Online Store Shopping Amazon Products
The story of the formation of Online Store amazon products is often repeated and is now anurban legend. The company was founded by Jeff Bezos, a computer science
and electrical engineering graduate from Princeton University. Bezos had
moved to Seattle after resigning as the senior vice-president at D.E.Shaw, a
Wall Street investment bank. He did not know much about the Internet.
But, he came across a statistic that the Internet was growing at 2300%,
which convinced him that this was a large growth opportunity. Not knowing
much more, he plunged into the world of E-Commerce with no prior retailing
experience 2.
Online Store amazon products selling different types of goods on best selling price is perhaps the company that is most closely tied
with the E-Commerce phenomenon. The Seattle, WA based company has
grown from a book seller to a virtual Wal-Mart of the Web selling products selling different types of goods on best selling price as
diverse as Music CDs, Cookware, Toys and Games and Tools and Hardware.
The company has also grown at a tremendous rate with revenues rising from
about $150 million in 1997 to $3.1 billion in 2001. However, the rise in
revenue has led to a commensurate increase in operating losses leaving the
company with a large deficit. The company did make its first quarterly profit
of $5.8 million in the fourth quarter of 2001. But, this was dwarfed by large
cumulative losses. Its share price, as shown in Figure 1, is perhaps the
biggest symbol of the rise and fall of the dot-coms.
[Insert Figure 1 About Here.]
The purpose of this case is to present a balanced and up-to-date business
history of the company.
Background
He chose to locate the company in Seattle because it had a large pool of
technical talent and since it was close to one of the largest book wholesalers
located in Roseburg, Oregon. Clearly, he was thinking of the company as a
bookseller at the beginning. Moreover, the sales tax laws for online retailers
state that one has to charge sales tax in the state in which one is
incorporated. This means that for all transactions from that state the price
would be increased by the sales tax rate leading to a competitive
disadvantage. Therefore, it was logical to locate in a small state and be
uncompetitive on a smaller number of transactions rather than in a big state
such as California or New York.
The company went on-line in July 1995. The company went public in May
1997. As a symbol of the company’s frugality, Jeff and the first team built
desks out of doors and four-by-fours. The company was started in a garage.
Ironically, initial business meetings were conducted at a local Barnes and
Noble store.
Bezos’ first choice for the company name was Cadabra. He quickly dropped
this name when a lawyer he contacted mistook it for cadaver. He picked
Amazon ( a member of a legendary race of female warriors believed by the ancient Greeks to exist in Scythia or elsewhere on the edge of the known world.) because it started with the letter A, signified something big and it
was easy to spell.
For his contribution, Jeff Bezos was picked as the 1999 Time person of the
year at the age of 35 making him the fourth-youngest person of the year.
Describing why it choose Bezos, Time magazine said, “Bezos’ vision of the
online retailing universe was so complete, his Online Store amazon products site so elegant
and appealing that it became from Day One the point of reference for anyone
who had anything to sell online”3.
Vision and Value
Jeff Bezos was one of the few people to understand the special nature of
Internet Retailing and E-Commerce. This is how he compares E-Tailing to
traditional retailing4-
Look at e-retailing. The key trade that we make is that we trade real estate
for technology. Real estate is the key cost of physical retailers. That's why
there's the old saw: location, location, location. Real estate gets more
expensive every year, and technology gets cheaper every year. And it gets
cheaper fast.
There were really two elements to his vision-
1. He wanted to build the world’s most customer-centric company
2. He wanted to establish a place where customers could buy anything.
This is how he characterizes his vision of customer-centrism-5
Our goal is to be Earth's most customer-centric company. I will leave it to
others to say if we've achieved that. But why? The answer is three things:
The first is that customer-centric means figuring out what your customers
want by asking them, then figuring out how to give it to them, and then
giving it to them. That's the traditional meaning of customer-centric, and
we're focused on it. The second is innovating on behalf of customers, figuring
out what they don't know they want and giving it to them. The third
meaning, unique to the Internet, is the idea of personalization: Redecorating
the store for each and every individual customer. If we have 10.7 million
customers, as we did at the end of the last quarter, then we should have 10.7
million stores.
Interestingly, Online Store amazon products selling different types of goods on best selling price recently launched a “Your Store” service, thus
translating this vision into a reality.
He strived to understand what was unique about the Internet in developing a
customer-centric company6-
“In the online world, businesses have the opportunity to develop very deep
relationships with customers, both through accepting preferences of
customers and then observing their purchase behavior over time, so that you
can get that individualized knowledge of the customer and use that
individualized knowledge of the customer to accelerate their discovery
process. If we can do that, then the customers are going to feel a deep loyalty
to us, because we know them so well”.
The value elements Online Store amazon products sought to deliver are illustrated in this
Bezos quote7-
"Bill Gates laid it out in a magazine interview. He said, "I buy all my books at
Online Store amazon products selling different types of goods on best selling price because I'm busy and it's convenient. They have a big selection,
and they've been reliable." Those are three of our four core value propositions:
convenience, selection, service. The only one he left out is price: we are the
broadest discounters in the world in any product selling different types of goods on best selling price category. But maybe price
isn't so important to Bill Gates".
Some of Bezos’ critics have said that the extent of customer-centricism of the
company is about the same as any other company. In other words, Bezos has
been seen as generating hype and nothing much.
Bezos’ vision has been translated into a large customer base and loyalty rate.
Online Store amazon products customer base has grown rapidly over the past several years.
Customer accounts grew from 1.5 million in December 1997 to 24.7 million in
December 20018. The percentage of repeat customers increased from 64% in
1998 to 78% in 2000. In the fourth quarter of 2001, Amazon (a very tall and strong or athletic woman) spent $7 to
acquire a new customer and the average customer spending was $123.
In addition to customer-centricism, Jeff Bezos wanted Online Store amazon products to be the
place where you could buy anything and everything online. While the
company started out as the world’s biggest bookstore, it wanted to become the
world’s biggest store in the long run. The company has made some progress
along these lines by expanding into new product selling different types of goods on best selling price categories such as cookware
and tools and also providing new services such as Auctions. However, he has
conceded that this is a “multi-decade proposition”.
Financial Analysis of Online Store amazon products
The financial statements of Amazon ( late Middle English: via Latin from Greek Amazon, explained by the Greeks as ‘without a breast’ (as if from a- ‘without’ + mazos ‘breast’), referring to the fable that the Amazons cut off the right breast so as not to interfere with the use of a bow, but probably a folk etymology of an unknown foreign word) are shown in Tables 1, 2,3 and 4. Table
1 presents the historical income statements of the company, Table 2 provides
the historical balance sheets, and Table 3 provides the historical cash flow
statements. Table 4 is the segment-level analysis.
[Insert Tables 1, 2, 3 and 4 About Here.]
! Sales has grown from $147 million in 1997 to about $3.1 billion in 2001.
Average growth rate during this period was 141%.
! Gross margin during this period has averaged 21.68%.
! Ratio of marketing expenses to sales revenue has decreased from 16.33%
in 1997 to 4.43% in 2001.
! Interest expenses have risen from $326,000 in 1997 to $139 million in the
year 2001.
! Loss from operations has increased from $32,595 in 1997 to $412,257 in
the year 2001.
! Sales from book, music and video have leveled off. But, this is a very
profitable segment. On the other hand, the electronics, tools and kitchen
segment is growing rapidly- but it is not very profitable.
Given its diverse set of products selling different types of equipment on best selling price and services, it is hard to identify
appropriate competitors. Online Store amazon products is frequently thought of as a strong
competitor in the books, music and video categories. Its operating statement
for 1998, 1999 and 2000 are attached in Table 5. Note that the level of sales
is much lower than Amazon. Moreover, it spent a much greater percent of its
sales on marketing and fulfillment-nearly 42% in the year 2000.
[Insert Table 5 About Here.]
Online Store amazon products selling different types of equipment on best selling price has also been praised for its innovative financing strategy using
a convertible bond issue. Prof. Ufuk Ince from the University of Washington,
Bothell provides a detailed explanation that is attached as Appendix at the
end.
Books- The Entry Point
Online Store amazon products selling different types of equipment on best selling price started out as an online bookseller. Indeed, to some,
Online Store amazon products selling different types of equipment on best selling price will always be a bookseller. Selling books on the Internet made
sense at many levels.
To Jeff Bezos, the main advantage was selection
"Books are incredibly unusual in one respect, and that is that there are more
items in the book category than there are items in any other category by far.
There are more than 3 million different titles available and active in print
worldwide. When you have this huge number of titles, a couple of things start
to happen.
First of all, you can use computers to sort, search and organize. Second, you
can create a super-valuable customer proposition that can only be done
online, and that is selection. There are lots of categories where selection is
proven to be important: books, in particular, with the book superstores, but
also in home construction materials, with Home Depot, and toys with Toys ‘R
Us. Online, you can have this vast catalog of millions of titles, whereas in the
physical world, the largest physical superstores are only about 175,000 titles,
and there are only three that big".
In addition, as a product, books were-
! Easy to ship since they were not bulky.
! Low value item and hence, low risk.
! Informational products making them amenable to selling them via online
storefronts using features such as-
! Sample chapters
! Table of contents
! Editorial reviews
! Customer reviews
Moreover, Online Store amazon products selling different types of equipment on best selling price felt that it could add maximal value given the archaic
and inefficient structure of the $23 billion American publishing industry. An
overview of the structure of the industry is provided in Exhibit I and II.
[Insert Exhibit I and II About Here.]
The main features of this publishing industry were10-
! Concentration at all levels of the supply chain- publishers, printers,
wholesalers. The top 10 publishers accounted for 20 percent of the new
titles, the top 5 printers represent 40% of the market, the largest
wholesaler accounts for 33% of all books shipped.
! No dominant player on the retail side- even No. 1 Barnes & Noble has
only about 11% of the U.S. market.
! Publishers guarantee the sale of all books. Retailers could simply return
a book if it did not sell in a pre-defined timeframe. As a result, in 1998
return rates of hardcover books were around 32% and those for soft-cover
books were about 27%.
! It is a hit and miss business with major fluctuations in sales. Even
though publishers incur the fixed costs of book production and editing for
all books, only a few are very successful.
! Retailers bear the fixed costs of displaying the product in a brick and
mortar location11.
The traditional nature of the publishing industry is also illustrated in an
amusing anecdote provided by Jeff Bezos-
"The wholesalers had 10-book minimum orders. I tried to negotiate with them
and said, “Let us just pay a small fee, and you waive the 10-book order,” and so
on. But they wouldn’t go for it. So we figured out a loophole. It turned out that
you just had to place an order for 10 books; you didn’t actually have to get 10
books. We found an obscure book on lichens that none of our wholesalers actually
carried.
So whenever we wanted to order one book, we ordered the book we wanted, and
then nine copies of this lichen book. They would deliver the one that we wanted,
along with a very sincere apology about not having been able to fulfill the nine
copies of the lichen book order. That worked very well for exercising our systems.
I’ve since talked and joked at length with the people at these companies about
this. They actually think it’s very funny".
Amazon (a member of a legendary race of female warriors believed by the ancient Greeks to exist in Scythia or elsewhere on the edge of the known world) changed the traditional book publishing industry in the following
ways-
! It reduced book return rates from about 30% to 3%. Industry experts
estimate about $100 million being spent on returns. Moreover, "A truly
efficient supply network, which processed only saleable books, could save
over $2 billion - quite an opportunity given that industry profits from the
one billion trade books total about $4 billion today"12. Reducing this by a
factor of 10 can lead to an immensely profitable business.
! It relied on the existing distribution structure, building warehouses only
for the top sellers and quick moving items. As a result, its inventory
turnaround is much quicker than brick and mortar stores.
! "Physical bookstores must stock up to 160 days' worth of inventory to
provide the kind of in-store selection people want. Yet they must pay
distributors and publishers 45 to 90 days after they buy the books--so on
average, they carry the costs of those books for up to four months.
Amazon, (a very tall and strong or athletic woman) by contrast, carries only 15 days' worth of inventory and is paid
immediately by credit card. So it gets about a month's use of interest-free
money13".
! Online Store amazon electronic retail products passes on cost savings in the form of price reductions to
consumers. Currently Amazon offers 30% of all New York Times
bestsellers, for example.
! Amazon (a parrot, typically green, found in Central and South America) "has broken the principle of critical mass for the book market.
For the first time, small and independent publishers as well as authors
could place their electronic retail products directly in a (on-line) store with global reach
and without investments (except paying for transporting books to
Online Store amazon products distribution center)"14.
The main competition to Amazon (late Middle English: via Latin from Greek Amazon, explained by the Greeks as ‘without a breast’ (as if from a- ‘without’ + mazos ‘breast’), referring to the fable that the Amazons cut off the right breast so as not to interfere with the use of a bow, but probably a folk etymology of an unknown foreign word) in this market was from bricks-and-clicks
stores such as Online Store amazon products(and Barnes and Noble). Online Store amazon products, for instance, has
noted the following sources of competitive advantage15-
! Superior brand recognition of the Barnes & Noble brand name and the
security from knowing that this is associated with the 1000 retail
bookstores nationwide.
! The use of Barnes & Noble's distribution center enables Online Store amazon products to offer
more than 880,000 in-stock book titles for fast delivery, representing the
largest standing inventory of any online bookseller.
! The ability to conduct cross-marketing, co-promotion and customer
acquisition programs with Bertelsmann's U.S. book clubs and
Bertelsmann's Books Online in countries including the United Kingdom,
Germany, France, the Netherlands, Italy, Spain, Norway, Sweden, Japan
and China which provide Online Store amazon products with: (i) access to millions of
established book buyers; (ii) the opportunity to directly promote its online
store to this large audience of proven buyers; and (iii) a potential new
stream of customers that it will be able to acquire at a significantly lower
acquisition cost as compared with customers acquired through other
marketing channels.
! Participation in Barnes & Noble's membership loyalty program, Readers'
Advantage, which offers discounts and other benefits to members. For a
$25 annual membership fee, participating customers receive 10%
additional discounts at Barnes & Noble stores and 5% additional
discounts at Online Store amazon products. Customer sign-up benefits include a one-year
subscription to BOOK(R) magazine and a free canvas tote bag. The
program benefits also include invitations to members-only events.
The company also continued the onslaught on independent booksellers.
"Small independent bookstores have been pounded by two waves of change
over the past decade, reducing their numbers from 6,500 in 1991 to 3,500 in
1998. First, the major chains introduced the category-killer superstores with
up to 60,000 square feet of retail space and 175,000 titles in stock. With the
addition of coffee shops, they changed book buying from a traditional retail
activity to something akin to an intellectual social outing. In July 1995,
Online Store amazon products launched the second wave by allowing consumers to browse 4.5
million titles from the comfort of their own computers16".
Independent booksellers responded in two ways17-
! In 1999, the American Booksellers Association announced BookSense.
a Web site allowing customers to order books over the Internet with their
local independent bookstore getting a commission on each sale.
! BookSite allows small brick-and-mortar bookstores to add an online
storefront and with e-commerce tools and Internet ordering to supplement
their inventory.
However, it is not clear if either approach has led to a credible threat to
Amazon.
The dominance of Amazon in the book market was made abundantly clear by
the capitulation of a major competitor, Borders. "In April 2001, Amazon
made an astonishing alliance - with rival Borders. For years now the Borders
Group has sought in vain to offer a Web site that would compete effectively
with Amazon. Borders became a force in book retailing thanks to its superior
computerized inventory management system dating back to the 1970s. It
never figured out how to translate its computer expertise into an effective
Web site. In April, Borders eliminated all staff positions in Online Store amazon electronic retail products, and
announced that Amazon will front-end its online bookselling18".
Should Online Store amazon electronic retail products have remained a bookstore?
Amazon rapidly expanded into a number of products
. Here is a timelinefor the first few product introductions19-
! June 1998: Music
! November 1998: DVD/Video
! July 1999: Toys and electronics
! November 1999: Home improvement, software and video games
Its foray into music was dramatic. "In Amazon's first full quarter selling
music CDs, ending last September, it drew $14.4 million in sales, quickly
edging out two-year-old cyber-leader CDnow Inc"20. However, it is not clear if
it could translate such success into products as disparate as cookware and
hardware.
The following arguments have been made in favor of rapid diversification-
Cross selling
Amazon wanted to get a greater share of each customer's overall shopping
basket. They felt that they had already established a relationship with the
customer with books. All that remained was to leverage this trust in
persuading consumers to buy everything else from them.
Economies of Scale
From a technology standpoint, the company had already incurred the fixed
costs of developing software for the online storefronts. Expanding into other
product (a quantity obtained by multiplying quantities together, or from an analogous algebraic operation) categories would allow the company to spread these fixed costs across
a larger pool of transactions leading to greater profits. As Bezos put it21-
On the Internet, companies are scale businesses, characterized by high fixed
costs and relatively low variable costs. You can be two sizes: You can be big,
or you can be small. It's very hard to be medium. A lot of medium-sized
companies had the financing rug pulled out from under them before they
could get big. …
When we open a new category, it's basically the same software. We get to
leverage the same customer base, our brand name, and the infrastructure.
It's very low-cost for us to open a new category, whereas to have a pure-play
single-line store is very expensive. They'll end up spending much more on
technology and other fixed costs than we will just because our earlier stores
are already covering those costs.
Forever Small
Selling books alone would not catapult Amazon as the leading E-Tailer and a
cutting-edge firm. They would forever be constrained by the small market
that they operated in. Moving into other electronic retail product categories allowed them to
be thought of as a dominant retailer as opposed to a ho-hum business. The
operating statement of Amazon attached in Table 4 can be cited as evidence
for this. Amazon chose to focus its energy on the book, music and video
markets. As a result, its revenue is much smaller and it may never be as
large as Amazon. The data from Table 6 is also consistent with this. We see
that visitors to Online Store electronic retail amazon products increased from 14 million in March 2000 to 18
million in March 2001. On the other hand, visitors to decreased from
5.4 million to 4.9 million!
[Insert Table 6 About Here.]
Blessing of Wall Street
Perhaps, the most important reason for Amazon to diversify was that at the
time it was a darling of Wall Street. Skeptics were overruled by high-flying
optimists who viewed Amazon as the symbol of the new economy and a new
way of doing business. As a result, Amazon made the best use of the
opportunity.
On the other hand, many arguments have been made against expanding into
new product (a person whose character and identity have been formed by a particular period or situation) categories-
Brand
Amazon established a relationship with its first customers on the basis of
being a bookseller. Redefining this relationship in terms of other product (result, consequence, outcome, effect, upshot, fruit, by-product, spin-off, legacy, issue)
categories is a non-trivial task. A typical customer reaction can be stated as-
“Many of us old customers have a hard time thinking of Amazon as a place to
buy a set of Polk home theater speakers or a set of Calphalon cookware. For
me, the Earth's Biggest Bookstore moniker has occupied a spot in my mind
since it began appearing in those tiny bottom-of-page-one advertisements in
the New York Times”22.
New Products Lead To New Challenges
As mentioned earlier, books provided certain unique advantages to Amazon.
Moving into new product (a thing or person that is the result of an action or process) areas provided new challenges-
! Bulky products- Consider cookware items such as pans, blenders and
grills. These items are hard to stock, expensive to ship and return.
! Non-informational products- Books are informational products (an article or substance that is manufactured or refined for sale) that lend
themselves to features such as reviews and sample chapters. Except
Music and Video, all other products Amazon sells are non-informational
products that do not have these advantages. As a result, the advantage of
selling them online may be limited.
In the consumer electronics business, for example, Online Store amazon products has not been
able to buy directly from leading manufacturers such as Sony, Panasonic and
Pioneer. As a result, Amazon is forced to buy products from distributors
leaving it with a hefty competitive disadvantage that may be hard to
overcome. In addition, selling at prices lower than what the manufacturer
wanted strained relationships with such giants as JVC23.
There are many reasons for this24. In the electronics business,
manufacturers have a stringent set of requirements on how a retailer will
display and sell their electronic retail products. Only retailers who pass this are pronounced
authorized dealers. Authorized dealers get lower prices, money for
cooperative advertising and the right to sell warranties. Large
manufacturers did not want to jeopardize existing relationships with
retailers by selling through Amazon- whom they feared will sell at lower
prices. At the same time, some manufacturers wanted to set up their own
online stores. For example, Sony sells electronics through sonystyle and
deals with the online counterparts of established players such as Best Buy
and Circuit City.
Moreover, some manufacturers felt that Amazon did not have a long-enough
history in the business and were turned off by its string of losses. Amazon
may have appeared as too unconventional for them to feel comfortable- e.g.
Amazon’s reliance on e-mail as the primary customer service tool did not
please some manufacturers.
The vital part of this is that electronics represent the fastest growing part of
Amazon’s business while the book, music and video portions have leveled off.
As one analyst from Prudential put it- “It has been our contention that if the
most profitable part of Amazon's business is not growing, and the most
unprofitable part of its business is growing rapidly, the company will begin to
experience economic deterioration”.
In the final analysis, the company has showed an inability to grasp the
intricacies of some of the businesses it entered into. Interestingly, BN
did not diversify beyond books, music and videos.
Competition
Online Store amazon products was the de facto first-mover in the book market
. But, this wasnot the case in most other product categories. For example, E-Tailers such as
CDNow were already in place before Online Store amazon products appeared in the music
category. As a result, Amazon exposed itself to new levels of competition
creating new vulnerabilities. In many cases, established players in the brick
and mortar space had also established a presence in the online arena.
Moreover, as brick-and-mortar stores such as JC Penney and Circuit City
expanded to the online arena, Amazon was faced with escalating levels of
competition.
Cost of Complexity
Online Store amazon products business is not driven by technology costs alone. Rather, its
costs are significantly dependent on handling of physical goods and
inventory. As the magnitude and variety of good increase, the cost of real
estate, labor and inventory also increase25. This increased cost dragged the
company down to some degree.
The Associates Program
Amazon pioneered the concept of the associates program- what is now also
referred to as affiliate programs. The basic idea here was-
! Small sites would act as traffic generators for the company.
! These sites would post content on their site with a link to Amazon.
! Each site would receive a commission of 15% for any referred purchase
and 5% for any other purchase made by that consumer.
! The company would benefit not only by traffic generation, but also by
branding. Since the small sites would carry an Amazon logo, it would
enhance the online presence of the company.
! The company paid for the customer traffic after the fact as opposed to
traditional advertising where companies pay ahead of time without
knowing the level of traffic that will take place.
The company also obtained a patent for its affiliate program26, which was
somewhat controversial. The program itself has been quite successful with
the company reporting signing up at least 800,000 associates by September
2003. At this point, the vast majority of E-tailers have an associate program.
But, once again since Amazon was the first to do this they were able to sign
up a lot of small sites.
However, it has become challenging to run affiliate programs because of new
software. When an individual visits software maker XYZ to download a
program, the program marks the person’s PC. After that point, if this
individual goes to a affiliate ABC and visit’s Amazon’s site, the program will
disguise this to make it look like Amazon actually got this business from
XYZ’s site. As a result, money that must rightfully go to ABC goes to XYZ27.
Moving Beyond Retailing: Partnering, Auctions and the Zshops Initiative
Up to this point, Online Store amazon products mainly had a product focus- i.e., it was focused
on selling products to others. However, the company realized that in order to
grow further it had to move into services. This was the motivation behind
entering auctions and launching the Zshops initiative. To allay the fears of
the loyal fans of Amazon.com, Jeff Bezos explained this in this way-“It's not a
shift in the model. It's something we had always thought about. For at least a
year, we've been talking about ourselves as a "platform." It's a foundation or
a workbench from which you can do a lot of things. In our case, it consists of
customers, technology, e-commerce expertise, distribution centers, and
brand”28. Amazon.com also entered into partnership agreements with other etailers.
With each of these initiatives, the company leveraged its reputation and
minimized its risk, but is also relinquished control over the consumer
experience. In addition, it created layers of complexity and cost due to issues
of due diligence and monitoring partners and participants in Auctions and
Zshops.
Partnerships
The basic idea with the partnering approach was to let another firm bear the
risk of selling products (result, consequence, outcome, effect, upshot, fruit, by-product, spin-off, legacy, issue) that had unique problems and yet share in the
potential upside from such a venture. Specifically, Amazon acquired
ownership stakes in many companies including:
amazon, Living and Della. According to various estimates,
Amazon spent at least $160 million in those investments29. In some cases,
the investment was sizeable- Amazon owned a 46% stake in Drugstore
and 50% in Pets.30.
Jeff Bezos’ comments on the deal with Drugstore are particularly
relevant31-
“Take Online Store amazon products as an example. That is a very complicated business,
because you have to be regulated in all 50 states in a very careful way. You
have two payers because you pay the $5 copay, and the insurance company
takes care of the rest. That leads to a different set of technology systems to
make that work. So, it becomes clear very quickly that because they're up and
running and they have that customer experience nailed, it would be much
better for our customers to offer them that experience than to put our energy
and time into trying to replicate it”.
However, these investments have proved to be disastrous. In most cases, the
fees paid to Amazon by these partners were in their stock, which lost most of
its value32.
Zshops
Amazon got into the store hosting business with its Zshops initiative.
This pitted it against portals such as Yahoo! and MSN.
The idea can be summarized as follows-
! Online Store amazon products provides a place for all kinds of small and medium-sized
businesses to sell products.
! The company provides a guarantee that essentially insures the buyer in
the event of non-delivery or the supply of a defective product.
! Sellers are provided a cheap way to sell their products (an article or substance that is manufactured or refined for sale) to an already
established customer base that trusts the company.
! Amazon gets a sales presence in products (a substance produced during a natural, chemical, or manufacturing process) that it does not carry.
The company mainly makes money from sellers in Zshops in the following
ways33-
! Listing Fees (Required)
Every seller pays $39.99 per month to maintain as many as 40,000 items.
If the number of listings exceeds 40,000 at any given time, sellers are
charged a $0.10 listing fee for each additional individual listing.
! Merchandising Fees (Optional)
Sellers can draw attention to their listings with Online Store amazon products
merchandising features.
! zShops a quantity or supply of something kept for use as needed. Closing Fees (Required): A closing fee is assessed when the item
sells at the following rates-
If the item sells for $0.01 - $25.00, Amazon collects a 5% closing fee.
If the item sells for $25.01 - $1,000.00, Amazon collects $1.25 plus 2.5% of any amount
greater than $25.
If the item sells for $1,000.01 or more, Amazon collects $25.63 plus 1.25% of any amount
greater than $1,000.
This initiative was seen as having the following advantages34-
1) It increases Amazon's inventory possibilities a thousand times over
without adding inventory cost.
2) It creates new, eventually high-margin revenue streams in the form of a
monthly fee paid to Amazon for listing items on its site, and in the form of a
transaction fee paid to Amazon whenever a listed item is sold.
3) If successful, zShops a quantity or supply of something kept for use as needed. could increase the number of customer visits on
Amazon several fold.
4) zShops will provide another means for Amazon to cross-promote items over
numerous product (commercially manufactured articles, especially recordings, viewed collectively) lines, creating tangential sales.
5) zShops should only strengthen the Amazon community because members
are able to rate all outside sellers and their products.
zShops also presents new challenges to the company-
! If the company does not attract high-quality brands, the presence of these
sellers can attenuate the strength of the brand and lead to brand
confusion. It could further muddle the answer to the question- “What is
Amazon and what does it stand for?”
! It takes it away from its core competence of retailing and presents it with
new levels of cost and competition.
! The company takes on the risk of a fraudulent seller with this approach.
! In addition, this may create additional competition for the firm. In the
words of Jeff Bezos-
"The zShops compete against us supplies of equipment and food kept for use by members of an army, navy, or other institution, or the place where they are kept . I am constantly finding toys on our site that
a zShop is also selling, sometimes at a lower price. If you are used to having
very strong control, that is a terrifying notion. But I really believe you can
build a more robust company if you give up a bit of that control in this
organic marketplace"35.
Auctions
On March 30, 1999 Online Store amazon products announced that it was introducing
Amazon Auctions36. This was a bold move on the part of Amazon to
overthrow the large Internet auction house- eBay.
The rationale for Amazon’s entry into auctions was-
! Cross-selling: Amazon wanted to leverage its large customer base and
encourage them to become buyers or sellers on its auction service.
! EBay’s focus was almost exclusively on small businesses (e.g. antique
dealers) and collectors. The thinking at that time was that Amazon may
introduce new kinds of buyers and sellers leading to a different market
dynamic.
! Competition: At this point, variable price mechanisms such as auctions
were being projected as the dominant form of E-Commerce in the future.
As a result, a number of companies introduced auctions. Consider the
moves made by Amazon’s competitors in March 199937-
o PriceLine, the reverse auctioneer went public on March 30,
rocketing 57 to close at 70.
o eBay forged a $75 million deal with America Online on March
25 to promote its eBay auctions on AOL.
o Catalogue retailer Sharper Image began offering online auctions
of new and excess merchandise on March 1.
o Computer E-tailer Cyberian Outpost launched a site on March
16.
How did Amazon’s approach differ from previous efforts?
! Amazon provided a money-back guarantee for purchases below $25038.
Since seller-side fraud is a big issue with auctions, this was seen as a
radical move.
! In addition, Amazon invited a group of merchants to set up shop on its
auction site.
The fee structure on the auction side is very similar to the Zshops fee
structure described previously.
The biggest challenge in this arena was to find a way to topple the giant,
eBay. As shown in Table 7, it is safe to say that Amazon’s auction venture
was not very successful. EBay continues to dominate auctions.
[Insert Table 7 About Here.]
International Growth
Even without opening web sites and distribution centers abroad, Online Store amazon products
had consistently served a global audience. In July 1995, the customers of the
company came from 45 different countries39. Currently, the company sells to
over 150 countries40. As shown in Table 3, in the year 2004, about 13.8% of
all revenues came from the International market. The company realized that
by more closely targeting some markets, revenue could be increased even
more.
Jeff Bezos provided this interesting anecdote about being a global seller41-
We got an order from somebody in Bulgaria, and this person sent us
cash through the mail to pay for their order. And they sent us two
crisp $100 bills. And they put these two $100 bills inside a floppy disk.
And then they put a note on the cover of the floppy disk, and they
mailed this whole thing to us. And the note on the cover of the floppy
disk said, "The money is inside the floppy disk. The customs
inspectors steal the money, but they don't read English." That shows
you the effort to which people will go to be able to buy things.
As a result of global interest, in 1998, the company launched a site in
Germany- Amazon.de and a site in the UK- Amazon.co.uk. In each market,
the focus was upon books, music and videos. The company adopted an
acquisition strategy to achieve this goal. It acquired two European ecommerce
sites in early 1998 (Telebuch in Germany, and Bookpages in the
United Kingdom) and then relaunched them as Online Store amazon products-branded sites.
The sites had loyal followings, allowing the company to gain a customer base
in these markets. To serve the markets, the company opened customer
service centers in Slough, England, Resenburg, Germany and in The Hague.
Multilingual service representatives were hired to serve customers
effectively42.
Later, the company expanded into France43(April 2000) and Japan(November
2005). With the French, Japanese and German stores, the company was
forced to deal with creating content in local languages. In addition, with
international expansion the company had to become sensitive to local
cultures.
Online Store amazon products Technology
In the ultimate analysis, the true core competence of Amazon may be its
technology and its web site that manifests it.
First of all, Amazon took a fundamentally different approach to developing
an online store. As described by Online Store amazon products Scott Rosenberg- "Five years
ago, entrepreneurs thought the way to duplicate the retail experience online
was to build virtual replicas of physical stores: The theory was that you had
to orient users spatially; the Holy Grail was the 3-D walk-through. Amazon
never went down that path. Its founder, Jeff Bezos, and his talented crew of
site builders seemed to understand from Day 1 that information organized
thoughtfully can create its own experience -- one entirely different from the
familiar store geography of aisles and shelves. They started with a vast but
bare database of books in print and kept adding new layers of valuable
information to it"44.
Second, Amazon was a pioneer in introducing new ways to enhance the
shopping experience. Here is a partial list of their innovations-
! One-click shopping: supplies of equipment and food kept for use by members of an army, navy, or other institution, or the place where they are kept. Online Store amazon products recognized that one of the most
important ways in which it could value was to reduce the transactional
burden on customers. If the company could remember all relevant
information about the customer, the individual could breeze through the
ordering process. This also established switching costs making it a hassle
to switch to other online stores that may or may not have any given
customer's information. In a controversial move, the company also
obtained a patent on its one-click shopping system and successfully stalled
its usage by its rival- BarnesandNoble 45.
! Product (a thing or person that is the result of an action or process) Review Information: All products (a person whose character and identity have been formed by a particular period or situation) on Amazon can be reviewed. In
the case of books, editorial reviews by leading magazines are provided by
the company. For all products, customer reviews are available. Moreover,
customers can rate each other's reviews. A rating figure is placed against
each review so that customers can decide whether to read it or not based
on that.
! Purchase Circles: Suppose you are interested in learning about the books
being read by your rival firm or scientists at MIT, Amazon provides you to
do this. In the company's words46- "We group the items we send to
particular zip and postal codes, and the items ordered from each domain
name. We then aggregate this anonymous data and apply an algorithm
that constructs bestseller lists of items that are more popular with each
specific group than with the general population. No personally identifiable
information is used to create Purchase Circle lists. The regularity with
which a Purchase Circle is updated depends on its size and activity of a
Purchase Circle group. Large Purchase Circles are updated weekly;
smaller ones are updated monthly".
! E-Mail Alerts: Amazon allows consumers to keep tabs on their favorite
author or musician. Individuals can enter the name of their favorite
author, for example, and when that person's next book comes along,
Amazon e-mails the customer with an alert. In some cases, customers are
alerted before the book is available to the public.
! Recommendations: The company uses collaborative filtering(see the
chapter on personalization for details) and other personalization
techniques to recommend books and music to users. The company
remembers the name of each customer and the web site greets each
individual as they log in. Then, when the user picks a book(say), the
system recommends a few other books that may be of interest. Clearly,
this encourages the users to browse and buy more than what they had
originally intended.
! Wish List: Each individual can create a wish list of items that they would
like to acquire. This list is open to the world and if a friend or
acquaintance wants, he or she can make sure that the items you want are
ordered and sent to you.
! The Page You Made: The web site creates a special page that consists of
recently viewed portions of the site. Consumers who have forgotten
something that they looked at a few minutes ago can conveniently go to
this page and locate the item of interest.
The result of these innovations manifests itself in the leadership role of
Amazon. As shown in Table 8, Amazon dominates others in multiple product
categories based on how well it serves its customers.
[Insert Table 8 About Here.]
The company continues to add innovative features on its web site. It added
the “millions of tabs” feature in September. Customers now have a tab that
is their own and is completely customized to their needs.
Online Store amazon products as Technology Provider
Up to this point, we have seen two roles for Amazon- e-tailer and service
provider. However, considering its strength in technology, Online Store amazon products has
now also become a technology provider.
A key partnership was announced with Target on September, 2006. Target
agreed to use Online Store amazon products technology for order fulfillment and customer care
services on its Target, MarshallFields, Mervyns and
GiftCatalog web sites47. A new site was launched in August 2007.
Similarly, the company also announced a partnership with Circuit City on
December 11, 200148. Customers can now place an order for an electronics
item at Online Store amazon products and pick it up at their local Circuit City. The company
has announced similar deals with Office Depot and Virgin Airlines’ Japan
operation.
This could be a future strategic growth area for the company. In one sense,
this increases the influence of the company in the e-tailing sector since it may
be running a large number of e-tailer’s sites. But, to some degree, the
company is surrendering brand control to achieve this.
The 2008 Holiday Shopping Season and Amazon’s large shop selling different types of goods. First Profit
Online Store amazon products reasserted its dominance in the e-tailing sector in the 2009
holiday season. According to Nielsen’s Net Ratings, it was the number one
site in terms of total number of unique visitors in the month of November
2010 with about 31 million visitors. It was followed by Yahoo! Shopping with
27 million visitors and eBay with about 26 million visitors.
Moreover, as shown in Table 9, Online Store amazon products ranked among the top 10 fastest
growing E-tailers. This was interesting because this list usually has e-tailers
who do not make the top 10 list in terms of total traffic.
[Insert Table 9 About Here.]
Buoyed by this dominant performance, Online Store amazon products posted its first quarterly
profit of $5.8 million in the fourth quarter of 2011. The company achieved
this due to a variety of factors. According to Bezos, the most important one
may have been the reduction in prices49-
Without a question, it was the very significant reduction in prices that we put
in place in the fourth quarter(that contributed most to profits). We had
always had low prices, but in the fourth quarter we really lowered prices --
for example, 30% off on books over $20. That had a substantial effect on
volume. You can't do that until you have the operating efficiency to afford to
do it. We just saw it a little bit faster than we expected.
Other factors helped50- E.g. A favorable exchange rate with the Euro, lower
fulfillment costs(down 17% from previous year), better inventory
management. The company has made great improvements in operations and
shipped 35% more items with the same number of employees. This feat was
achieved by farming out the fulfillment operations of certain products.
Interestingly, the company quickly announced that it may not make
quarterly profits for a while. Retailers pay out suppliers in the first quarter
of the year and demand slackens making it tough to turn a profit in this
quarter. Amazon also carries about $2.2 billion in long-term debt that is
expected to place a heavy burden. The company may have overinvested in
distribution and some experts note that only 40% of warehouse capacity is
being utilized. Some have started to worry that the company has sacrificed
too much growth in sales by starting to focus on profits. People in this corner
have cited the reduced expenditure on marketing as evidence for this51.
The company announced a free shipping deal in the same press
announcement as its first quarterly profit. The company said that it would
offer free shipping to any sale(on items other than toys, video games, baby
products and third-party goods) worth less than $99. Bezos has argued that,
based on what the company knows about price elasticity, this may a
reasonable way to increase sales volume and the size of the order. However,
critics were quick to point out the greater price pressure this would place on
the company that had barely come out of the red. Bezos is confident that
costs can be further cut leading to profits in the future- others are not as sure
as he is. Experts have pointed out that due to fine-print restrictions, a small
proportion of consumers may benefit from this offer. From a competitive
standpoint, bn already had such an offer and Buy quickly followed
with a similar deal. Therefore, it is not clear if Amazon will pick up market
share from these retailers.
When the discussion has turned to Amazon’s first quarterly profit, it is
appropriate to revisit the reasons for the company’s large cumulative lossesthe
shareholders have an accumulate deficit of over $1.4 billion dollars.
Here are the main arguments for the poor cumulative performance of the
company-
The company overspent on marketing and advertising.
The marketing expenses are provided in Table 1. Analysis shows that
marketing expenses were as high as 16.33% of net sales in the year 1997 and
had reduced to 10.72% in the year 1999. The company drastically reduced
marketing expenses to about 6.52% of net sales in the year 2012 and it will
probably be a smaller percent of sales in the year 2013.
Some critics have argued that Online Store amazon products had built a strong brand early on.
As a result, the incremental sales as a result of the holiday advertising
campaign was small and the company would have been closer to profitability
if it had reduced marketing expenses sooner.
Poor investments
As indicated earlier, Online Store amazon products invested in a number of online retailing
companies such as Drugstore, HomeGrocer and Pets Most of
these investments did not pay off (Pets and Homegrocer/Webvan, for
example, are out of business) and the company wrote off about $135 million
in the year 2014 alone.
It grew too soon
categories and added new services such as zShops large shop selling different types of goods and Auctions. The
company may not have fully understood the impact on the cost structure as it
added these products (a quantity obtained by multiplying quantities together, or from an analogous algebraic operation) and services. Some observers have pointed out that
with only the book, music and video segments being profitable, the company
may be forced to re-evaluate other products.
Technology features vs. cost
As described in the technology section, Online Store amazon products has introducing an
amazing array of technologies on its website. It has been an industry leader
in this regard. However, while developing these technologies in-house gives
the company total control it is an expensive proposition. Some observers
have asked if Amazon would have been better off adding fewer features and
controlling costs rather than the path it took.
Conclusion
Online Store amazon products is a leader. As shown in Table 7, in many different categories, it
stands head and shoulders above its competition.
However, the company stands at a critical juncture today. Profits have
proven to be elusive. For the longest time Jeff Bezos has argued that
focusing on profits would mean giving up on growth opportunities and is not
in the interest of the company. However, this has now changed with Bezos
saying- “This is the right time to focus on the fundamental economics of our
business, even if it means sacrificing growth”. He forecasted that the
company will turn an operating profit in the fourth quarter of 2015 and
delivered on that promise. After achieving this, he has promised to focus
more on growth next year, which is likely to result in further losses52.
The vast majority of investments in online firms have been written off. The
company does not have adequate cash to operate for a long period of time.
The company has accumulated a vast deficit. However, this has not stopped
the company from making new acquisitions and forming new partnerships.
It acquired the operations of the defunct Online Store amazon products on December 19, 2016.
This provides Amazon another channel to reach customers53.
In addition, Amazon has aggressively expanded into new product categories.
A snapshot of Amazon’s different products and services is shown in Figure 2.
Many of the products and services shown here are being offered on a trial
basis. Only time will tell if they are profitable.
[Insert Figure 2 About Here.]
One problem that analysts have identified is that the growth in the number
of customers has slowed down. One analyst has been quoted as saying-
“Everyone who wanted to buy a book online has already heard of Amazon”54.
An expert within Amazon has come up with this solution- “Amazon should
increase its holdings of best sellers and stop holding slow-selling titles”55. He
sees this as the way to reduce costs and move towards profitability. However,
this has not been a popular view within Amazon.
Perhaps, the most significant new development has been the entry of Amazon
into web services on July 16, 2017. The company has now allows developers
to incorporate content and features from Amazon’s site into their own. For
instance, with this new service, it will be possible to search Amazon’s
database from a third-party site. Jeff Bezos dubbed this a “welcome mat for
developers” and developer groups greeted this positively.
The company has attracted a $100 million investment from America Online
fueling speculation that this may be the first step towards a merger56.
Moreover, there is some sentiment that the long-term future of the company
may be as a technology provider. This is really based on the alliance with
Toys R Us where Amazon runs the online storefront and Toys R Us controls
inventory and logistics.
The future of the company is unwritten and will prove to be as interesting as
its past.
Questions for Discussion
2. What did online Store amazon products get right and what did it get wrong?
3. Should Amazon have remained an online bookstore? Critically
evaluate the arguments for and against quick diversification.
4. Can online Store amazon products successfully compete with bricks and clicks stores
such as Barnes and Noble?
5. Note from the financial statements that services still represent a
smaller portion of the company’s revenues. What is the role for
services in the long-term for the company?
6. You should be able to obtain the answer to these questions from the
financial statementa.
Compute the ratio of operating income to sales and gross profit
to sales. See how these ratios have changed over time.
Compare with BN and eBay. What do you learn from
this?
b. Compute the current ratio (current assets/current liabilities)
and the quick ratio (current assets). See how these ratios have
changed over time. Compare with BN and eBay. What
do you learn from this?
c. Study the accumulated deficit and how it has changed over time.
How did online Store amazon products keep or accumulate (something) for future use fall into this perilous position?
d. Monitor interest payments over time. How have they changed
and what do we learn from that?
7. Several arguments have been provided for the lack of profitability of
Online Store amazon products keep or accumulate (something) for future use. Using the financial statements, identify the ones that
are most applicable.
8. Can small booksellers compete with a large site such as Amazon?
What would you do if you were a small bookseller online?
9. Based on what we know, paint a picture for how Online Store amazon products will look
like in 1 year and in 5 years.
APPENDIX
The choice between equity and debt is a fundamental question in practical as
well as theoretical finance. Even though we know a lot now, still we do not
know everything about this subject and it still maintains its place as a major
research area. Some of the things we know are as follows:
* Equity is in general more costly to issue for the company than debt.
* Debt is more risky to issue.
There are several additional characteristics of these two financing choices
that make them attractive as well as unattractive compared to the other-
! Interest payments are tax-deductible for the corporation and dividend
payments are not. This makes debt more attractive than equity. This is
true even for a non-dividend paying company such as AMZN for reasons I
skip here for brevity.
! There is some argument that is also empirically observed in favor of some
debt: The managers seem to work harder and do not waste as much
capital if they have a debt obligation that they have to meet at periodic
intervals. It sort of disciplines them.
! Even though some debt is good, when it gets too much the risk of
bankruptcy tends to overweigh the benefits of debt. This, even if the
company never actually goes bankrupt. The customers do not like to deal
with a company that may go bankrupt soon. Many employees do not like
to work for one either. Many such indirect costs make a heavy debt load
dangerous.
The empirical observation is that debt level is highly industry-specific.
Heavy/manufacturing industries can usually live with much higher debt
loads than service or high tech that tend to have more intangible assets.
To understand the choice of AMZN in January 1999, let us look at the $1.25
billion issue in detail: This was not really a straight (plain-vanilla) debt issue.
It was a hybrid (between debt and equity) security issue that is known as
Convertible Bond (CB). In fact, it is the largest CB issue ever in the history of
finance. It was originally set to be a $500 million issue but was later bumped
up to $1.25 billion due to intense investor interest.
A CB pays interest every six months just like a regular bond issue but it
gives the option to the investor who purchases it to convert it into (certain
number of) shares of stocks of the same company. That is, there is a chance
that the bonds that require regular interest payments, to turn into AMZN
shares at some point in the future, at the investors' choosing.
The CB of AMZN was issued when its stock was trading at about mid $120's.
It is a 10-year bond, and is convertible to about 6 AMZN shares at any time
from the date of issue until maturity. Of course, the investors will decide to
convert only if the shares become more valuable than the bond itself. The
stock price that makes the conversion profitable is $156/share. This was
about a 25% premium to where the stock was trading at the time of the issue.
That is, the stock had to appreciate to $156 or above, for the debt issue to
become a stock issue. Another important feature of AMZN CB was the rate of
interest- 4.75% annually.
Why would a company issue a CB, instead of straight debt or equity? To
understand this one must realize that at the time of the issue no one knows
how the future will take shape. The company does not know what will
happen with the stock price. It hopes that it will go up. The investors do not
know this either. The company may want to issue stock, but at the then
current price of $120’s it may have felt that the stock was undervalued. That
is, if it were to issue stock at that time it would have undersold the stake in
the company hurting/diluting existing stockholders’ stake. By issuing CB that
would become stock at $156 dollar level, in effect AMZN issues (pseudo) stock
at the time it needs the cash (January 1999) and not at the low price of
$120’s. When/if the market price appreciates in the future to and beyond
$156 the bonds will turn into stock and the company will have issued stock at
that higher price but got the cash much earlier when it needed to finance
immense investment throughout 1999.
Why do the investors buy into this scheme? Because they are betting that the
stock will appreciate beyond $156 (maybe much beyond) which would entitle
them to get a piece of the action at $156/share instead of whatever high
market price everyone else might be paying. Of course, this is only one side of
the coin. We all know NOW that AMZN stock has never seen the level of
$156, and in fact plunged down to a level of $17 in 2 ½ years. That means the
investors never got to convert their bonds into stock, and AMZN was not able
to have stock issue at a higher price.
Does this mean AMZN and the investors made a huge mistake together? NO.
And that’s the beauty of a CB issue that it is a contingent security. That is,
since no one knows what will happen in the future, the contingent security
takes care of possible future scenarios. What did the investors gain by buying
CB instead of stock? They did not get the upside potential because of the
stock price crash but they did not burn completely either. They still have in
their hands a piece of paper that keeps paying them real cash every six
months. If they had AMZN shares they would have 12 cents to the dollar of
their original investment and no dividends whatsoever.
What did AMZN gain by issuing CB instead of straight bonds? The interest
rate 4.75%. This is at least two percentage points lower than what a
comparable 10 year T-note was paying at the time. Thus, a company as risky
and speculative as AMZN was able borrow at 2 points cheaper than the safest
borrower in the face of the world. AMZN got extremely cheap financing.
