An Article about Amazon in today's WSJ:
online.wsj.com
In Latest Strategy Shift, Amazon Is Offering a Home to Retailers
Web Giant Brings Technology, Strong Customer Base;
Nike and Others Balk
By NICK WINGFIELD
Staff Reporter of THE WALL STREET JOURNAL
Updated September 24, 2003
At Amazon.com Inc., a new strategy is taking root: The world's biggest online retailer is trying to transform itself into a shopping mall.
This week, Amazon opened a sporting-goods department where retailers such as Golfsmith International Inc. can sell golf clubs, baseball bats and other athletic gear. Lands' End and online luggage retailer eBags.com Inc. have already set up stores in the apparel section. And Amazon hopes to roll out a gourmet-food store and health-and-beauty shop in time for the holidays, according to people familiar with the matter.
Amazon processes the orders for these departments, but the retailers fill the orders from their own warehouses. Amazon gets a cut of the sales -- and can expand into different businesses without making a big investment in inventory. The retailers receive access to Amazon's most important assets: its customer traffic, $1 billion investment in technology and Internet know-how.
But becoming a shopping mall is creating new tensions in Amazon's business. Even as Amazon successfully recruits retailers to sell on the site, some popular manufacturers are worried Amazon's emphasis on discounts might cheapen their brands. Nike Inc. is trying to get retailers to remove its products from the site, and Callaway Golf Co. has asked retailers not to sell its new golf equipment there.
At the same time, Amazon has to worry about risking its own reputation by putting the delivery of products into the hands of outsiders. And as it expands its stable of partners, Amazon finds itself managing relationships with hundreds of retailers, most of them with their own demands about how their blue jeans, shoes and other goods are presented on the site. Gap Inc. and other retailers, for example, have clamored for bigger, sharper pictures of their products on the site or for special features such as monogramming.
Amazon is "kind of like the United Nations," says Bill Bass, the senior vice president of e-commerce at Sears, Roebuck & Co.'s Lands' End. "We're not the easiest people in the world to work with and neither are some other retailers."
The strategy is another example of Amazon's hunt for the perfect business model. The company, guided by its restless founder and Chief Executive Jeff Bezos, has reinvented itself many times, changing from an online book seller with mostly virtual operations to an operator of huge warehouses stocked with electronics and kitchen appliances to a technology provider for other merchants, including individual sellers and big retailers.
Amazon's mall approach is different than other online retail partnerships. Yahoo Inc., AOL Time Warner Inc.'s America Online and other Web portals operate shopping sites that send visitors to the Web sites of online retailers in exchange for commissions. EBay Inc. is a forum for merchants, big and small, to sell goods. Several years ago, Amazon itself got big payments from a handful of merchants, such as car-seller Greenlight.com Inc. and online pharmacy Drugstore.com Inc., to provide little more than links to their Web sites.
Few, though, have incorporated the products of other big retailers as deeply into their sites as Amazon is doing now. "Other portals aren't shopping sites" like Amazon is, says Mr. Bass of Lands' End. "They would send traffic to you, but they'd send it to your sites."
Amazon has a lot riding on the mall strategy. The sales commissions from its retail partners are emerging as a crucial plank in the Seattle company's effort to show consistent earnings.
Amazon doesn't disclose its revenue from the sale of other retailers' goods, but it says 20% of items ordered through its site last quarter were goods sold by third parties, including individual sellers of used goods, up from 14% of items sold a year earlier. Amazon's commissions on such sales typically range from 10% to 15% and are mostly profit, with gross margins of more than 70%, estimates Deutsche Bank analyst Jeetil Patel. In contrast, books, DVDs and other goods that Amazon warehouses carry gross margins -- profit after subtracting the cost of goods and shipping expenses, but before operational costs -- of about 22%, Mr. Patel estimates.
The commissions have helped Amazon sharply stem the flow of red ink at the company. It showed a loss of $149 million last year, but that was a fraction of the $1.41 billion it lost in 2000. Revenue at the company jumped 42% to $3.93 billion last year from $2.76 billion in 2000.
The glory days of December 1999, when Amazon's shares traded at a split-adjusted high of $106.69, haven't returned. But as the company's strategy for growth has started to click, Amazon has become an investor favorite again. Its shares have more than doubled this year on the Nasdaq Stock Market to about $50, including a big surge Tuesday after the new sporting-goods store was introduced.
When Mr. Bezos opened Amazon for business on the Web in 1995, it carried little inventory, relying on book wholesalers and distributors to ship many orders. This was part of the great promise of Internet retailers, who disparaged the heavy overhead of "bricks and mortar" retailers.
As it quickly expanded and money from investors gushed into the company, Amazon began loading up on supply. It built a network of warehouses across the country to handle its burgeoning selection of products and to ship orders more quickly to customers.
Amazon sometimes stumbled as it ventured farther away from the businesses it knew best -- selling media products such as books, music and videos. During the holiday quarter of 1999, shortly after introducing toys and electronics products on its site, Amazon took a charge of nearly $40 million to cover excess merchandise that didn't sell.
So Amazon tried a different approach. In 2000, it cut a deal with Toys "R" Us Inc. under which the Paramus, N.J., retailer selects and buys the toys sold on Amazon. Amazon runs the toy Web site and handles packaging of products for delivery. Toys "R" Us says it had sales of $340 million through Amazon last year.
Later, Amazon expanded its electronics selection by getting Circuit City Stores Inc., J&R Music & Computer World and others to list their products for sale on the Amazon site, helping it to minimize its own stock of electronics.
Teaming up with other merchants eliminated inventory risk for Amazon and reduced the amount of expertise it needed to accurately forecast hot products in unfamiliar categories. It was a more practical strategy for Amazon following the bursting of the dot-com bubble, as the flow of funding for more expansion was shut off. The arrangement also suited retailers, which no longer fantasized about taking their Internet divisions public and realized they were better off focusing on their main bricks-and-mortar businesses.
Last November, Amazon launched a huge apparel department -- the first time Amazon created an entirely new department on its site in which almost all of the products were sold by third parties. The company didn't even consider keeping its own inventory of clothing. "It's fair to say Nordstrom is doing better determining what style of Diesel jeans will sell this Christmas than we would," says Jason Kilar, Amazon's senior vice president for world-wide application software.
Amazon is applying the same thinking to sporting goods. Rather than reconfigure its warehouses to handle hundreds of thousands of different types of products -- a number that would have multiplied to millions of goods when different sizes, colors and other variations were added -- Amazon has gone looking for experts in the business.
It found several takers, including Golfsmith, a chain of golf superstores, who were eager to sell their goods to Amazon's 35 million users. It also ran into a problem: Some golf-equipment makers don't want to see their goods in the Amazon shopping mall.
Golfsmith, for one, was told by the makers of Titleist, Callaway and Ping goods not to sell their clubs and other gear through Amazon, even though Golfsmith is authorized to sell those same brands through its own Web site, according to Jim Thompson, CEO of Golfsmith, of Austin, Texas.
Pat Loftus, vice president of sales for Ping Inc. of Phoenix, Ariz., says the company isn't yet convinced that the process of buying golf equipment "can be done justice over the Internet." Customers must choose from a number of complicated options, such as selecting a club's shaft stiffness and loft, the angle of the club's face relative to the shaft of the club.
Although Ping has allowed four specialty golf retailers to sell Ping equipment through their Web sites, Mr. Loftus says, "We're not going to extend that through a mall-type environment like Amazon. Currently we're being very cautious on the Internet."
Callaway Golf Co., Carlsbad, Calif., reached a compromise: While it asked retailers not to sell new Callaway equipment through Amazon, it gave the go-ahead to Callaway Golf Pre-Owned, a separate company owned by Trade Up Commerce Inc., to sell used Callaway clubs there.
Sam Sheagren, director of world-wide sales at Callaway Golf Co., says the company doesn't want to see its products listed on Amazon next to discounted goods. "Our concern is for the brand. We don't want to see ... a Callaway Great Big Bertha II next to something on sale for $100," says Mr. Sheagren, referring to a titanium Callaway club that typically sells for upward of $400. "We try to convey a premium brand image."
Mr. Sheagren says Callaway Golf Co. might authorize its retailers to sell through Amazon in the future after the company's sporting-goods department has a longer track record.
A spokesman for Titleist, which is owned by Fortune Brands Inc., declines to comment on its relationship with its retailers.
Other big brands are fighting the sale of their goods through Amazon. "Nike has said, 'We don't want to have our products shown on Amazon,' " says Peter Cobb, vice president of marketing at eBags, which sells Nike products on its own site. "That's really Nike's call."
People familiar with the thinking of Nike of Beaverton, Ore., say the sporting-goods manufacturer is "actively" discouraging its retailers from selling through Amazon, in large part because it thinks Amazon's emphasis on discounting isn't a good fit for its sneakers and other products. Amazon is "not a venue that we think is appropriate for our brand now," says Nike spokeswoman Joani Komlos.
In any event, Nike's efforts haven't been very successful: Many Nike products are still widely available through Amazon, listed by Foot Locker Inc., Nordstrom Inc. and others. Ms. Komlos declines to comment on conversations Nike has had with its retail partners. A handful of Titleist and Ping items, some of them used, are also listed on Amazon.
Amazon executives say there's still a huge selection of sporting goods on its site, even without the support of those brands, and that it will win over detractors. The company says it has partnerships with "hundreds" of retailers overall, and more than 50 retailers in its new sporting goods store alone.
Amazon has overcome resistance from retailers before. Book publishers initially complained because Amazon allowed customers to post their own reviews of books. Sony Corp. refused for years to authorize Amazon to sell most Sony products in its electronics department. Amazon went ahead and got Sony products through other sources, including retailers, and eventually the Japanese company made Amazon an authorized seller of its products.
"It's our job to earn the respect over time of vendors in any new category and to work hard to present their products appropriately," says Diego Piacentini, senior vice president of world-wide retail and marketing at Amazon.
Today the response among retailers is mixed. Some, such as Mr. Cobb of eBags, say Amazon delivers "kind of decent performance but nothing extraordinary." But Target Corp. recently extended an agreement under which Amazon handles its online operations and others say they're happy with their partnerships. And Rachelle Friedman, co-founder of J&R Music & Computer World, says, "We're getting a lot of new customers."
Amazon's web of partnerships is putting new demands on the company. Before its apparel department launched, for instance, Amazon thought it had designed the area with space for enough images to show blue jeans, jackets and other clothing. But apparel partners such as Gap insisted on more images and in bigger sizes so shoppers could better see details. "Amazon was taken aback by how every retailer would have their own request," says Dave Fry, chief executive of Fry Inc., a consulting firm in Ann Arbor, Mich., that has helped almost a dozen retailers get running on Amazon.
Amazon says it wasn't at all surprised by the amount of requests for changes by its retail partners and that it valued their feedback. Amazon rides its partners, too, to make sure they're not falling down on delivering orders to customers. The company's Mr. Kilar says he spends several hours a week closely reviewing its partners' performance, from the number of refunds retailers provide on orders to the amount of communications they're having with customers.
Write to Nick Wingfield at nick.wingfield@wsj.com |
