These days more and more companies – particularly in the U.S. – are run for volume rather than profit and, as long as investors find it desirable to pay exorbitant amounts of money for companies that have never made a decent profit, you can understand the companies’ desire to pursue such a strategy.
The best known example of this is probably Amazon. Despite having seen a huge increase in turnover, profits continue to be tiny. For that accomplishment, Wall Street has rewarded Amazon with a valuation of almost $300 billion.
"Amazon’s business model has ensured that it cannot earn a decent profit – at least not in the short term. Having said that, one could also argue that its business model has virtually guaranteed that nobody else can either," says economist, Niels Jensen.
In the mid-1990s, before Amazon entered the stage, U.S. department stores generated decent profits (3% of sales on average). They no longer do. "So the disruptor doesn't earn much money, and the disrupted earn no money at all. Now, that is a disruptive business model.
"The obvious winner is the consumer, who benefits from the ongoing pressure on consumer prices. How he or she will react when there are no department stores anymore, only time can tell," adds Jensen.
In the meantime, the ‘volume over profit’ business model will ensure that consumer inflation stays muted.
Is Amazon trying to eat even more of Tesco and the rest of the supermarkets' lunch? Not satisfied with muscling in on the grocery world with speedy deliveries straight to your door, the retailer-slash-tech giant is now planning on selling its own-label range of food and other sundries, according to reports.