Crunch Time at Amazon
Company founder Bezos doing everything he can to make the prediction of a profit come true
By Kim Peterson
Staff writer
December 16, 2001
Time is running out on Amazon.com's race to profitability, and Jeff Bezos isn't giving many clues about whether his company will make it.
"There's a lot of holiday left," he says. "It's too early to say for sure, but so far, so good."
Bezos promised nearly a year ago that Amazon.com, the world's largest online retailer, would finally make a pro forma profit this holiday season.
The "pro forma" condition gave the company some wiggle room because it excludes certain costs, such as interest and depreciation, that normally count on a company's balance sheet.
The promise was bold back then. Now, after the Sept. 11 attacks and the economic calamities of the past year, it seems almost brazen.
But Bezos is standing by his prediction, and doing everything he can to make it come true.
His company has offered discounts on books and free shipping for early holiday shoppers, and regularly sends out e-mail encouraging customers to buy more.
Bezos, 37, has embarked on a one-man nationwide tour this holiday season -- flipping burgers for laughs at a Chicago tavern, chatting it up with folks in Newcastle, Del., and giving radio interviews from a phone at a Los Angeles hotel.
And he does it happily, with his signature honking laugh on full volume, not saying publicly what those following the company know to be true: It's crunch time.
E-commerce leaders
Amazon has beat out hundreds, perhaps thousands, of Internet retailers who tried to capture a share of the growing e-commerce pot. In some ways the company has come to epitomize the dot-com philosophy of "customers now, profits much, much later."
But in Amazon's case, the profits have yet to arrive, and after seven years analysts and shareholders have become impatient for any sign that the company is heading into the black.
Amazon reported a $1.4 billion net loss on $2.8 billion in revenue last year. Bezos began his annual letter to shareholders with a one-word sentence: "Ouch."
The company is trying hard to bring costs down this year, but has seen new challenges arise. Amazon has lost some ground to competitors such as BarnesandNoble.com, and sales have come in lower than some analysts predicted.
In October, the company said quarterly sales had fallen for three straight quarters, and sales in its core book, music and video business -- its largest category -- plunged 12 percent from the year before. Most of that drop was seen after the Sept. 11 attacks, Bezos said.
That led analysts from such companies as Merrill Lynch and SG Cowen to downgrade Amazon's stock, which closed at $11 Fiday.
Amazon "set themselves some goals for this fourth quarter which should have been easily achievable," said Jeffrey Fieler, an analyst with Bear Stearns. But the quarter now has all the drama of a suspense thriller, he said.
Other analysts are more optimistic. Financial firm US Bancorp Piper Jaffray gave Amazon a solid "buy" rating this month, saying the stock has upward potential from current levels. Amazon is well positioned to benefit from a changing e-commerce environment and will increase earnings in coming years, analysts with the firm said.
Bezos said he views Amazon's ups and downs through the lens of legendary investor Benjamin Graham, who said the stock market is a voting machine in the short term and a weighing machine in the long run.
"Folks who want to build lasting companies just stay focused on their business," he said. "They don't get distracted by the stock market or by what the broader environment is doing."
Over time, he said, the market will weigh a company like Amazon and give it the value it deserves, he said.
Growing trade There is some good news these days for Amazon, most notably in the company's growing customer list.
About 23 million people shopped at Amazon in the past 12 months. By way of comparison, 14 million did so in 1999, when the company's stock was near $100. The company's achievements back then led Time magazine to name Bezos its 1999 "Man of the Year."
And traffic to the company's Web site continues to increase -- up nearly 30 percent in October from the year before. The site had 1.7 million visitors the day after Thanksgiving, up a third from the same day last year, according to Internet research firm Nielsen//NetRatings. But people are spending less than they did in past years, which isn't going to help Amazon's quest for profitability. If they bought a $100 gift last year, they're buying a $75 gift this year, Bezos said.
"Whenever the economy gets uncertain, that's the behavior you see, so it's really not that surprising," he said.
With 23 million customers, Amazon gets a close look at big-picture shopping trends that smaller retailers can't see. There were increased orders after Sept. 11 for emergency items such as hazard scanners and crank flashlights.
More parents are buying history and government books for their children, trying to explain what is happening in the country, Bezos said. Sales of travel books are down, but the increase in road map sales tells Bezos that people are driving more.
Amazon reacts quickly to these trends, playing up hot items with special deals and such features as the Harry Potter Store.
The big seller this year at Amazon is the $99 DVD player, which is featured prominently on the site. Amazon sold 40,000 DVD players last season and Bezos expects to more than double that figure this season.
What does Bezos buy on Amazon? Everything, it seems. He recently purchased a $55 "Lord of the Rings" boxed book set for himself -- to get ready for the movie, he said. All of the family's Christmas presents are from Amazon -- he buys 20 percent, his wife, MacKenzie, buys 80 percent.
Consolidation Bezos is also short on details when it comes to the future of Amazon. All he says is to expect to see "more of the same."
But for Amazon -- and any surviving e-commerce company -- next year could be a time to grow through acquisition. The corpses of the industry are there for the taking.
Amazon bought all the assets of bankrupt retailer Egghead.com earlier this month for $6.1 million, and might continue acquiring companies in its efforts to grow.
E-commerce "is very clearly in a period of consolidation that started a couple of years ago and has accelerated," Bezos said. "If you go back more than two years, what you saw was great expansiveness in terms of startup companies everywhere. Every experiment that could be imagined got done."
Today the environment is nearly the opposite, with companies going out of business or consolidating. The cycle is a very natural one for this kind of innovation, he said.
E-commerce is becoming more like the physical retail world, Bezos said.
"There will be a lot of very successful companies and there will also be a tremendous number of failures," he said.
Amazon is joining forces with some of the most well-
known retailers. After a successful partnership with Toys "R" Us last holiday season, the company recently teamed up with Target, Borders and Circuit City.
Unlike such executives as San Diego's Michael Robertson, the former head of MP3.com who refuses to chalk up any of his success to luck, Bezos said Amazon just happened to be in the right place at the right time.
"We have been a very lucky company," he said. "We started in a very different time from most of the companies who are going out of business or being forced to consolidate."
Bezos received a reminder of those early days recently, when one of his angel investors gave him a gift wrapped in copies of Amazon's original business plan.
That plan, written before Bezos founded Amazon in 1994, predicted that Amazon would have $70 million in sales by 2001. Amazon's sales are actually around $3 billion.
Bezos said the plan reminded him of how astonishing the years have been for him and for the company.
"This thing has grown so much more rapidly than anybody would have predicted," he said. "I continue to be surprised."
Betcha didn't know this about Jeff Bezos . . .
His last name is pronounced
BAY-zoes.
His siblings refused to take him to movies when he was younger, embarassed by his loud booming laugh.
He made $3.7 million in August when he sold 300,000 shares of Amazon stock at $12.40/share.
He graduated summa cum laude, Phi Beta Kappa in electrical engineering and computer science from Princeton University in 1986.
His father, Miguel, left Cuba for the United States in the early 1960s.
His dog, Kamala, is named after an obscure Star Trek character
His name has been an answer (the wrong answer) on a $125,000 "Who Wants to be a Millionaire" question.
Copyright 2001 Union-Tribune Publishing Co. |
