December 26, 2000, 9:55 AM

Who Likes Amazon`s Expansion Drive?

Ever-hungry Amazon.com spent much of the fall loading up like a marathon runner at a spaghetti dinner. In September, it launched zShops, the Web equivalent of a flea market. In November, it followed with four new “stores” and a co-branded credit card. But many market watchers weren’t cheering. They took turns flogging the still-unprofitable Web legend for jumping too quickly into selling space it knows nothing about.

All year long, as Amazon has invested, analysts have groused. The retailer may have the Web’s best shopper base and customer service program, they contend, but it’s getting in over its head running auctions and selling everything from table saws to software, toys to televisions. “Until they jumped into auctions and zShops, nobody was going to catch Amazon in online retailing, but that’s not the case any more,” says Richard Berkman, senior analyst at net.Genesis Corp., Cambridge, Mass. “They are the leader in books, but not for long.”

Only a few months before it announced the zShops initiative, Amazon invested about $40 million in Seattle-based Home Grocer because Amazon CEO Jeff Bezos likes the online grocer’s customer service philosophy. But the investment is peanuts compared to the $500 million that investors have poured into competing cyber grocer Webvan Group of Oakland, Calif.

Given that the Web accounts for only 2% of all grocery sales, Amazon may think it has plenty of time to grow Home Grocer. Yet analysts wonder why Bezos and company are only dabbling in the market when Webvan, Peapod Inc. and others are busy investing hundreds of millions more than Amazon. “Amazon is into an e-commerce business where its financial commitment and expertise aren’t even close to what bigger competitors are doing,” says George Whalin, president of Retail Management Consultants, San Marcos, Calif. “They should stick with books and music.”

But those worries haven’t stopped stockholders from bidding up Amazon’s share price. A day before Amazon confirmed its expansion into software, home improvement, gifts and video games, shares soared 20%, before slipping back 9.2% the following day.

Amazon has made no secret of its grandiose ambition to become the biggest shopping portal on the Web. To drive home the point, the e-retailer has spent more than $650 million this year launching new Web stores, acquiring promising technology companies and investing in up-and-coming niche players like Home Grocer, Gear.com and Pets.com.

Shifting focus

Amazon’s plan is straightforward. By leveraging its brand and investing heavily in hot e-commerce categories, it intends to own Internet retailing in the same way General Motors and U.S Steel once dominated the automobile and steel industries. But instead of becoming a run-away Internet train, many analysts contend that Amazon’s zealous and unfocused expansion could cause it to derail. “The bigger Amazon gets, the less time its management has to worry about keeping the core book customers happy,” says Ken Cassar, an analyst in the digital commerce group at Jupiter Communications, New York.

Amazon is the undisputed leader in online book sales and is moving up fast in music and movies. Books make up 74% of Amazon’s estimated 1999 sales of $1.4 billion-or just over $1 billion-while music is 17% and movies and other merchandise account for 9%. But by moving too quickly into categories such as consumer electronics, where it must become a quick study if it hopes to compete with major chains such as Circuit City or Best Buy, Amazon risks losing its core book business.

And that lack of concentration could open the door for rivals such as Barnes & Noble and others to chip away at Amazon’s once insurmountable lead. Amazon is still the bookselling market leader. In 1998, it sold more than $450 million, compared to $62 million for Barnes & Noble. But while Amazon was busy diversifying during the last six months, Barnes & Noble has concentrated strictly on books, music and videos. “Whether Amazon can hold off Barnes & Noble by keeping the book business and the level of customer satisfaction they have today is a very open question,” Cassar says.

With more than $1 billion in cash, Amazon has the capital to expand into any market it wants. But given that the company will lose a projected $300 million this year and doesn’t expect to become profitable until at least 2002, that red ink already has investment bankers and analysts questioning Amazon’s diversification plans.

The Old Curiosity Shop

All these issues have come to the forefront with the launch earlier this fall of zShops, Amazon’s controversial ploy to add more merchandise and shoppers to its Web site. With zShops, literally anybody wanting to sell consumer goods can do so by leasing space on Amazon’s site. Amazon envisions zShops as a way to offer more merchandising options to its online customers without having to stock the inventory itself. But given Amazon’s less than stellar performance in the Internet auction business where it runs a very distant second to eBay, (according to Media Metrix Inc., more than 7 million visitors log onto to eBay each month) analysts aren’t giving zShops a very strong thumbs up.

With zShops, Bezos wants shoppers clicking on his site, finding anything and everything they want under the Amazon umbrella and then coming back for more. The company will charge zShops merchants $10 per month and collect up to 5% of each sale.

Yet Amazon’s critics liken zShops and its various auctions as gimmicks that do nothing but water down the Amazon brand and lessen its customer support program. Amazon is famous for its customer service and use of technology to learn all about who’s shopping the site and what they’re buying. That’s why two-thirds of all Amazon shoppers are repeat book buyers who are greeted by name when they return to the site and who appreciate Amazon’s one-click buying program.

But unlike the bookstore-where Amazon controls all aspects of order fulfillment internally-the retailer isn’t assuming direct responsibility for zShops sales. That’s up to individual merchants.

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