Most people assume that internet retailing is a very profitable industry. Internet sales are growing rapidly, and internet retailers don’t have the enormous expense of operating brick-and-mortar stores, like the ones you see at shopping malls. Because of internet retailing, hundreds of departments stores and shopping malls have closed all over the country. It seems like internet retailing should be a gold mine, but it isn’t. The sad fact is this – most internet retailers lose money, a lot of money. And it doesn’t seem that its a question of size. In most cases, the bigger an internet retailer is, the more money they lose. Even Amazon loses money. Over the past 20 years, Amazon has only made a profit in few quarters but lost money the rest of the time. Amazon makes money on some of their services, especially Amazon Prime, but they lose money selling merchandise, and they always have. Amazon may someday become profitable, but if that happens, it probably won’t come from selling merchandise online. So what’s the problem?
The problem is the cost of shipping and returns – especially returns. About 10% of all the merchandise purchased in brick-and-mortar stores is returned, but 20% to 30% of all goods purchased online is returned. Even worse, 30% to 40% of all the clothes and shoes purchased online are returned. Still worse, most internet retailers pay the shipping both ways. Add to that the labor costs for filling and packing orders and then unpacking and processing all those returns. Then add to that the fact that most returned merchandise cannot be resold for full price. Some cannot be resold at all, like damaged clothes and toys. Some can be resold, but only at a discount, like the ‘out of box’ TVs at Best Buy. However, most returned merchandise is sold to liquidators, and they pay just a fraction of the good’s wholesale cost. So, why don’t internet retailers charge for shipping or adopt less generous return policies? Well, they would if they could, but they can’t. People who buy stuff on the internet have gotten accustomed to free shipping and returns. People take it for granted. Besides, who would buy something like a pair of shoes online if they didn’t know that they could easily return them for a refund if they didn’t fit? But most important, internet retailers know that if they charge customers for shipping or for returns, they will quickly lose those customers to other online retailers that still offer free shipping and no-cost returns. Until internet retailers figure out some way to significantly reduce the cost of shipping and returns, I don’t see how the industry will make money.
Of course, things are very different for retailers that just sell their own brand products, like Ikea, Godiva, and Gap. Because they are just selling their own products, they have pricing power that general merchandise retailers do not. If you are considering a career in internet retailing, think twice about it. Remember that we live in a market economy. Making a profit is not just a desirable objective. A company that fails to make a profit must eventually go out of business.
I have been wondering for a long time when internet companies were going to discover how much cheaper it is to do business in Oakland than San Francisco. Commercial office space in downtown Oakland is half the price of comparable space in San Francisco, just 10 miles away. It seems like that day has finally come. When Capwell’s department store in downtown Oakland opened for business 85 years ago, it was the biggest and most beautiful store in the East Bay. The Beaux Arts building featured an 85 foot high atrium with a domed stained glass roof. After Capwell’s went bankrupt more than 20 years ago, it became a Sears store, but the building was so large that Sears never used all of the space, and they covered up most of the building finer architectural features. After Sears moved out, the building was vacant for many years. The Capwell’s building is now undergoing an expensive renovation. It is being converted into office space for internet companies. Part of the building has already been leased to Uber, which will move 600 employees there from San Francisco. Ultimately the building, renamed Uptown Station, will house about 3,000 high tech workers. The ground floor will be filled with stores and a food court. The roof will become a garden and picnic area. The 19th Street BART station is right next to the building, and there is a direct entrance into the building from the subway station. That is probably the building’s single most valuable asset.
If am constantly amazed at the silly things that dot-com billionaires spend their money on. Most of these people are relatively young men who came into a lot of money suddenly, usually as a result of an IPO or a buyout. Once they get all this money, they go on spending sprees, buying toys – very, very expensive toys. For example, one of these guys bought a zeppelin, the world’s biggest zeppelin. You can see it flying around San Francisco Bay. The owner of the zeppelin uses it to fly his friends from Oakland Airport to the Napa Valley for dinner at pricey restaurants like the French Laundry. Other expensive toys purchased by internet billionaires include a Russian submarine, a chocolate factory on a pier near Fisherman’s Wharf, and one of the Hawaiian islands, and a populated island too! Can you imagine anyone having enough money to write out a check for a whole Hawaiian island?
This brings me around to Timothy Draper, a billionaire Silicon Valley venture capitalist. In July, Draper announced that he had collected enough signatures to qualify a state ballot initiative to divide California into six states. Draper paid people to gather 1,300,000 signatures, well over the 800,000 needed to put the measure on the ballot in 2016. Draper says he did it because: “California needs a reboot”, whatever that means.
One of the six states would be called Silicon Valley and would include all the counties around San Francisco Bay including San Francisco itself. Critics say that Draper’s plan is simply designed to cut off the wealthiest part of the state from the rest, leaving poor people in the Central Valley to fend for themselves.
California is not actually going to become six states. This ballot initiative is just another internet billionaire’s toy. It takes an Act of Congress to admit new states into the Union, and there is absolutely no possibility that Congress will allow California to become six states.
Aaron Levie. My nephew Aaron Levie started an internet company 8 years ago in my backyard called Box.com. Box.com now has over 1,000 employees and offices all over the world. I wonder what expensive toys Aaron will buy when his company goes public, which could happen soon.
The Lady and the Tiger. One expensive toy that Aaron might want to buy is the ‘Lady and the Tiger’ trick. When Aaron was growing up, we used to go to magic conventions together every summer. Aaron and I once saw the Lady and the Tiger trick performed at one of these conventions. In this trick, a beautiful young woman is put into a cage. The cage is lifted into the air and covered with a cloth. When the cloth is removed a few seconds later, the woman is gone, and a live 500 pound Bengal tiger is in the cage instead. Although Aaron knows how this trick is done, he has never done it. Aaron doesn’t have a tiger. Now – Aaron doesn’t like it when I reveal magic secrets, but I am going to reveal a secret about this trick. No magician can actually turn a beautiful woman (or even an ugly one) into a Bengal tiger. No. In order for a magician to do this trick, he has to have a tiger first. I guess that’s not really a secret. You probably already figured that out.
Houdini Magic Shop. There are a number of magicians who do the ‘Lady and the Tiger’ trick, but I have no idea where they get their tigers from. They don’t sell tigers at magic stores. I have a friend who works at the Houdini magic shop at Pier 39 in San Francisco. Although they sell professional magic tricks there, I know they don’t sell Bengal tigers. I wonder where magicians get their Bengal tigers from. I looked up ‘Bengal tiger’ on Google Shopping, but nothing came up.