Amazon Must Move Beyond Retail

(MoneyWatch)  Every now and then I read an article so fundamentally smart that I want to hold people's heads down to get them to see it. One today is by Martin Peers of the Wall Street Journal, in which he observes how a good portion of Amazon's financial success depends on putting off paying its bills. And while he is right that eventually vendors won't put up with it, the company is still largely in retail, which is dependent on that delay between money in and money out. That's why Amazon has been working so hard to break out of the category, and why it must -- because time is running out.

In the third quarter, for instance, Amazon stretched out its bill-payment to 72 days, up from 63 in the year-earlier period. As Behind The Numbers analyst Brian Evans notes, this "theoretically means that Amazon has not paid suppliers for sales consummated in mid-June." Amazon's sales rose 28% in the quarter, but accounts payable nearly doubled, helping push free cash flow up 116% to $696 million.Averaged through the year, Amazon's accounts-payable days have risen from 49.25 days in 2003 to 59 last year before jumping to an average of 64.6 so far this year. Free cash flow has grown to $1.36 billion in 2008 from $346 million in 2003.

Do read the rest of his article, as it deserves the attention. Now let's look at some of the implications of these and other numbers. Why would Amazon put off vendors? Because of float, or the interest made on cash that a company manages to hold before paying the money to someone it owes. And given that purchase from Amazon are primarily via credit card (according to the latest 10-Q), the company has its money right away. So the net sales in Q3 of $5.449 billion will pretty much all see more than 60 days of interest, which is probably translating into tens of millions of interest a quarter.

Grocery store chains make heavy use of float, given the many millions that come in each week as people buy their groceries. However, the difficulty that Peers noted is that after a certain point, like 30 days, the float is essentially coming from the suppliers, who are waiting past 30 days for their payments. That's where the friction is going to develop, just as it did when Dell was trying to pull out every possible dollar from its manufacturing "partners" to maintain a profitability multiple times higher than some of its competitors. That eventually dropped, and the same could happen to Amazon.

To the credit of Amazon's management team, however, they've been exploring revenue sources that could provide the margins that simply aren't available selling others' products for discounted prices. I think that is why it is so aggressive in pushing the historic boundaries between publishers and retailers, for instance. Amazon needs to push beyond ordinary retail, because the margins simply aren't going to cut it for tech investors.

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