E-BUSINESS SPECIAL REPORT

Amazon’s Ambitious Failures

Amazon’s e-commerce triumphs are legendary. But every groundbreaking companymust balance its successes against questionable experiments and outright failures. Paralleling Amazon’s victories are product-category fizzles, the result of the company’s near-constant efforts to morph into a universal department store.

Which of these failures have been most prominent? What potential uncertainties does Amazon face as a result of its entry into several new areas? And how will the company likely fare over the next few years?

Amazon Architecture

Like ships in a fleet, four main divisions define Amazon’s armada. Each division encompasses at least a few departmental categories, so the product breakdown looks like this:

  • BMDV (book, music, DVD, video)
  • ETK (electronics, tools, kitchen)
  • Services (merchant affiliations, auctions, zShops, B2B strategic alliances)
  • International (Amazon operations in Britain, Germany, France and Japan)

    The BMDV section is certainly the flagship, in terms of both long-term sales growth and customer recognition. “Amazon has done a great job with [its] BMDV division, which now has nice operating margins,” David Kathman, a stock analyst with Morningstar, told the E-Commerce Times.

    The (un)Balance Sheet

    But it is a mistake to think that Amazon’s other divisions necessarily lagbehind its core business in financial terms, on both a quarterly and annual basis. Indeed, over the course of the past two years, the BMDV and ETK divisions have danced a revenue pas-de-deux.

    In fiscal 2001, for example, BMDV held the lead in sales growth, but that trend reversed in fiscal 2002. However, ETK sales growth was flat in the fourth quarter, a strong period for book, music and film holiday purchases.

    But as easy as it is to compare the four main categories, Amazon does not make it easy to measure strengths and weaknesses within those divisions. Quite the contrary: The company refuses to break down sales of books vs. music in BMDV, for example, or computer peripherals vs. kitchen items in ETK. “It’s tough,” Kathman noted. “They are coy about that.”

    Wins and Losses

    Even so, there is widespread recognition that Amazon has suffered some revenue shortfalls and dashed hopes in certain areas.

    Most notable is the failure of Amazon Auctions to gain ground againstmarket leader eBay. And within the ETK group, the tools product categorylacks an experienced customer base with online purchasing habits.

    In addition, Amazon’s heavily promoted attempts to sell clothes represent yet another foray into a new and untested area for the company. Kathman was cautious on the apparel segment, saying only that Amazon should be prepared to factor in moremerchandise returns than it is accustomed to throughout its traditional product lines.

    Sharing Risk

    Fortunately, there are good experiments as well as failed or uncertain ones. In the Services group, the Merchant Program seems to have been successful, providing an alternate revenue stream for Amazon. Publicized by affiliate agreements with Target and Toys “R” Us, merchant alliances do not cost much, since Amazon does not house its partners’ inventory. Risk is shared, as are marketing resources. “Everybody wins,” said Yankee Group analyst Adi Kishore.

    By sharing risk with its merchant partners, whether they are high-fliers likeTarget or small zShop owners, Amazon is taking a page from eBay’splaybook — just as eBay stole a bit of Amazon’s thunder by entering the fixed-price retail space with Half.com.

    Morningstar’s Kathman noted that it makes little difference whether Amazonearns money by booking product revenue or an affiliate fee. Both revenue sources contribute to the bottom line, and in many cases, the two amounts are almost equal.

    The Amazon Vision

    Overall, although Amazon’s vision of a universal department store has taken flak over the years, it remains resilient. A literal transfer of a brick-and-mortar department store to the online channel seems impossible. “There will always be products that do not fare well online,” Kishore told the E-Commerce Times, expressing skepticism about apparel and tools.

    But transplanting a physical department store might be beside the point. AlthoughAmazon functions similarly to a Wal-Mart or Macy’s, insofar as it deploys distinct buyers for each department, the company’s true goal is to determine what moves well through the online channel, specifically.

    “The opportunity is not to be the universal seller of all goods, but theseller of those goods that sell well online,” Giga’s Bartels told the E-Commerce Times.

    Amazon’s Future

    With that in mind, it seems pertinent to wonder what the world’s leading fixed-price e-tailer will look like in five years.

    Will Amazon’s electronics department hold its own against outfits like Best Buy, which is becoming a sophisticated multichannel retailer? Will its clothing experiment gain traction against experienced catalog retailers? Will the International division, currently almost breaking even, continue to build brand recognition and customer trust in Europe?

    These and other questions could be the failure stories of tomorrow. But withAmazon’s repeated upside earnings surprises and robust (if unevenlydistributed) sales growth, it is clear that failures do not outbalancethe company’s overall success — and that is not likely to change.

  • 1 Comment

    • How quickly things do change. Just a few years ago, many analysts were predicting that Amazon would crash just like nearly all of the retail pure-plays did during the Dot Com crash. Amazon has not only survived, but still dominates the online shopping market and, moreover, continues to show steady progress in improving its financial performance.
      While some of the analysts that Brad Hill interviewed may think that Amazon could be making a mistake by expanding its product mix into the apparel and tools categories, I disagree and think that these particular categories were purposely added to strengthen and broaden Amazon’s appeal to women and male do-it-yourselfers. If these analysts would do a little research, they’d see that both apparel and tools are now evolving into the Net’s ten most popular shopping categories and, furthermore, have much higher gross margins than books, consumer electronics and most other products that Amazon has traditionally offered its loyal shoppers. I don’t know about you, but I’m wondering if the Net’s analysts ever make accurate predictions.
      Jim Pflaum – Raleigh, NC

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