Amazon Books’ shutdown: This company benefits when it sells books

Written by By S. Jane Wardle, CNN Amazon never had a book store. The online retailer recently dropped its Amazon Books operation in San Francisco and New York (by some accounts as much as…

Amazon Books' shutdown: This company benefits when it sells books

Written by By S. Jane Wardle, CNN

Amazon never had a book store.

The online retailer recently dropped its Amazon Books operation in San Francisco and New York (by some accounts as much as 90%) in favor of lower-margin business models such as video streaming and building Amazon’s Alexa personal assistant into your smart speaker.

Commentary on the demise of Amazon Books suggests the company will continue to move away from physical bookstores towards a “Fulfillment by Amazon” (FBA) model (in which fulfillment services are provided by Amazon directly to its customers).

But that’s an overblown explanation. The fact is Amazon Books was, like the film “E.T.”, doomed from the start.

A business decision?

The bookstore was a business decision as much as it was an experiment in brand identity.

Amazon could create super-successful stand-alone bookstores, but doing so would be expensive. By ordering large quantities of product from Amazon for the stores, Amazon effectively frees up physical stores to sell second-hand books, merchandising around the inventory instead of in front of customers.

These second-hand books were, quite literally, the real life kitty litter of the Amazon store.

First signs of trouble in August 2017. Credit: Twitter/@loseac2s

Second-hand book stores make money mainly in convenience: the space, the experience, the ordering and distribution of goods.

Amazon not only suffered from the disadvantages of traditional retail, but also a disturbing new trend in bookselling, one that has upset the top-shelf customers of old who were used to seeing and having their own stores.

Amazon is changing bookselling. Credit: Adobe Stock

Since its inception, Amazon has been under the influence of economic theory and a universe of large companies with an unhealthy interest in selling overconsumption of consumer goods. For the purposes of our discussion, this giant is Ikea.

Like Ikea, Amazon is a new business model, and like Ikea it has never faced the limitations of its legacy. The world is full of business models that offer higher returns to company owners than it does to consumers.

But what exactly are these boundaries? What is a normal return for a stock, for instance?

Imagine a world in which there are a number of stocks available to consumers: Apple, Amazon, Adobe and Netflix. When the percentage of returns from these stocks is compared, the stocks with the highest returns are invested into, and the stocks with the lowest returns are disposed of.

The main differences in returns across these stocks are that they make between one and ten dollars per share profit per year, and that they also make between one and two dollars per share profit per year.

In our book, Brands That Matter, we examined the returns of the 50 highest-returning brands between 1927 and 2010. We found that the cost of brand ownership is greater than returns, and the absolute, general market wide return (which equals total profits) of shares is higher than the market capitalization of the same companies.

The values that the companies are valued at do not reflect their intrinsic value. Even when earnings are controlled by market forces, the return at which companies are valued is higher than the returns that could be earned by companies that are unhedged in this way.

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