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Technology Stocks : Amazon.com, Inc. (AMZN) -- Ignore unavailable to you. Want to Upgrade?

To: Glenn D. Rudolph who wrote (110155)	10/11/2000 1:11:08 AM
From: H James Morris	Read Replies (1) \| Respond to of 164684

>WILL 'EARTH'S BIGGEST SELECTION'TM TRANSLATE INTO PROFITABILITY? We have become increasingly concerned about a potential incompatibility between Amazon's brand positioning as Earth's Biggest SelectionTM and the real-world business implications of operating such a bold broadlines strategy. We wonder if product diversification efforts and an exhaustive assortment impairs Amazon's ability to achieve the efficiency to drive sustainable profitability. To test our hypothesis and better understand what we refer to as "Amazon's fulfillment black box," we have been placing multicategory, multiproduct orders over the past several months, then analyzing the costs of fulfilling those orders. It is important to note that the data from our study is anecdotal and limited and provides only a small-scale snapshot of Amazon's fulfillment efficiency. That said, our initial findings raise concerns for us about Amazon's long-term strategy. Our initial results imply that too much product diversification can result in inefficient fulfillment operations. While we placed larger orders than what we believe is typical for Amazon customers, our goal was to test the promise of Amazon's "one-stop" shopping concept of the future, not its current state. We believe our diverse orders added complexity to the fulfillment process as reflected in the large number of split shipments (i.e., one order shipped in multiple packages, increasing fulfillment costs). We received 3.7 boxes for every order of eight products we placed. As a result, we estimate Amazon's shipping costs exceeded shipping revenue. While this finding appears to contradict the 10% shipping margin Amazon reported in Q2, we note that roughly 70% of product sales were from the book, music and video categories, which can be more efficiently distributed. Our study, on the other hand, was designed to look at what happens when all categories are equally represented. In our view, Amazon could pursue several strategies to improve its profit potential. We believe it can maintain a broad product offering but with more of a specialty focus in some categories. In many areas, we believe Amazon could effectively outsource certain risks, a la its Toysrus.com agreement. It also appears to us that it has yet to demonstrate a sustainable business model surrounding the Amazon Commerce Network. We have long contended that Amazon could evolve into an online retail portal and rent out its valuable real estate. Management's lack of guidance regarding plans for ACN concerns us. It would take progress on one or more of these fronts to make us more optimistic about the company's long-term outlook. In the near term, investors are likely to stay focused on Amazon's operating performance during the upcoming holiday quarter. Once holiday euphoria is behind us, we believe the concerns raised by our study could become increasingly critical since Amazon's stock value is ultimately based on the company's long-term profit potential. Thus, we believe investors should be prepared for volatility for the extended period it takes Amazon to prove out its business model