May 5, 2004, 12:00 AM

The New Wal-Mart?

(Page 3 of 4)

So far, the dual strategy seems to be working for both Amazon and its retail clients, analysts say. When Lands’ End became one of the first retailers to open its own section within Amazon’s apparel category in the fall of 2002, its goal was to bring new customers to the Lands’ End brand and reactivate former customers. “That’s exactly what we’re seeing,” Taylor says. “About half of Lands’ End customers on Amazon are either brand new to us or reactivated Lands’ End customers.”

When Amazon launched its apparel section, some experts doubted it could succeed as a marketplace for established brands, especially since returns policies for products sold at Amazon often are different from the returns policies at the retailer’s own web site. In addition, Amazon handles order processing and customer service for many of those retailers, taking control of those crucial customer service functions out of retailers’ hands.

But so far, the experts have been proven wrong, and many are eating their words. “I thought it was a statement of defeat when apparel retailers signed up at Amazon, but it has turned out to be a winner for all,” Rosenblum says. “Retailers are getting incremental customers, and I haven’t heard any complaints.”

Indeed, apparel retailers are getting more than just incremental sales, Taylor says, they’re getting new online marketing and merchandising ideas. He notes that Amazon has been helpful in discussing new ideas for increasing Lands’ End sales on Amazon.com, for example, studying consumer reviews of different brands at Amazon and analyzing the mix of products in Amazon shopping baskets. “Our merchants use this data to see the most popular brands among Amazon’s customers,” he says. Although he declines to specify how sales have increased on Amazon, Taylor says they’re trending at or better than expected. “We’re very pleased with the results we’re seeing,” he says.

Amazon was also helpful in providing clear instructions to Lands’ End’s IT staff on how to quickly link product and order data feeds between Amazon and Lands’ End, which handles its own customer service and fulfillment for orders placed through Amazon, Taylor says.

Amazon is also winning over smaller retailers. T-ShirtKing.com LLC, which has maintained a boutique on Amazon since the late 1990s, has found it to be a bargain for tapping into a broad customer base, says Bill Broadbent, founder and CEO, noting that a small retailer can expect to pay under $40 per month to merchandise products on Amazon. “You could spend $10,000 and not get a better shopping cart,” he says.

Cross-selling opportunities

Broadbent says a big advantage of listing products on Amazon is the cross-merchandising opportunities with related hot-selling products. Because T-ShirtKing’s products include T-shirts adorned with rock music groups, for example, they can experience higher sales when Amazon lists new music CDs from the same groups. He says that T-ShirtKing gets more than half of its Amazon sales through in-site searches conducted by shoppers, a process he leverages by making sure his products are linked from sections of Amazon with complementary products.

Amazon isn’t only offering real estate to other retailers, however. It is also offering its technical expertise. Its other revenue-which includes revenue from hosting other retailers’ web sites and selling its technical expertise in other ways-reached $110 million in the U.S. last year, up from $85 million the previous year. That revenue stream represents a diversification from retail because Amazon realizes the revenue, even if the retailer itself isn’t making money.

ToysRUs.com, which Amazon has operated as the toy category on Amazon.com since 2000, posted an operating loss of $18 million on $376 million in net sales last year, following a loss the prior year of $37 million on $340 million in net sales. But analysts say they don’t hold Toys R Us as a mark against Amazon’s overall success. “Toys are a notoriously difficult market to make money in,” says Rashtchy. “It’s not clear whether Toys R Us would have made even less money if it did its e-commerce on its own.”

50% margins

Under its agreement with Amazon, ToysRUs.com handles its own marketing and merchandising and chooses, owns and manages its inventory, while Amazon handles web site development, order fulfillment, customer service and storage of ToysRUs.com’s inventory in Amazon’s U.S. distribution centers. In spite of ToysRUs.com’s losses, Amazon still earns revenue and profits from its arrangements with Toys R Us and other merchants, including Borders and Target. “Its services division is generating 50%-plus gross margins and growing rapidly,” says Beaulieu.

ToysRUs.com is satisfied with its Amazon alliance and has a services contract that extends to 2010, a spokeswoman says. Target, which has a similar arrangement with Amazon to operate its TargetDirect.com site for Target, Marshall Field’s and Mervyn’s brands, is also satisfied with its deal and recently extended it by two years to 2008.

But even the strength of Amazon as both a retailer and services provider must bend to market forces in e-commerce, where it has more competition as a provider of large amounts of online traffic. So while it has been building a reputation for providing sound e-commerce technology and services as well as consumer traffic, it has also begun to solidify its deals with other retailers by offering more flexible terms, analysts say. In earlier years, when companies would pay a premium for Amazon’s web traffic, Amazon charged higher fees, analysts say.

In revenue-sharing arrangements with partners like Toys R Us and Target, it would charge 10-30% or more of sales depending on volume, Rashtchy says. “Now times have changed and Amazon is being more flexible,” he says, noting that fees now usually run under 20%.

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