William - you are famous. Take a look at this week's Business Week, where you are quoted.
From today's "Business Week":Business Week: February 21, 2000
Information Technology: The Internet
Suddenly, Amazon's Books Look Better
The e-tailer is raking in a bundle--from other merchants
No sooner had Amazon.com Inc. reported its fourth-quarter earnings on Feb. 2 than the
squabbles erupted on online-investor message boards. ``The Amazon numbers were
great!' gushed William Harmond, a trader on the Silicon Investor site. Retorted another,
identified as Lucretius Taurus: ``I'll be shocked if this piggy is even around in a couple
years.' Even the pros are betwixt and between. ``I'm still a believer in Amazon in the
long term,' says
David D. Alger, chief executive of money manager Fred Alger Management Inc.--yet he
recently dumped most of the Amazon shares in his Enterprise Internet Fund.
It's easy to understand why there's so much confusion about the pioneer e-tailer's
prospects. Each year, its sales have rocketed far beyond expectations. But so have
losses, now at nearly $900 million and counting. As CEO Jeffrey P. Bezos has moved
Amazon far beyond books to music, Pokemon cards, drill presses--and, ultimately,
anything people want to buy--doubts have intensified about whether it will ever turn a
profit. Those doubts were fueled
on Jan. 28 when Amazon fired 150 employees, or 2% of its staff. Now its stock
languishes at 83, about 27% below its Dec. 9 high of 113. Says J.P. Morgan analyst
Thomas H. Wyman: ``There's a fear on Wall Street that maybe e-tail business models
aren't working.'
But suddenly, that fear is starting to wane. Once again, Amazon's model is looking
sweet--and showing a path to that most elusive of dot-commodities, profits. The
turnaround started on Jan. 21, when Amazon announced the latest in a series of deals to
rent some of its Web-site space to other e-tailers--in return for a stunning $606.5 million
in cash. Then, on Feb. 2, it announced that its original books business is profitable--a
sign that its core
e-tailing model might just have legs after all. The kicker: Some analysts now think
Amazon will be profitable in 2002, a year earlier than expected. Says Goldman, Sachs
& Co. analyst Anthony Noto: ``These guys are really poised to take off in 2000.'
Positive signs aside, though, it's far from certain that Amazon's core e-tailing business
is viable. It had to write down $39 million in inventory in the fourth quarter, mostly toys
and consumer electronics--which Amazon said it purposely overstocked to avoid
disappointing customers during the holidays. But since Bezos plans to keep adding new
products--more this year than ever--balancing demand and inventory is a ticklish
problem that may plague
Amazon for a long time to come.
SNAFU SPECTER. And the stakes are higher than ever. Insiders say the company,
even though it has ballooned to $1.6 billion in annual sales and 7,500 employees, is
stretched to the breaking point. Over the holidays, hundreds of administrative workers
had to help out in distribution centers and customer service to keep up with demand,
raising the specter of execution snafus as Amazon keeps growing. And now that Bezos
has stuck his neck out by
predicting better results to come, there's no room to disappoint. If he misses the mark,
the stock may crater, reducing his ability to expand. Bezos concedes Amazon has taxed
some investors' patience but insists the long wait was worth it. ``This year, we expect
our model to visibly demonstrate its inherent operating leverage and its long-term
potential.'
Indeed, Amazon may finally have hit a historic milestone in e-commerce: critical mass.
With 17 million customers, Amazon has an asset unmatched in all of e-commerce--one
that may finally be primed to deliver on the Web pioneer's promise. ``We have reached
a tipping point as a business,' Bezos says. ``When you reach a certain critical mass of
customers, you very quickly have a long line of people who want to associate with you.'
In other words,
people who give you boatloads of money for nothing more than a few square
centimeters of your Web page.
Once again, Amazon's hyperkinetic leader has changed the rules of the game almost
overnight. First, he showed the world he could sell stuff online to millions of people
worldwide with almost none of the costly stores and inventory of traditional retailers. But
he quickly recognized that as he added more products and customers, the virtual model
would not work. To offer not just the biggest selection but the nearly instant gratification
customers
demanded, he needed to stock and ship his own inventory. So he spent an
unprecedented $300 million to build five new distribution centers last year, and hired
hundreds of customer-service operators.
Investors blanched, but Amazon aced the holidays: More than 99% of Amazon's holiday
deliveries arrived on time. That earned the unswerving loyalty of Amazon's customers,
whose repeat purchases now make up 73% of its sales. ``Amazon's biggest asset is its
customer base,' says Alex Nesbitt, CEO of Sameday.com, a Los Angeles e-commerce
distribution company. ``Customers who are satisfied and keep coming back are very
valuable.'
That's the key to Bezos' latest shift. He's flipping e-tailing itself on its head---not just
selling more and more products to his customers, but selling the attention of those
customers to other e-tailers. It's a page from the playbook of Internet portals such as
America Online Inc. and Yahoo! Inc.--with one big difference. Amazon's customers aren't
just surfers and chatters. They're people primed to buy and experienced in how to do it
online.
That's why the deals are especially attractive to other e-tailers, such as Drugstore.com
and Visa issuer NextCard Inc. ``We're going to the sweet spot of online shoppers,' says
Shaun Holliday, CEO of Living.com, which will open a store within Amazon in return for
paying $145 million over five years.
BUY, BUY. Already, this rich new lode--which carries 85% gross profit margins, more
than six times Amazon's current level--has helped turn around many analysts who had
been wary of the stock. Several have upgraded their ratings recently so that now, 16
analysts have a strong or weak buy and 10 have a hold. Some have even moved up by a
full year their timetable for Amazon to turn a profit, to 2002. Goldman analyst Noto sees
the six deals so far
cutting operating losses by $110 million in operating income this year, or about 25%.
And more are on the way. ``We've had hundreds of companies that have approached us
to work with us in this way,' says Amazon President Joseph Galli. ``We're the power that
takes the customer and delivers him to the suppliers.'
Becoming a landlord isn't the only new role Amazon can play. Bezos reckons he has
built an e-commerce ``platform'--made up of its customers, its brand, technology,
e-commerce expertise, and distribution capabilities--on which it's far easier and
cheaper to build new businesses. Boasts Bezos: ``The platform allows us to launch new
e-commerce businesses faster, with a higher quality of customer experience, a lower
incremental cost, a higher chance
of success, and a faster path to scale and profitability than any other company.'
In short: Amazon may be poised to add a raft of other revenue streams if it so chooses.
It could accept traditional advertising, a $4.7 billion market. It could offer membership
clubs, giving those who pay a fee access to more in-depth reviews or discounts. It could
offer Internet service subsidized by advertising--as a new rival e-tailer, the Kmart
Corp.-backed Bluelight.com, just started doing. Amazon could even offer distribution
services to
other e-tailers. Says Jeffrey A. Wilke, Amazon's vice-president for operations: ``I want to
have people lining up out the door begging, begging, begging us to fulfill their
operations.' Bezos says he has no immediate plans for such moves, but he also doesn't
rule anything out.
Despite these new and potential riches, e-tailing will continue to comprise the bulk of
Amazon's business. But that's a business that depends on execution more than
vision--and Amazon's executives and employees have a lot to learn about retailing
basics like balancing demand and inventories. Some skeptics say Amazon was forced
to become a landlord because the underlying model doesn't work. ``They had to give
merchandise away in order to get
customers,' says Prudential Securities analyst Mark Rowen. ``It's not clear if costs will
come down or they'll be able to raise prices.'
PINK SLIPS. Indeed, Amazon's profit picture in the fourth quarter looked grim. It lost
$184.9 million, its biggest quarterly loss ever. Gross margins fell by more than a third, to
13%, thanks largely to the inventory writedown. As Amazon continues to expand, that
could remain a chronic problem. ``They have a lot of room for improvement,' says
Robert A. Bowman, CEO of online computer seller Outpost.com.
That's where the layoffs came in. The need to tighten up operations--not a drive to cut
costs, according to Amazon insiders--led to the recent purge. Those fired were largely
veteran employees whose jobs outgrew their skills, say insiders, who peg the layoffs to
more rigorous management instituted by two managers hired last year: former Black &
Decker exec Galli and Chief Financial Officer Warren C. Jenson from Delta Air Lines.
While the layoffs
pained Amazonians, investors applauded. ``It was a very healthy sign,' says Andrew S.
Cupps, portfolio manager with mutual fund firm Strong Capital Management Inc.
It's up to Wilke, who oversaw AlliedSignal's manufacturing quality drive, to polish up the
back end. He's deep into analyzing each step of the fulfillment process, from delivery by
suppliers to shipping the product out the door. He hopes to persuade suppliers to cut
unnecessary steps--such as wrapping toys in packaging geared to physical store
needs. If such moves can reduce the time it takes to receive a product from a supplier to
perhaps a day,
Wilke says, then inventory falls to almost zero--for a huge jump in efficiency. ``We should
start to see gains within six months,' he says.
That's one reason the fourth quarter may have been the low-water mark for Amazon's
finances. Another plus: The biggest capital costs are over for now. The distribution
centers, which can handle up to $10 billion worth of annual sales, are all built. Actually,
the costs never were that much relative to traditional retailers, whose biggest expenses
by far are building and staffing stores. Amazon's fixed assets, such as warehouses, for
instance, on
average produce double the sales of Wal-Mart Stores Inc. and Barnes & Noble stores.
Now that the warehouses are built, some analysts see the attractive cash flow of
Amazon's business model becoming more obvious. But even with the added inventory it
now carries, on average, it gets paid about a month before it must pay
suppliers--because it charges credit cards as soon as buyers click but doesn't have to
pay suppliers until up to 45 days later. That's one reason that the underlying business,
before equity investments and capital
costs, generated $32 million in cash in the fourth quarter.
Marketing efficiencies also are beginning to kick in as Amazon's brand recognition and
customer base grow. Some 118 million U.S. adults recognize its name, more than any
other e-commerce company. And the more customers Amazon serves without a hitch,
generating chummy word-of-mouth, the less it has to spend to get more.
As a result, Amazon's marketing cost to acquire a customer is only $19, less than any
other e-tailer. As Amazon's sales grow from $1.6 billion in 1999 to an expected $2.8
billion this year and $6 billion in 2002, marketing costs will fall from 25% of sales now to
13% in 2002, according to Goldman Sachs. At the same time, as Amazon adds more
products, each customer is starting to buy more--from $106 annually in 1998 to $116 in
1999 and, by Noto's
estimate, $150 by 2002.
With traditional retailers from Barnes & Noble to Wal-Mart all breathing down their neck,
Amazon will have to keep those trends heading in the right direction. Brick-and-mortar
retailers can apply their formidable brands and the ability to offer pickups and returns at
stores. By using the Web as a broadcast channel for stores, vows Barnesandnoble.com
Chairman Steven Riggio, ``we are going to create a network of tens of millions of
customers.'
But with Amazon asserting its newfound power, traditional retailers' gains may come
more at the expense of other e-tailers. Amazon has bought nine companies, from
cataloger Tool Crib of the North to technology providers such as shopping software
maker Junglee Corp., and taken stakes in 10 others, including category leaders such as
Drugstore.com and NextCard. With its $28 billion market capitalization and $706 million
in cash and short-term
investments, it can afford to keep plucking off rivals--or playing kingmaker with
partnership deals. ``The pure-play e-tailers are going to be forced to reinvent
themselves,' says Mark H. Goldstein, CEO of BlueLight.com. But they had better hurry
before Amazon once again reinvents itself.
By Robert D. Hof in San Mateo, Calif., with Heather Green and Diane Brady in New
York
Copyright 2000 by The McGraw-Hill Companies, Inc. All rights reserved. Any use is
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