Don’t be surprised if Amazon.com Inc. slims down a bit after the holidays. The world’s largest Internet retailer is being told by experts that tools, kitchen appliances and furniture don’t earn enough to justify the cost of selling them via mail.
“They need to shed some of the businesses,” says Holly Guthrie, an analyst at Janney Montgomery Scott, a Philadelphia-based broker. “They are way too broad.”
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Amazon wouldn’t be the only dot-com looking to get lean in a cooling economy. The meltdown in technology stocks since April has made 2001 a make-or-break year for online businesses. They will need to pump up what works–and dump what doesn’t. If they don’t, investors who planted seed money could abandon them rather than wait any longer to see a profit.
In Amazon’s case, scaling back would be a significant shift away from its ambition of being the ultimate online shopping mall. In the past year, Amazon has leapfrogged beyond books, music and videos into lawn umbrellas, Toyotas and $800 coffeemakers.
But analysts wonder if the mix of items has grown too unwieldy. And with close to $3 billion in sales expected for the year–a third of it in the final three months–any move by Amazon is sure to be followed by other online retailers.
Amazon said its U.S. book, music and video business showed a profit in 2000–the first since the company started selling online in 1995. But its massive expansion into new product lines has inflated expenses enormously. The overall company does not expect to be profitable until at least the end of 2001.
Some analysts read hints that Amazon is bracing for change. Among other things, the company altered its privacy policy last summer to say customer data would be sold as assets if the company is acquired in whole or parts.
Amazon also parted ways in December with its longtime ad agency, FCB’s San Francisco office, citing differences of philosophy about the company’s future. The agency created the funky ads that featured Mitch Miller-type singers crooning about canoes and cars.
Amazon won’t comment on business strategy. But it insists that being the Web’s all-in-one retailer remains its goal. Building a business big enough to achieve that takes time, money and experimentation–a combination of flexibility and planning that earns the company praise.
“They’re willing to be patient and develop business lines even if they’re not profitable in the near term,” says Daniel Good, an analyst at Merrill Lynch in New York.
Partnerships with Drugstore.com Inc., Toys “R” Us Inc., Microsoft Corp., Hewlett-Packard Co. and the automotive site Greenlight.com are testament to Amazon’s innovative approach.
Shoppers looking for medicine and cosmetics, for example, are routed to Drugstore.com, which books the sale and pays Amazon what amounts to a referral fee. Amazon doesn’t have to find, catalog or stock any of the items. Similarly, Greenlight.com pays to be the car “tab” on Amazon’s site. Shoppers clicking on that button are passed via Greenlight to local car dealers, where they can kick tires and make their purchases.
“We want to be the place where people can find anything they want to buy on the Net,” Amazon spokesman Bill Curry says. “But that doesn’t mean we’re going to be the seller.”
Some experts say that strategy needs better definition and discipline. For example, Amazon’s decision to carry a wide range of inventory this holiday season could force it to discount heavily in January. Guthrie predicts a write-down of as much as $100 million on inventory for the fourth quarter, more than the company has taken in the past. Others doubt the charge would be that much but say discounting is possible–something familiar to traditional retailers.
As an example of experimentation, the company recently sent an e-mail advertising a new online outlet store that will offer discounts after the holidays, Good says. “That’s a nice vehicle for them to reduce inventory of seasonal items.”
The company also mailed a print catalog this quarter, further pushing the online retailing boundaries.
Good says the company’s statements, while not a dramatic departure, are “leaving the door open” for changes.
Others expect Amazon to stick to its mission–and consider that a mistake.
So what would get the ax? At this stage that’s anyone’s guess. But analysts figure it is unprofitable to mail bulky kitchen items, tools and furniture stocked in Amazon’s distribution centers.
Another concern: Amazon offered free shipping for much of the holiday season, which will reduce or erase the profitability of each item sold. That has some analysts wondering whether profit margins on some items will be negative. Amazon’s Curry says the shipping was factored into marketing costs.
Other categories don’t seem a logical fit with a company best known as a bookseller. “Their consumer just doesn’t seem like the kind who buy tools,” Guthrie says.
Curry says some products don’t sell well, but that’s no reason to rule them out as future moneymakers.
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“I can certainly make a case that ball gowns might not work now. Most people would probably want to try on a ball gown,” he says. “But there may be technology one day to do that online.”