Does the answer lie in the following simple facts?
· It is difficult to assess returns of intangible assets. Benefits of investment in intangible assets are realized when they are combined with other assets to create value, e.g. investment in IT assets do not yield results unless complemented with HR training and development.
· Intangible assets are created as a cost of ‘development’ versus a cost of ‘acquisition’ for tangible assets. CEOs, managers and owners struggle to make sense of an asset whose value is a ‘cost.’
· Presented above is the structure of P&L statements of Amazon and Macy’s as reported in their 10-K statements.
Amazon, a digital business, highlights fulfillment (logistics), marketing (customer acquisition) and technology as the prominent line items of cost (operating expenses line item 1, 2 and 3). In Macy’s P&L emphasis is on an umbrella term – Selling General and Administrative Expenses. The other prominent line items are gains on real estate and restructuring, impairment and store closings, etc. Marketing and Technology are the value-adding parts of Amazon. Macy’s adds value through trading of goods, reflected in the gross margin. Macy’s relies on location and traditional marketing for customer acquisition and this is reflected in rent and marketing expenses, both of which are costs.
Traditional retail companies can’t adjust their mindsets and mental models, invest in technology assets to manage customer acquisition. They can’t visualize technology cost as an operating asset.