Amazon Investors Suddenly Bearish on Losing Money
Amazon just reported its third-quarter earnings, and the numbers weren’t pretty. It missed Wall Street’s targets for revenue and gave disappointing sales projections for the holidays. It posted a quarterly loss of $437 million. Investors aren’t happy. The stock is tanking. It’s a little weird.
Amazon is a Wall Street darling. The “prophet of no profit,” as Matt Yglesias once wrote in Slate, has long been given a bye from investors—the right to operate without close regard to its quarterly reports and margins. Investors accepted that Jeff Bezos was playing the long game and allowed Amazon to make big bets on the future at the cost of its short-term figures. And so, Amazon would report a loss, or plummeting profit margins, and yet its stock would climb anyway.
Lately, though, that bye has weakened. Amazon’s stock fell 11 percent after hours or a little more than $33. It's down 21 percent since the start of the year. Longtime Wall Street Internet analyst and Business Insider founder Henry Blodget told Yahoo! Finance that “clearly investors are getting frustrated,” especially after the big loss the company forecast for the third quarter. “It was startling even to me. I’m very patient. I have been an Amazon shareholder forever,” he added. “But even I when I saw the guidance last quarter was like, ‘Wow, that is a big number.’ ” The actual loss was even bigger than the guidance had indicated.
It doesn’t help that the Fire Phone, which Amazon rolled out this summer to much hype, has largely flopped. Early on in September, the company cut the price of the device to just $0.99 in an effort to jump-start its sales. At the same time, it’s faced increased competition in delivery, particularly from Google, which is slowly rolling out its same-day service in a handful of major U.S. cities.
Wall Street’s growing skepticism was palpable on the call after the earnings announcement. Amazon, as always, emphasized that it doesn't focus on “individual margins” but instead on driving cash flow and operating income. It said that there are “a lot of opportunities” in front of it and that it will be careful in choosing which it pursues. But not all of the analysts were having it. One asked how Amazon still holds itself accountable. Which numbers did its board keep an eye on? The company and its leadership might still have patience. But on Wall Street, it's running thin.
It Seems No One Is Rich or Happy: I Looked
One day I'd like to meet someone who is, in fact, rich.
Sometimes I think I've found one, but I'm always wrong. No matter how rich I imagined the person to be, within a few minutes I find out just how poor that person really is.
Take the guy who sold his company for more than $40 million. (Well, actually $100 million in total; $40 million is his share.) I was sure he was rich.
Then he told me how, for tax and estate planning purposes, he had structured the disbursement of funds over 10 years. So sure, he may be "worth" $40 million, but he only gets around $4 million each year. And despite all that nifty financial planning, the taxes are still so high he doesn't see nearly that much. It's a bummer.
Then he told me what he wants most in life is a Bugatti Veyron, only they cost about $2 million. Sure, he has money, he said, but he doesn't have that kind of money. He thinks about it all the time. It's a bummer.
Or take the guy with the 110-foot yacht. Strictly speaking, it's a ship, not a boat, since it's big enough to carry several small boats and a couple of Jet Skis on a platform at the stern. And it has a pool. I was sure he was rich.
Then he told me how expensive the yacht is just to own: Fixed costs like cleaning, upkeep, berth, and crew run over six figures a year. And what about the expense of actually taking it for a cruise? He told me firing it up is so expensive he sometimes has to think twice about whether to take it out of the harbor. It's a bummer.
Or take the guy who—I know it's a cliché, but it's still true—started a company in his garage, financing it with credit cards and a loan from his father-in-law. A couple decades later his company owns its building (and a few more), employs 500 people, and generates tens of millions in annual revenue. And he put his three kids through Ivy League schools and then gave them significant seed money to start their own businesses. I was sure he was rich.
Then he explained how he still has to work 60- to 70-hour weeks and can maybe take one week of vacation a year. Sure, he would like to have more free time, but running a company that size requires constant and total attention. Why, it could all go away in an instant, he said. And then what would happen to his family? The very thought makes him shudder. It's a bummer.
So I decided to set my sights on a different target. By definition there can't be that many rich people; maybe statistical probability was the problem? So I decided to look for someone who is happy: Not everyone can be rich, but anyone can be happy.
I thought I found one when I met an entrepreneur who had just landed her first big customer. Not just a big customer, a truly enabling customer, one who made it possible for her to hire much-needed employees, make long-delayed equipment purchases, and finally get creditors off her back. I figured that surely made her happy.
Then she told me how much she hates to recruit and interview … and then actually having to supervise those employees on a daily basis? Ugh. She told me how adding equipment, maintaining a larger inventory, and managing the huge increase in production was such a pain. Don't get her wrong, she said as she looked around to make sure no one overheard, but she often longs for the good old days when life was a lot simpler. It's kind of a bummer.
Or take the guy who after years of putting out feelers and constant hints was finally invited to serve on the board of a startup. The company has potential, he said, but it's not Twitter. Or Facebook. Or even Fancy. Now that would be cool. This? He thought it would be fun, but it's kind of a bummer.
The guy who just bought a bigger house? Bummed because it takes so much work to clean. The guy who just doubled his income? Bummed because now his taxes are higher. The gal who just landed her dream job? Bummed because now her daily commute is a half-hour longer.
Seems no one I meet is actually rich. Not really. And no one I meet is actually happy. Not really.
But that's OK. I'll keep looking.
Someday I might find someone.
And I hope that someone will be you.
Is McDonald’s Planning to Replace Its Cashiers With Computer Screens?
After McDonald’s announced yet another round of disappointing earnings yesterday—its quarterly profits fell 30 percent—the Wall Street Journal editorial page took a moment to gloat. “So even one of the world’s most ubiquitous consumer brands cannot print money at its pleasure,” it wrote. “This may be news to liberal pressure groups that have lately been demanding that government order the chain known for cheap food to somehow pay higher wages.”
In other words, if you think McDonald’s is doing poorly now, just imagine how it would fare with a $10 or $15 minimum wage. Meanwhile, the Journal already sees signs that McDonald’s is planning to reduce labor costs by automating away its cashiers. Next year, the company says it will introduce touch screens to make it easier for patrons to order and customize their meals. (Recently, it's been playing with a "build-your-own burger" concept that it hopes will lure back diners who grew tired of its stale menu.) "Customers want to personalize their meals with locally relevant ingredients," CEO Don Thompson told reporters yesterday. "They also want to enjoy eating in a contemporary, inviting atmosphere. And they want choices in how they order, choices in what they order and how they’re served.”
"That is no doubt true," the Journal edit board responded, "but it’s also a convenient way for Mr. Thompson to justify a reduction in the chain’s global workforce. It’s also a way to send a message to franchisees about the best way to reduce their costs amid slow sales growth. In any event, consumers better get used to the idea of ordering their Big Macs on a touchscreen."
I wouldn't be so sure. Replacing cashiers with computer screens is indeed the most obvious way that most fast-food chains could cut down on human labor. (I've warned about that prospect before, in the context of Seattle's $15 minimum wage.) But when McDonald's began deploying touch-screen kiosks in Europe several years ago, management told the Financial Times that it didn't expect the new technology would lead franchises to cut their workforce. And if you walk into a McDonald's in, say, France, one thing you'll notice is that there are plenty of employees standing behind the counter despite the fancy kiosks, which many customers simply ignore. The same way plenty of shoppers hate the idea of checking out their own groceries, some people seem to just prefer having a human take their order.
At fast-food chains other than McDonald's, experiments with touch screens haven't necessarily led to smaller staff. Take White Castle, which installed an ordering kiosk in a Columbus, Ohio, location. The company says that it doesn't plan to use the interface to replace workers and that the number of employees at the restaurant has stayed flat.
“We are 100 percent reliable on our people to create a memorable experience," White Castle Vice President Jamie Richardson told QSR, a fast-food industry trade magazine. "The kiosks free them up even more to provide that hospitality." I'm not sure McDonald's would say quite the same about the workers who staff their franchises, which tend to operate with the bare minimum amount of labor already. But I'm not sure the company is really interested in abandoning the idea of customer service altogether.
It's entirely possible that, as kiosks become more ubiquitous and customers get used to them, they'll eventually lead to fewer workers in the front of the house at McDonald's and other fast-food chains. Who knows—maybe that automatic burger-making machine will also take off and decimate kitchen staff. But for now, it might be safe to take McDonald's at their word that this is about making it simpler for customers to order a custom burger with a little guacamole on it.
Update, Oct. 22, 2014
Earlier today, I asked McDonald's whether it had any plans to reduce labor costs using touchscreens. Spokeswoman Terri Hickey writes back:
To clarify, there are currently touchscreens being used as part of a Create Your Taste burger customization test that is ongoing right now in four restaurants in California. Customers customize their burgers, choosing from various toppings on touchscreens. The dining experience is interactive at McDonald’s and our restaurant staff who are participating in the four-restaurant test have shared that interacting with customers is still an engaging and important part of their jobs at McDonald’s.
Hickey also called the Journal's editorial "highly speculative and hypothetical." So, as of now, the company's official line is that it's not swapping out cashiers for computer screens.
Soda and Fries Have Lost Their Charm for Both Consumers and Investors
People just aren't into sugary drinks the way they used to be. Coca-Cola is keenly aware of this, which is why it embarked on the "Share a Coke" campaign in June, putting ordinary names on cans and bottles of Coke in the hopes that mass personalization would make people more eager to buy soda. For a while, it appeared to be working: Sales of Coke soft drinks in the U.S. rose more than 2 percent over the summer. But based on the company's latest earnings report, that campaign alone wasn't enough to turn things around.
Shares of Coke sank 6 percent on Tuesday after reporting flat soda volume and lower revenue in the third quarter. Along with the disappointing figures, Coke said it would trim annual costs by $3 billion over the next five years by "streamlining and simplifying our organization." Coke CEO Muhtar Kent told investors that his team is taking "additional steps to get us back on track over the longer term and we will do whatever we have to do to get there, to get us across the bridge." But until the numbers start to perk up, that reassurance is unlikely to silence the critics calling for new leadership at the company.
Over at McDonald's, things aren't much better. In its third quarter, profit fell by 30 percent and sales at restaurants open at least 13 months slipped 3.3 percent. That's in sharp contrast to the tremendous 19.8 percent jump in sales that Chipotle reported in its earnings for the same period on Monday. Even McDonald's CEO Don Thompson couldn't scrape together a positive spin on the results, bluntly calling them a "significant decline versus a year ago" in his prepared statement. McDonald's stock slipped only 0.63 percent during Tuesday's session, but it's down more than 8 percent in the past eight months.
Both Coke and McDonald's have their excuses. Coke CEO Kent told investors that the company is struggling with "a challenged disposable income growth environment" and a consumer who "is challenged everywhere around the world." McDonald's cited a "higher effective tax rate" and "unusual events in the operating environments in APMEA and Europe." But the bigger problem might be the products and experiences the two are selling. Fast-food restaurants are being upstaged by fast-casual, slightly more upscale rivals like Chipotle. Soda is battling concerns over obesity and artificial sweeteners. For whatever reasons, consumers are no longer charmed with Coca-Cola and McDonald's, and so investors aren't either.
Walmart Is Killing the Rest of Corporate America in Solar Power Adoption
Walmart might be an unadulterated, union-busting evildoer in the eyes of organized labor. But when it comes to another liberal priority, green energy, it's becoming something of a corporate hero. For a few years now, Walmart has been installing solar panels on its stores’ capacious rooftops to improve its corporate image while controlling energy costs. Other big-box retailers such as Ikea, Costco, and Kohl’s have done the same. But thanks to its huge real-estate footprint, Walmart’s efforts are reaching enormous scale.
This week, the Solar Energy Industries Association, a trade group, reported that Walmart has installed 105 megawatts of solar capacity, up 16 percent from last year, and more than twice as much as the next closest company, Kohl’s. All told, the 25 corporations with the most solar have added 569 megawatts combined—roughly one-sixth of which belongs to the pride of Bentonville, Arkansas.
Here’s another comparison that puts Walmart’s efforts into perspective: According to SEIA spokesman Ken Johnson, the company now has more solar capacity than 35 states and the District of Columbia. It lags behind California, Arizona, Colorado, Florida, Georgia, Hawaii, Maryland, Massachusetts, North Carolina, Nevada, New Jersey, New Mexico, New York, Pennsylvania, and Texas. That’s it. (Last year, using a different data source, Bloomberg reported that Walmart had more capacity than 38 states).
Walmart’s efforts are also only just beginning—it has pledged to double its solar installations by 2020 and says that, long term, it wants to get all of its electricity from renewables, up from about a quarter of its worldwide consumption today. So while smaller companies like Kohl's and Whole Foods, which according to the Environmental Proection Agency get all of their power from green sources, have made faster progress shifting their own power consumption to renewables, Walmart has the ability to keep growing the solar market.
All of which helps explain why President Obama chose to use one of Walmart's stores for a backdrop during a speech on green energy. At the time, liberal critics savaged the decision, in part because he appeared to be lending respectability to a company with an awful labor record. But Walmart's notoriously ruthless cost-cutting might actually burnish solar power's reputation as an economically viable choice rather than some goofy liberal fixation. The company wouldn't be building out an entire state's worth of capacity if solar didn't make fundamental financial sense. Corporate America doesn't get any more hardheaded—or mainstream—than Walmart, and that's great news for green energy.
The Global Millionaires Club Is Booming and Losing Its Exclusivity
Is it still cool to be a millionaire? Perhaps not by 2019. Over the next five years, the global millionaires club is expected to grow by 53 percent, from 35 million to 53 million members. According to a new report from Credit Suisse, that rapid expansion makes millionaires the fastest growing segment of the world's wealth pyramid. By comparison, the global middle class is predicted to increase 30 percent by 2019 and the upper-middle class by just 22 percent in the same period.
The biggest regional growth in millionaires is expected in China, where that population could nearly double from its current 1.18 million members to 2.29 million by 2019. The U.S. should have less of a spike—forecasts show its millionaires increasing by 39 percent over the next five years—but will easily retain its title of Most Millionaire-Filled Nation with almost 20 million of them by 2019.
Worldwide, millionaires (defined in the report as "with wealth above USD 1 million") are still a small portion of the population. They account for less than 1 percent of all adults and together own 44 percent of global wealth (approximately $115.9 trillion). But relative to that, their ranks are booming. Particularly in countries and regions that don't currently have a lot of millionaires—Malaysia, Chile, Poland, and Africa, for example—their numbers are expected to swell by 80 to 110 percent over the next five years. Those millionaires who are no longer feeling special might want to set their sights a little higher: The world's billionaire club still has only 2,325 members.
Chipotle’s Magical Burrito Empire Keeps Growing, Might Be Slowing
Chipotle is no longer cheap. In New York City, a nationwide hike in menu prices means that a chicken burrito costs $8.27, a steak burrito $8.96, and a carnitas burrito $8.73. Want guacamole? That will be another $2.30. But so far, Chipotle consumers have yet to blink.
That's the takeaway from Chipotle's third-quarter earnings, which it reported Monday afternoon. Sales at restaurants jumped 19.8 percent over the same period the prior year on increased foot traffic, and profit soared 56.9 percent to $130.8 million. The company's operating margin came in at 28.8 percent. For the sake of comparison, comparable sales were flat at McDonald's in the second quarter and profit declined 1 percent. At Yum Brands' KFC, Pizza Hut, and Taco Bell, sales fluctuated in both directions by a few percentage points in the third quarter and the highest margin (at Taco Bell) was 20.7 percent.
"We are extremely pleased with our performance for the third quarter," Chipotle CEO Steve Ells said in the earnings release. "Recent industry trends suggest the Chipotle model is resonating with customers, who are realizing there are better alternatives to traditional fast food." That model—"fast casual"—is often described as the sweet spot of the dining world: to provide the ambience and food quality of a casual sit-down restaurant while maintaining the quick service of a fast-food establishment. "This formula has worked extremely well for us since the beginning—and others are starting to notice," Ells said on the company's earnings call. In a July ranking of 65 fast-food and fast-casual restaurants by around 32,000 customers, Ells said Chipotle topped the list. Chipotle has also built strong consumer loyalty, keeping people coming even as menu prices climbed higher.
Despite the strong results, shares of Chipotle dropped a little more than 4 percent after the bell on a conservative sales forecast for 2015. Unlike the double-digit growth of the last quarter, Chipotle said it expects "low to mid-single digit" sales growth at restaurants in the following year. And some good news for customers: At least for now, Chipotle executives aren't planning another menu price hike in 2015. Guacamole for everyone!
Apple: Still Enormously Profitable
I'm starting to the think that the relationship between U2 and Apple is more than a misbegotten co-branding exercise—there's pretty clearly a deep spiritual simpatico at play. Youthful icons of the 1980s who had some '90s-era hiccups before a turn-of-the-millennium revival, they've both settled into a groove as dull but enormously lucrative enterprises. U2 keeps cranking out forgettable albums and enormously successful tours. Apple continues tweaking its iPhones and iPads, then watches the money pour in.
Today, the company announced its fourth-quarter earnings, which were robust as usual. The company earned $42.12 billion, beating expectations and up 12 percent year over year. IPhone sales keep rising, while iPad sales are slumping. Business Insider notes, meanwhile, that the Mac, "is the surprise of the quarter. Apple sold more Macs this quarter than any other quarter in its history." Chances are, the iPad and Mac stories are related. The Wall Street Journal suggests tablet sales are getting "squeezed" as laptops get ever thinner and smartphones evolve into phablets. (Ugh, that word.) So maybe the PC isn't dead, as long as it has an Apple logo somewhere on it.
(How much money is $42 billion? Well, it's roughly the annual gross domestic product of Luxembourg. Price Waterhouse Cooper estimates that the entire North American sports market was worth $53.6 billion in 2012.)
Of course, questions always hover over Apple's continued dominance. Can it continue to expand in China? Its sales grew just 1 percent year over year in that all-important country, though management says it's still "bullish" on the market. And what about its famously thick margins? Apple's have remained incredibly healthy, while its chief rival, Samsung, has seen its profits erode due to competition from inexpensive Chinese handset makers. Can Apple float above that fray forever?
And what of Apple Pay? The company just launched the mobile payment system, which allows users to pay for merchandise with a wave of their phone at the checkout counter. Apple has been promoting the app's convenience—no need to fumble with those pesky credit cards!—but its data security features may prove to be the real sell. Should that happen, it has "the potential to grow into a whole transactions empire for the company," as my colleague Lily Hay Newman put it.
But for now, Apple is still a reliable behemoth that makes little hand computers that lots and lots of people want to buy. And thankfully, its new phones still get better reviews than U2's albums.
Whole Foods Desperately Wants Customers to Feel Warm and Fuzzy Again
Whole Foods has a national branding problem. Once synonymous with “healthy” and “organic,” Whole Foods has lately been derided for high prices and quackery. Its grip on natural has slipped as new competitors—most formidably Walmart—have stocked their shelves with organic foodstuffs for a fraction of its costs. The formerly elusive bag of high-quality quinoa has become, for Whole Foods, horrifyingly ubiquitous.
How do you fix a national branding problem? With a national branding campaign, which is what Whole Foods announced on Monday. Headlined “Values Matter,” the campaign is designed to restore customers’ faith in Whole Foods values in two senses: its prices and its ethics. “Not everyone knows what makes Whole Foods different from other grocers,” Jeannine D’Addario, global vice president of communications at Whole Foods, said in a statement. “This campaign will distinguish what makes our brand special, our food different, and our quality superior.”
The campaign features 22 video ads, which were uploaded to YouTube in a “Values Matter” playlist between Friday and Monday. Two 31-second ads are marked as TV commercials—one for produce (above) and one for beef (below). They play heavily to the sustainability-conscious, emphasizing that Whole Foods produce is “grown locally on over 1,000 U.S. farms” and its beef is “from cattle who’ve had room to roam.” Inspirational string music hums in the background and the sun glistens on workers picking vegetables and a herd of cattle striding through fog. “Whole Foods Market: America’s healthiest grocery store,” the ads conclude.
Whole Foods hasn’t disclosed how much it spent on the campaign, but the New York Times reports that the budget is estimated between $15 million and $20 million. In previous advertising sprees, the store has spent less and focused on promoting specific products or marketing to local and regional customers. Since 2008, Whole Foods has spent between $4 million and $8.4 million on advertising each year. Its latest campaign targets people ages 25 to 49, the company said, and will run through winter 2015. It also seems geared to high-end consumers—print ads will appear in Bloomberg Businessweek, Rolling Stone, and the Times, among other publications. In presumably another effort to appeal to that demographic, Whole Foods also said Monday it will begin accepting Apple Pay.
Whole Foods, in other words, is not trying to radically expand its consumer base with this new campaign. It probably knows that it will never be able to compete with the likes of Walmart in increasing affordability and access to organic foods, so it’s not really trying to. What Whole Foods thinks it can do better than Walmart is values—of the ethical kind. “We’re trying to advertise who we are. We’re trying to change what we think is a negative narrative about our company,” co-CEO John Mackey told investors in July. What remains to be seen is whether that will be enough to win frustrated and disillusioned customers over again.
Even When They Go to College, the Poor Sometimes Stay Poor
Over the weekend, the Washington Post’s Matt O’Brien published this killer graph that captures just how unequal the economic playing field is for children of the rich and poor. Low-income kids who graduate from college, it shows, have the same odds of ending up at the bottom of the economic ladder by age 40 as high-income children who drop out of high school.
Unfortunately, the article’s headline—which has been burning up Facebook and Twitter—is misleading. It isn’t true that “poor kids who do everything right don’t do better than rich kids who do everything wrong.” The graph, adopted from a new paper by Brookings researchers, makes that clear. If you’re a low-income kid who graduates from college, you’re much more likely to end up in the top 40 percent of earners than a privileged schmuck who flunked out of 11th grade.
The real issue, as O’Brien points out, is that rich kids enjoy lots of advantages that keep them from falling to the very bottom of income distribution, and sometimes those advantages keep them at the very top. They might be able to go to work for family businesses, for instance, or family friends. Researchers like Brookings’ Richard Reeves call that collection of advantages “the glass floor.” Educated poor kids are in the exact opposite position. Many attend second- or third-rate (and possibly for-profit) colleges that churn out less-than-useful degrees. And instead of a floor propping them up, their families and friends can act like an anchor pulling them down. A classic example: a college-educated woman who goes home and marries a boyfriend who never made it past high school and has trouble holding down a job.
America’s lack of class mobility is still largely a problem of education. As of now, low-income kids have low high-school graduation rates, rarely go to college, and tend not to finish when they do, all of which keeps them out of the middle class. But education alone isn't the issue—there are plenty of forces that keep rich underachievers rich and poor strivers poor.