Amazon.com – 13 July 1999
2
Other Key Points
New categories should eventually lead to higher revenue
per customer. The key issue regarding Amazon.com is
whether the company will be able to leverage its brand,
infrastructure, and customer acquisition costs by
continuing to generate higher revenue per customer. The
revenue-per-customer metric, in our opinion, is the
equivalent of the same-store sales metric in offline
retailing, and over time, we expect it to be a meaningful
tool for following companies in the sector. Over the last
12 months, Amazon.com's average revenue-per-customer
per quarter has gone down, not up, as new customers
account for a smaller and smaller percentage of the
company's total revenue base (new customers tend to
purchase about $45-worth of product in the first quarter;
existing customers are currently averaging about $30 a
quarter). For the dream to become reality, as it were, this
trend will ultimately have to reverse, with the company
gaining an ever-increasing “wallet-share” with its repeat
customers.
Impact on model. As mentioned, we believe that the new
stores will likely generate 1) incremental revenue, 2) lower
gross margin, 3) neutral or slightly lower operating
margin, and 4) increased inventory. The lower gross
margin per unit should be mostly offset by lower SG&A
per unit (lower variable fulfillment costs, lower marketing
and G&A costs), resulting in a neutral impact to the
operating margin. The consumer electronics industry is
notoriously brutal on pricing and inventory risk, and
Amazon.com will clearly be taking more inventory risk in
this category than it has in the past. Over time, however,
we believe that the company will be able to manage its
inventory exposure in the category much more effectively
than a store-based retailer. We expect the company to err
on the side of over-supply for this holiday season, so we
would not be surprised to see inventory spike as a
percentage of revenue in Q3 and Q4.
The new stores have been carefully planned—the
company didn't just throw them up. Success in online
retailing appears to be the result of many factors, including
brand, service, selection, information, and price.
Amazon.com's new product strategy has always been to
become the category leader in each of its product
categories, and to do so, it has always taken the time to
develop deep expertise before launching a store.
According to the Wall Street Journal, the company has
been working on the toy and electronics stores for over a
year, and has hired more than 50 people to work on each.
This focus and depth, in our opinion, gives the company
the best chance of success.
Toys and Consumer Electronics appear to be good
products to sell online. Based on recent nationwide poll
of people who have bought toys and electronics in stores,
more than half said they would prefer to buy toys and
electronics online.
Distribution of electronics, toys, and games will be
mainly direct—and Amazon.com has plenty of capacity
to spare. At this point last year, Amazon.com had about
350,000 square feet of distribution space. Now it has
approximately 3.5 million. With recent agreements
between eToys and Fingerhut (outsourced distribution) and
Wal-Mart and Fingerhut, it is becoming clear that
Amazon.com's distribution capability represents a
significant competitive barrier. We estimate that the
company could support at least $5 billion in annual
revenue with its current capacity.
New site design. New visitors to Amazon.com are now
greeted with a new “Welcome” page, along with the
familiar “tab” structure. The “Gifts” tab is gone, and two
new tabs, “Toys &Games” and “Electronics” are up.
[AMZN] The securities of the company are not listed but trade over-the-counter in the United States. In the US, retail sales and/or distribution of this report may be made only in states where these securities are exempt from
registration or have been qualified for sale. MLPF&S or its affiliates usually make a market in the securities of this company.
Opinion Key [X-a-b-c]: Investment Risk Rating(X): A - Low, B - Average, C - Above Average, D - High. Appreciation Potential Rating (a: Int. Term - 0-12 mo.; b: Long Term - >1 yr.): 1 - Buy, 2 - Accumulate, 3 - Neutral, 4 -Reduce,
5 - Sell, 6 - No Rating. Income Rating(c): 7 - Same/Higher, 8 - Same/Lower, 9 - No Cash Dividend.
Copyright 1999 Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S). This report has been issued and approved for publication in the United Kingdom by Merrill Lynch, Pierce, Fenner & Smith Limited, which is
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