Amazon Cuts Some Prices 50%

One of the questions often asked by retail experts and investors is whether bricks-and-mortar companies and e-commerce operations can afford to deeply discount a large portion of the products they sell. If not, many retailers will post results no better than break-even or even losses for the final quarter of the year–the quarter in which retailers are supposed to make their largest profits.  One case in point is Amazon (NASDAQ: AMZN) which has dropped prices on some of the items it sells by 50% or more

Amazon has already warned Wall St. that it may not make money this quarter. In its last earnings release, management forecast:

Net sales are expected to be between $27.3 billion and $30.3 billion, or to grow between 7% and 18% compared with fourth quarter 2013.

Operating income (loss) is expected to be between $(570) million and $430 million, compared to $510 million in fourth quarter 2013.

More than half a billion dollars in losses is a great deal, even for a public corporation Amazon’s size. Investors worry that Amazon is “buying”  the revenue that could rise above $30 billion in the quarter via massive discounts.

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There is anecdotal evidence the discounts Amazon is offering are extraordinary. Some of these discounts are over 50%. Amazon does not disclose whether these are “best sellers” in terms of volume, so its is impossible to apply their price breaks to Amazon’s profits overall. However, the discounts are bound to erode the bottom line

Among the items on which Amazon is offering extraordinary discounts of 50% or more are the video game “Middle Earth: Shadow of Mordor”, a Singer sowing machine–the “7256 Fashion Mate 70 Stitch” model, and the 2014 “Diamond Model” bike. These products have nothing in common, which is one reason for concern. Amazon’s discounts are not isolated to one segment of inventory.

As an aside, there is another part of Amazon pricing which is worrisome. The company is discounting its own consumer electronics flagships. Amazon has chopped the prices of the “Fire HD 6” by $20, the “Fire HD 7” by $30, and the “Kindle” by $30. For some time, outsiders have suspected these are loss leaders meant to get people to buy e-books, sign up for Amazon’s Prime streaming product, or get shoppers to use the company’s apps for the bulk of their online purchases.

So, Amazon has stated it may lose a great deal of money in the current quarter. The pricing of a large number of items it sells makes that more and more likely