September 30, 2002, 12:00 AM

Buy.com’s Blum Takes on Goliath

(Page 4 of 4)

Still, the man who dismisses higher education actually teaches a course on entrepreneurship at a local college. But he is quick to point out his class is relevant in today’s business climate and adds, “They didn’t have classes like that when I was in college.”

If Blum is teaching students today what he has learned from Buy.com, those lessons are likely to include the need to stick to your beliefs while maintaining enough flexibility to move with changing markets. And he is likely to encourage students to be daring and innovative.

But Blum has yet to demonstrate whether those lessons work in the real world of retail-and whether he can pass his own big final exam.

Lauri Giesen is a Chicago-based freelance writer.

 

Profitability may be Amazon’s biggest defense against Buy.com’s assault

By Paul Demery

After several years of painfully forgoing profits in hopes of hitting an Internet gold mine, Amazon.com is finally showing some positive numbers, posting operating profits of more than $1 million in each of this year’s first two quarters. With sharpened efficiencies cutting costs and new revenue streams and aggressive marketing tactics boosting its income, Amazon appears to have hit its stride toward success. “They are doing a lot of the right things,” says Derek Brown, analyst with investment firm W.R. Hambrecht + Co. “They have been able to really tighten their expense structure, and at the same time re-ignite revenue growth.”

But Amazon, even with steady growth of over 20% in online sales, hitting $806 million in the second quarter of this year, still faces large challenges to turn its small operating profits into steady net profits. A major obstacle is a $2 billion debt load that played a key role in turning its second quarter operating profit of $1.47 million into a net loss of $93.55 million.

Still, its recent momentum appears to be setting Amazon on a long-term course more profitable than its experience up to this year, analysts say. The world’s largest e-retailer is scoring significant gains in a number of key areas, including steadily increasing sales in several product categories, growth in international markets and operating efficiencies in such crucial areas as shipping.

When Amazon released its second quarter earnings report, founder and CEO Jeff Bezos lauded the company’s advancements in its new as well as its traditional markets. “I’m especially pleased with the outstanding job our U.S. Books team is doing, posting another quarter of 20% year-over-year book unit growth,” he said in statement that accompanied the earnings release. He noted that revenues also grew in Amazon’s newer categories of electronics, tools and kitchen products even “as we lowered prices and expanded electronics selection to over 60,000 items.”

It’s also becoming far more than an online purveyor of goods. Leveraging three vital assets-its customer database of 30 million, its e-commerce infrastructure and its fulfillment capabilities-Amazon is branching out as a service provider. “They’re becoming a shopping mall, an enabler of other retail web sites,” says Safa Rashtchy, an analyst with U.S. Bancorp Piper Jaffray. He notes that providing online selling services to other retailers is helping boost Amazon’s gross profit margins to more than 25%. “They just book commissions, so they get better margins,” he says. In the second quarter, Amazon’s third-party transactions accounted for 35% of North American orders, up from 18% a year ago. In that vein, Amazon and Office Depot Inc. in September announced the arrival of an Office Depot store at Amazon.com (see p. 5).

Fulfillment costs falling

Moreover, says Duif Calvin, vice president of the retail practice at consultants Scient Inc., Amazon’s strength is in providing a platform for handling large amounts of sales transactions, particularly well-suited for commodities in a high-growth market. Its forte is not, she says, as a merchandiser with expertise in moving goods in a way that caters to the fickle whims of consumers in a competitive market. “The Amazon platform is not well-suited for cross-sells, particularly of the type retailers offer with fashion apparel,” she says.

International sales, from Amazon’s web sites serving the United Kingdom, Germany, France and Japan, are surging. In the second quarter, they grew 70% over Q2 of last year, to $218 million. “International expansion has been a real revenue driver for them,” Brown says. Although Amazon probably won’t maintain a 70% growth rate overseas, he adds, “There’s clearly more room for them to run internationally.”

While Amazon has been increasing the amount and scope of its sales, it has also been cutting operating costs. Although fulfillment operations-which it also handles for part of Target’s operations-account for 40% of operating expense, Amazon is learning to use its clout in the market to demand better terms from distributors. “Shipping continues to get better and better,” Rashtchy says, noting that the company can be expected to continue reducing fulfillment costs as a percent of net sales. That ratio fell to 10.6% in the second quarter, down from 12.8% a year ago.

This should also enable it to continue posting quarterly profits even as it continues aggressive campaigns such as free shipping on orders of over $25 for popular items like books and apparel, Rashtchy adds. “The issue for Amazon is not so much the operations, which are pretty much in control,” Rashtchy says. Its biggest challenges ahead, other than its $2 billion debt load, he says, will be maintaining growth amid any downturn in consumer activity. Until now, Amazon has been immune to fluctuating consumer demand because of the overall rapid growth of e-commerce, Rashtchy says, but if the rate of increase in e-commerce growth levels off, “more and more Amazon will be subject to broader retail patterns, the upturns and downturns.”

But with plenty of cash on hand ($270.4 million among total assets of over $1 billion) along with operating efficiencies and market expansions, Amazon’s continued growth is a certainty, analysts say. “The question is at what rate that growth will continue to happen,” Rashtchy says.

paul@verticalwebmedia.com

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