Of course, the Web is supposed to be a sales outlet unto itself, and virtually no on-liner has more experience at it than Amazon. And rarely have so many companies been thrown into so much panic by a company that loses so much money. In the past three years Amazon lost a cumulative $162 million on sales of $774 million. Indeed, the deficit has grown nearly as rapidly as revenue. As a percentage of sales, Amazon's net loss has actually gotten worse, widening from 16.4% in the last quarter of 1997 to 18.4% in the last quarter of 1998. Amazon expects more losses for the foreseeable future.
Even for a pure on-liner like Amazon, distribution costs are a huge drain. When Jeffrey Bezos founded Amazon in 1994, he planned to rely heavily on Ingram Books, the largest book wholesaler in the U.S. The concept: Ingram would keep his inventory—and the costs that go with keeping inventory.
Bezos bragged of offering 1.1 million titles while stocking just 500 bestsellers, in a single 45,000-square-foot warehouse. He set up shop in Seattle in part because of its proximity to some Ingram operations. But he stopped short of letting Ingram handle shipping to individual customers, insisting on deploying his own force to ensure quality of service.
Three years later Amazon relied on Ingram for 60% of its books. That portion has since declined, and today two-thirds of Amazon's 2,100 employees work on customer "fulfillment," placing orders, packing shipments and answering customer e-mails and processing credit card charges. That consumes close to 10% of revenue, and it could go higher.
Now Ingram is being bought for $600 million by Amazon's rival, Barnes & Noble. Ingram hopes to keep supplying Amazon, but Amazon is increasingly sidestepping Ingram to buy directly from publishers.
To house all its new inventory, Amazon is opening its third warehouse—a colossal seven-acre facility in Fernley, Nev.—with plans for a fourth and possibly a fifth one. Staffing costs will grow accordingly.
Worth it? Even Sam Walton of Wal-Mart shaved his cost of goods sold only 2% below his competitors by buying direct. Amazon says its gross margins on books have risen four percentage points in 18 months. But music CDs now provide 13% of sales, a big reason the on-liner's overall gross margin fell by 1.6 points, to 21.1%.
Perhaps Amazon will find profits in becoming an on-line landlord. In December Bezos launched a "shop the Web" program, charging "e-tailers" rent to be featured on Amazon. Cyberspace is getting to be as expensive as a storefront on Rodeo Drive. Barnes & Noble's on-line unit is paying America Online an eye-popping $40 million to lock in space as AOL's exclusive bookseller for four years. A bargain?
"I've always felt these portal deals were way too expensive and lock you in for way too long," says Darryl Peck, head of Cyberian Outpost, a Web seller of computers. "No one knows if they're going to work or not."
Music sellers N2K and CDNow agreed to merge in part because their already-ailing finances were hurt by contracts to spend, between them, $108 million for similar marketing agreements. That is almost half their hoped-for full-year revenue—a costly promotion, to be sure. "We don't want to go out and talk about how it's not working," says N2K Chief Executive Jon Diamond. He has renegotiated some deals, which could reduce the cost by $10 million.
Such savings can get eaten up quickly by other needs. Ad budgets are a big jolt. Last summer software seller Beyond.com began a six-month TV blitz for $10 million—exceeding its entire third-quarter sales. Buy.com, an on-line discount store, paid $1.6 million for a single 30-second spot on the Super Bowl.
Special promotions are de rigueur. At the Buy.com site, you can get an Agfa digital camera for $723.95—and a $250 Clik disk drive free of charge. Computer Literacy, an on-line seller of computer books, offers some software developers $19.95 off any purchase north of that amount.
Technology spending can be a drain, too. 1-800-Flowers poured $13 million into its new Web site and will spend $15 million in the next two years to upgrade it. "We've been profitable thus far. Now we're plunging into the dark," says Chief Executive James McCann. "Still, we do believe it's the future. We're betting all our chips on it."
The Web was supposed to all but wipe out the cost of customer support, letting mouse-clicks replace phone orders. Don't count on it. During the Christmas rush, Shopping.com's support lines were swamped with callers who needed a human touch. Some of them were left on hold for an hour. The Web discounter, which sells watches, Cuisinarts and other goods, doubled its support staff to 50 people, easily adding another $1.5 million a year in costs. Yet revenue for the nine months ended Oct. 31 totaled just $4 million.
Compaq Computer Corp. is willing to forgive Shopping.com its cost problems, for now. It has agreed to buy the upstart for $200 million.
Will these Web selling costs go away? Probably not. Web sellers have noticed that on-line buyers are indecisive, filling up their digital shopping baskets as they proceed through a site, but then erasing two-thirds of their purchases before reaching the checkout. They lose their nerve or can't find their way out.
"The bottom line is that e-commerce companies have to spend more on phone centers than bargained for," says Ajit Pendse, founder of Beaverton, Ore.-based Efusion. His firm offers a fix. He pushes "pop-up" buttons on Web pages that could route frustrated customers who are ready to bail out to a service rep, turning the PC into a speakerphone.
There must be some way to make money. Ebay, the auctioneer, is one of the few Websters to turn a profit, in part because it refuses to fuss with "fulfillment"; customers who use the site must do the work to get the booty shipped from buyer to seller. Beyond.com hopes to cut delivery costs by zapping more copies of software over phone lines into customers' PCs.
Scott Blum, the founder of Buy.com, plans to sell some products below cost—in the expectation of building a large enough audience that he can make money on advertising. He hopes so many customers stampede his way that other Web sites will pay him big bucks for customer referrals.
Good luck to him. Someone will get it right, but along the way hype and hope will collide with harsh realities. "This is just a catalog retail business with lower barriers to entry. Margins, if they ever materialize, will always be crummy," grouses Michael Murphy, a veteran tech investor in Half Moon Bay, Calif. He may be right.
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Sidebars:
Pulp Addiction
Grade-A challenges
Read more:
By Mary Beth Grover
On the Cover
From March 8, 1999 Issue
March 08, 1999
Table of Contents:
On the Cover:
-Digital Messiah?
Backseat driver
-Ford outsell GM? Really?
-E-commerce, e-pain
Property Strategies
-Property strategies
Management, Strategies, Trends:
Companies
-Hilton's head
Technology
-Gateway 2005
Companies
-Hell for Dell
Investing
-"I gotta tell you . . . "
Media
-Must-save TV
Marketing
-By George, it's George!
-Deregulation fever
The Forbes Lunch
-Life with Rupert
-What a pickle!
As We See It
-Ah . . . the new economy
-The art of soap selling
-Mirror, mirror . . .
-Video-on-parade
At Work
-Good morning, HAL
Entrepreneurs:
Up & Comers
-WD-40 in Y2K
Follow the money/Venture Capital
-"What's my take?"
Starting Your Own Business
-Fly-by-day
-Body by Lycra
International:
-Beijing surfer
Charticle:
-Schumpeter, revisited
Law & Issues:
-Arrest that software!
Technology:
Computers/Communications
-DRAMS and FRAMS
Software
-Bad karma
-Of men and mice
Digital Tools
-It's Candid Computer
Departments:
-Side Lines
-Readers Say
-Follow-Through
-Flashbacks
On My Mind
-Executive bookmarks
-Fact and Comment
Commentary
-Memories Of King Hussein
Digital Rules
-The Upside Of Optimism
-Transparent Eyeball
-Economic Forecast
Columnists:
Insights
-Your virtual desktop
Money & Investments:
-Streetwalker
-The Forbes/Barra Wall Street Review
-World Markets Review
The Funds
-Bombs away!
-Sex and Ben Graham.
Estate Planning
-Death match
Statistical Spotlight
-Leading indicator
Investment Columnists:
Capital markets
-Death puts
The contrarian
-Bubble psychology
Stock trends
-Profitable prosperity
The Forbes Life:
Napkin Notes
-Wine sans whine
Sports
-Sailor boy
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