazon in the USA. Now, the question for those of us in Japan who love Amazon.jp; will Amazon Japan survive? Well, Amazon Japan has a different set of problems than Amazon in the USA does. In the USA, sales tax is decided by different states. In Japan, sales tax is uniform nationwide and charged by the central government.

Amazon Japan has problems with the many competitors in Japan. At this time, some items on Amazon are cheaper than competitors and others are not. In my opinion, Amazon's best advantage is free shipping.

But with sales declining across the board and talk of a doubling in sales tax in Japan in the very near future, Amazon Japan's future looks to be an interesting ride.

UPDATE! A Japanese user sends in a very interesting piece on Amazon Japan avoiding paying sales tax:


「僕がAmazonを使わなくなった理由」"Why I just can't use Amazon anymore"　http://site-ichijo.net/blog/archives/date/2010/1011-231855.php


The article is in Japanese but you can get a simple Google translation here: http://translate.google.com/?hl=en&tab=mT

Quality Over Quantity, Especially as You Get Older

I recently went to Guam with the wife and kid to spend Christmas on the island. It was a wonderful one week. I will write about the actual vacation later on probably this week.

Left: No. Right: Yes!

When the vacation ended, on the flight back to Japan, on a US carrier that claims to be "a premium airlines"... I noticed that all the flight attendants were male and, well, unattractive... They were all older men, as a matter of fact. I'd guess our main cabin attendant was at least 55-years-old, had all white hair and a beard and was about 50 pounds overweight. It wasn't pleasant at all and, pardon my sexist tendencies, but I'd prefer to see a charming young lady or even a charming young man as our cabin attendant. (Caveat: I don't think seeing overweight older women attendants is pleasant either - we had those on the flight to Guam.)


I don't want to see a fat old man, especially several of them, servicing our flight. I know that idiotic US labor laws and unionization of the work place have made an environment whereby older people are "protected" but I actually think that, in many ways, this is bad for business. And when it's bad for business, it's bad for all employees, not just one. I wonder how making the user experience less satisfying helps with sales? Follow that train of thought with how decreasing sales can be good for anyone.

Like I said, these kinds of labor laws and unionization have greatly helped to hurt western businesses. Protecting people due to seniority is a very bad idea (Japan used to do this at the office place - bad enough. But when dealing with the public do you hire beautiful people or old and fat people?) When people feel protected by a group, rather than their own good efforts at being their best, then their work quality drops, and they become lazy. Do you need proof of this?  Just go to any US Postal Service office anywhere in America anytime of the day and you can see a prime example of this.


Image is everything in business today. There isn't a person alive who would prefer flying an airline that has old and overweight flight attendants over an airline that has young and beautiful people handing customer service. Because that's what flight attendants are: customer service. When union rules or protecting the rights of the individual take precedence over the total welfare of the company (read: all employees) then there is a definite problem.

This girl is a real stewardess for a China based carrier. 

Her name is Sun Qing.

That's what they're supposed to look like.

That, for example, Asian carriers do not have to deal with this sort of union rules and can hire pretty stewardesses or handsome stewards shows that they understand that image and perceptions are crucially important and that those perceptions of the customer and customer comfort comes first. That's one of the big reasons for the success of these airlines.

Some western airlines still "get it"

But I digress. This is not a post about idiotic labor rules in the west. It is a post about committing yourself to quality over quantity as you get older (that includes looks too if you are a flight attendant, stewardess, waitress, in customer relations at a private firm, on TV, etc. etc.)


I used to ride the very early morning train into Tokyo a few years back. There, everyday, I met an older German gentleman. His name was Karl, he was 65-years-old, and he was the head chef for all the Westin Hotels in all of Asia. He was in Japan at the time to help set up the in-house restaurants and catering for the new Westin Hotel just built near Ebisu station in Tokyo. Even though Karl was 65, he was an extremely friendly and energetic guy. Karl was running up the stairs full speed to catch the connecting train every morning until I showed him an easier way. I'm a nice guy like that!

Karl and I would ride the train together and he had many good stories to tell about his job. I love talking with people and by letting them talk, I get to learn many things. Karl was so enthusiastic about his job. Even though he was head chef, his area of true expertise was in making pastries. He'd often tell me about having to make several hundred pies, tarts or cakes... The part that always surprised me was how he would go into details about costs and time spent per unit of pie. I'd ask about making soups or roasting large birds, and Karl would always say the same thing,


"We have to carefully calculate the costs of gas and electricity for cooking and preparation time in order to judge if it is economical to create the dish for several hundred guests. Everything must be calculated down to the last penny to make sure that we don't run over costs."


Hell, that really surprised me. Whenever I roast a turkey at home, I just open a bottle of wine, start drinking and fire up the oven without a care in the world. Calculating the cost of the gas and electricity in order to roast the bird?! I wouldn't even know where to begin.


Karl had cooking down to a science.

Karl also had great advice for work as he mentioned to me that he was about to retire. He said, 


"Mike, as you get older, you must always be concerned with these costs, but you must mostly be concerned with having your name associated with quality. When we are young, there are many in our same field of work. But as we get older, the field of people doing our job narrows down to just a few..."


I asked him how many people in the world there were like him and he told me that there were only three like him who knew how to go into a country and set up a large hotel and organize the entire kitchen, room, service, restaurants, bars and train the staff and set up the accounting procedures for all food and drink related services. Wow! Think about that! Only three guys in the entire world and, of course, they all know each other...


Karl continued,


"That's is why, Mike, as you get older, you must concentrate on quality and delivering the best. If you decide to concentrate on quantity, you will lose. Because when it comes to a quantity issue, then you start dealing with lower quality... You will not be able to beat a younger competitor... You will not be able to beat a McDonald's."


I've always remembered what Karl told me. That's why I want to do quality work and not half-assed work.


Now, think about that. How does this relate to our 55-year-old flight attendant? Who is happy with that? I'm sure the customers aren't. And if the customers aren't, then I imagine that translates into a lower repeat and customer loyalty and return customer base... Hell, think about that poor guy too. Do you think he is happy being a flight attendant for 30 some years? I don't.


He should have moved up to management of flight attendants long ago. But he didn't... His just so-so service also gave me a hint as to why he didn't climb the ladder long ago. To give an example, I was wearing a headband made from the leaf of a palm tree given to me by a local and I was on a flight from Guam and the guy said to me,


"What's that? Is that headband some sort of religious item?" I smiled and  said, "no!" but thought, 


"Duh! What's it look like? We're on a flight from Guam. You know; Guam. It's a south seas tropical Pacific island. As in palm and banana trees, beaches, sand, sunsets, local people... This isn't rocket science. If we were returning from Hawaii would he ask me what the flowers around my neck were?"

Anyway, the point is clear: As we get older the thing that sets us apart from the rest is our experience gained. If we do not use this experience to better our game all the while doing as energetic a job as a youngster would do, then we are setting ourselves up for a bad situation.


Remember folks, when it comes to your personal branding: Quality beats quantity any day.

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EXTRA: Rory Sutherland: Life lessons from an ad man - Thanks to diego.a