Glenn, season's greetings. Amzn to slim down?
>by Alwyn Scott
Seattle Times business reporter
Don't be surprised if Amazon.com slims down a bit after the holidays.
The world's largest Internet retailer may stop pitching tools, kitchen appliances and furniture - bulky products that, experts say, don't earn enough to justify the cost of selling them via mail.
"They need to shed some of the businesses," says Holly Guthrie, an analyst at Janney Montgomery Scott, a Philadelphia-based broker. "They are way too broad."
Amazon wouldn't be the only dot-com looking to get lean in a cooling economy. The meltdown in technology stocks over the past nine months has made 2001 a make-or-break year for online businesses. They will need to pump up what works - and dump what doesn't. If they don't, investors who planted seed money could abandon them rather than wait any longer to see a profit.
In Amazon's case, scaling back would be a significant shift away from its ambition of being the ultimate online shopping mall. In the past year, Amazon has leapfrogged beyond books, music and videos into lawn umbrellas, Toyotas and $800 coffee makers.
But analysts wonder if the mix of items has grown too unwieldy. And with close to $3 billion in sales expected for the year - a third of it in the final three months - any move by Amazon is sure to be followed by other online retailers.
Amazon's U.S. book, music and video business showed a profit this year - the first since the company started selling online in 1995. But its massive expansion into new product lines has inflated expenses enormously. The overall company now does not expect to be profitable until at least the end of next year.
Amazon closed at $15.56 Friday, down from an all-time high of $106 on Dec. 10, 1999.
Some analysts read hints that Amazon is bracing for change. Among other things, the company altered its privacy policy last summer to say data on individual customers would be sold as assets if the company is acquired in whole or parts.
Amazon also parted ways this month with its long-time ad agency, citing differences of philosophy about the company's future. The agency created the funky but critically acclaimed ads that featured Mitch Miller-type singers crooning about canoes and cars.
Amazon won't comment on business strategy. But it insists that being the Web's all-in-one retailer remains its goal. Building a business big enough to achieve that takes time, money and experimentation - a combination of flexibility and planning that earns the company praise.
"They're willing to be patient and develop business lines even if they're not profitable in the near term," says Daniel Good, an analyst at Merrill Lynch in New York.
Partnerships with drugstore.com, Toys-R-Us, Microsoft, Hewlett-Packard and the automotive site Greenlight.com are testament to Amazon's innovative approach.
Shoppers looking for medicine and cosmetics, for example, are routed to drugstore.com, which books the sale and pays Amazon what amounts to a referral fee. Amazon doesn't have to find, catalog or stock any of the items. Similarly, Greenlight.com pays to be the car "tab" on Amazon's site. Shoppers clicking on that button are passed via Greenlight to local car dealers, where they can kick tires and make their purchases.
"We want to be the place where people can find anything they want to buy on the 'Net," Amazon spokesman Bill Curry says. "But that doesn't mean we're going to be the seller."
Some experts say that strategy needs better definition and discipline. For example, Amazon's decision to carry a wide range of inventory this holiday season could force it to discount heavily in January. Guthrie predicts a write-down of as much as $100 million on inventory for the fourth quarter, more than the company has taken in the past. Others doubt the charge would be that much but say discounting is possible - something familiar to traditional retailers like Nordstrom and Bon Marché.
As an example of experimentation, the company recently sent an e-mail advertising a new online outlet store that will offer discounts after the holidays, Good says. "That's a nice vehicle for them to reduce inventory of seasonal items."
The company also mailed a print catalog this quarter, further pushing the boundaries of online retailing.
Good says the company's statements to date, while not a dramatic departure, are "leaving the door open" for changes.
Others expect Amazon to stick to its mission - and consider that a mistake. "There's no indication that the company has given up that fantasy of being the source for absolutely everything online," says Landes.
So what would get the ax? At this stage that's anyone's guess. But analysts figure it is unprofitable to mail bulky kitchen items, tools and furniture stocked in Amazon's distribution centers. Last summer, Texas-based Living.com went bust after finding it couldn't sustain the business of selling furniture online.
Another concern: Amazon offered free shipping for much of the holiday season, which will reduce or erase the profitability of each item sold. That has some analysts wondering whether profit margins on some items will be negative.
Amazon's Curry says the shipping was factored into marketing costs. But the promotion went longer than originally planned, and the company's kitchen store continued offering free shipping well after the others stopped Dec. 10. "I can only imagine it's quite costly to ship a KitchenAid mixer," says Guthrie.
In fact, a six-quart KitchenAid standing mixer, with the bowl attached, would cost $31.20 to ship by standard mail, which takes three to seven days to deliver, according to Amazon's Web site. Amazon's actual shipping cost might be less, but it is absorbing the expense after discounting the item by $50 to $349.99.
Other categories don't seem a logical fit with a company best known as a bookseller. "I can't imagine these guys are selling many tools," Guthrie says. "Their consumer just doesn't seem like the kind who buy tools."
Curry says some products don't sell well yet, but that's no reason to rule them out as future moneymakers. "I can certainly make a case that ball gowns might not work now. Most people would probably want to try on a ball gown," he says. "But there may be technology one day to do that online."
Whatever happens to Amazon will influence retailers around the world, including stores like Wal-Mart and K-Mart that are establishing online brands.
And 2001 might not be the disaster for dot-coms that 2000 was. Some people expect Internet companies that are making money and operating sustainable businesses to come roaring back. The prospect that interest rates will begin to fall in January, and the possibility of tax cuts under George W. Bush's administration, could boost the economy, stave off recession and restore consumer optimism.
But for now the weakening economy is the big dot on the radar. Holiday sales and corporate profits have been disappointing, layoffs are on the rise and many companies are curbing spending for the new year. That means investors will be on the lookout for any business that's flabby. And they won't be forgiving of failures.
"There's going to be a residual dot-com clear-out in the first quarter," predicts Chad Waite, a partner at OVP Venture Partners, a local firm that funds start-ups. "There are so many companies now on life support that the tube is just going to be pulled on them." |
