Many of us have a strong interest in the orderly expansion of Minnesota’s economy. With respect to Amazon’s search for a second-headquarters location, however, some important questions should be explored before Minnesota neglects other opportunities to focus on preferential subsidies for the retailing giant.
1. Is Amazon’s profit recipe sustainable over the long term?
2. Does Amazon have an established track record of being good for employees, customers, suppliers, business partners and the communities in which they reside?
Amazon is a very large, minimally profitable company, whose fortunes depend upon a long list of anticompetitive practices and the systematic avoidance of taxes wherever possible. In the second quarter of 2017, Amazon’s revenue was nearly 25 percent larger than one year earlier. That’s impressive, but profits declined 77 percent. Net profits were one half of 1 percent of revenue, compared with 20.2 percent at 3M. The highest rate Amazon ever earned in any quarter was 1.8 percent.
Amazon has a tangible net worth of $18.96 billion, of which $19.13 billion was supplied by shareholder investments. Thus, more than all of Amazon’s tangible net worth has been contributed by shareholders, rather than accruing because of company operations.
It is certainly true that Amazon has been a darling of the stock market in recent years, but huge explosions in stock values have happened before with many companies. Enron, Hudson Motor Car, Lionel, WorldCom, Global Crossing, Stutz Motor and others were all darlings of the stock market at one time or another.
Yet there is no guarantee that a darling of the stock market in one year will be an asset to the community in the next. In 2006, Citigroup stock was $545 per share. Three years later, it was $40 — a decline of 93 percent, with mammoth layoffs and restructurings.
Amazon’s price-to-earnings ratio is 241. 3M’s is 24. Amazon’s stock price might someday reach a normal valuation, which could precipitate an enormous decline in the price of its stock and thus curtail the company’s dominant source of cash — shareholder investments.
At a time when online competition is ever-increasing and becoming more capable, Amazon is planning on an additional corporate headquarters with 50,000 more overhead people — all on the basis of exceedingly slim profits. Is that indicative of the solid management that warrants publicly subsidy?
I favor expansion of Minnesota industry. But whether Amazon qualifies as a suitable corporate partner should be thoroughly examined. Empirically, the company has a controversial history regarding tax payments, business practices, community relations and employee relations. Before Minnesota makes preferential investments not available to our current companies, should we not make sure any potential recipient will be of long-term benefit to Minnesota’s community and economic health?
Beyond the specific case of Amazon, perhaps we should also examine the efficacy of lavishing huge subsidies on companies and individuals with unknown or questionable behaviors and financial histories. Minnesota bailed out the inept predatory financiers who took over Northwest Airlines when it was the most solvent airline in the nation and then drove it into bankruptcy as the financiers were selling $61 million of their own stock — curiously proximate in time to when the bankruptcy papers were being prepared. How did that work out?
We might also ask if it is in Minnesota’s interests to subsidize any company that has played such a role in devastating our local retailers. These retailers have invested in our communities and paid their sales taxes. What has Amazon done for the communities in which it does business?
Minnesota’s economic development programs, and the philosophies behind them, should be reviewed and discussed. Well-thought-out economic development programs are needed, but they must be discerning. During the past few decades, Minnesota has lagged in both investment and discernment.
Fred Zimmerman is a University of St. Thomas professor emeritus, has worked in industry and has served on the boards of directors of several companies.