Actually, I had it wrong, it was AMZN: "Drinking the KoolAid: While Amazon.com Spends Like Crazy, Its
Customers Begin to Trim Their Expenditures
By Mark Veverka
Either you're a believer or you're not.
There's no middle ground. You either are convinced that Jeff Bezos is building
Amazon.com into the mother of all e-tailers or you aren't. It's that simple.
"The opportunity for investors here is to look beneath the cover," Bezos told a
room full of the converted recently. "Amazon.com is not a book company...
we're a customer company,"
Okay. For the sake of argument, let's give Bezos and his flock the benefit of
the doubt. The visionary says he's building a customer company (although I
must admit I'm not exactly sure what that is). He's hiring top-shelf talent,
expanding into food, drugs, toys, electronics and other commodities at warp
speed and is putting up high-tech distribution warehouses all over the globe.
All, one day, to sell tons of stuff and services to loyal Amazon customers.
Presumably, at a profit.
Forget about, for now, the company's mounting losses, swelling inventories,
soaring expenses and other trends that traditionally would be construed
negatively, which have been adroitly examined by my colleague Jacqueline
Doherty.
For the moment, consider yourself a believer. Sip from the company water
cooler in Seattle, if you will, and look through Bezos' prism. After all,
fundamental equity analysis on 'Net stocks went out the window quarters ago,
and the concept of valuation is of little concern for those who truly believe.
In fact, if you listen to Amazon and its acolytes, the primary thing that bears
watching is the top line. "It's a revenue story," they chant. And until this year,
Amazon's quarterly revenues grew at a 30% sequential clip.
But in the first quarter, revenue growth
slowed to 16%; and in the second, it
crawled to 7%. Naturally, holiday
shopping is likely to pick up some of
that slack during the critical fourth
quarter. What's more, as Amazon's
annual revenues approach $2 billion,
it's going to get a lot tougher to rack up
30% average quarterly rises based on
the pure heft of the numbers alone.
But here's the thing that even the most
ardent believers must be starting to lose
sleep over: revenues per customer are
sliding. On average, even though Bezos
is expanding his merchandise mix by leaps and bounds, his customers appear
to be buying less. And that's a problem, points out Eric Von der Porten, who
runs Leeward Investments, a small hedge fund in Silicon Valley.
"Their model is that they are going to spend on marketing to build a customer
base so that they'll be profitable over time. And I believe, to be profitable
over time, they're going to need to see rising revenue from their regular
customers," Von der Porten contends.
"It raises serious questions about the long-term viability of their business
model," he adds.
Von der Porten doubts that the impressive customer base Amazon is
amassing will ever deliver the goods. For instance, Amazon's revenue per
"ending" customer -- meaning sales divided by those total customers tallied at
the end of a quarter -- plunged about 20%, to $29.26 per shopper, in the
second quarter compared with $36.67 for the year-ago quarter.
So, as a believer -- if you buy into Bezos' strategy to build a giant customer
base first and worry about profits later -- you at least want to make sure that
people are buying stuff. As in the physical world, Amazon shareholders
should expect to see repeat customers eventually turn to the e-tailer for more
merchandise. Building customer and brand loyalty are key tenets of retailing
whether you operate an apple stand or a Website.
The reason Bezos is pumping Amazon's digital dollars into other online retail
ventures, such as the recently public drugstore.com, Pets.com and
HomeGrocer.com, is so that he can sell more stuff to loyal Amazon
customers. The more stuff and services he can sell, the more he's able to
leverage what it costs him to acquire customers.
The trouble is existing customers seem to be spending less, which implies that
Amazon regulars are buying fewer books and CDs -- or worse yet, are
shopping elsewhere. Von der Porten's estimated
"revenues-per-existing-customer" figures support this notion. The company's
revenues-per-existing customer were $26.06 for the second quarter, down
about 19% from the same quarter last year, according to Von der Porten's
extrapolations from Amazon's quarterly press releases. An Amazon
spokeswoman said the company does not disclose revenues-per-existing
customer. Bezos also would not grant an interview for this column.
Wall Street analysts liken
"existing-customer" revenue
comparisons to "same-store sales"
figures that are used to measure retail
performance in the old
brick-and-mortar world. Same-store
sales figures take new-store revenues
out of the mix, making it easier to
determine if sales are growing because
the company is doing a good job. Rest
assured that if the Gap reported
disappointing same-store sales, their
shares would most assuredly get
whacked.
And while Internet stock prices seem to be driven more by hyperbolic press
releases than by the 'Net metric du jour, revenues per-existing-customer is
one measurement that investors should begin to rely on as a key benchmark
for electronic retailing performance.
Merrill Lynch 'Net analyst Henry Blodget, whose career has catapulted since
he presciently predicted that Amazon's shares would double, agrees that
revenues per-existing-customer is a telling indicator. What's more, his existing
customer calculations are identical to those of Von der Porten.
However, the Amazon bull is a little more generous in his interpretation of
what the figures say about the company's performance. "I think looking at
these numbers might make you recoil, but it's too early to draw hard-and-fast
conclusions," Blodget says. "In a year or so, we will have a much better
picture."
In other words, if you're a believer, be patient and at least wait to see how
customers react to two recently added merchandise lines: toys and
electronics. With more to choose from, Amazon's customers will start buying
more. Or so the optimistic thinking goes.
If and when this starts to happen,
"Amazon will capture 'wallet share,' "
Blodget says, and "that is critical."
For his part, Von der Porten isn't
convinced that Amazon's core book
customers are going to cross over and
start buying Palm Pilots and Barbie
dolls from the Website.
"I have a hunch that part of Amazon's
problem over the past year has been
that rather than selling [music] CDs to
their book customers, they've only
added CD customers who buy just
that, CDs," he adds.
To say nothing of the thorny subject of profit margins from CDs, toys and
electronics, which Blodget expects to be thin. But margins and price
competition are worthy topics of debate for another time.
For now, believers should keep their eyes fixed on the third and fourth
quarters to see if any of these negative customer trends begin to reverse
themselves. In particular, if Amazon's existing bibliophile customers don't start
lapping up portable CD players and action figures during the critical holiday
shopping season, even the devoted may have to wonder if Bezos' creative
and bold business model will, in fact, work.
"This game is in the early innings," Bezos said recently. But will the believers
go the distance?
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