Who Likes Amazon`s Expansion Drive?
Only Its Shareholders
By Mark Brohan
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.
Amazon did launch zShops with some customer service features. If an item is branded with Amazon’s A-to-Z guarantee logo and something happens to a customer’s order, shoppers can fill out a claim form and get reimbursed by Amazon.
But not all zShops items are guaranteed. And filling out a reimbursement form isn’t the same as e-mailing or calling Amazon’s customer service department and getting an instant credit or finding out how to return an unwanted book, CD or video free of charge. “Amazon should have thought twice before allowing no-name stores to sell merchandise on its site because it confuses the customer,” says David Cooperstein, an e-commerce analyst with Forrester Research Inc. in Cambridge, Mass. “When shoppers buy books or music directly from Amazon they get consistent customer service from the time they order to the time the product arrives at their houses. That isn’t the case with zShops transactions.”
Twists and turns
Amazon is risking its reputation by opening Internet auctions and flea markets because Bezos is a big believer that online retailers either commit resources quickly to a promising sales category or find themselves permanently shut out. But even though Amazon is moving aggressively into the online toy and consumer electronics markets, some analysts say it’s already too late to steal market share from established online stores such as eToys and chain retailers such as Circuit City.
Amazon opened its toy and consumer electronics stores in July in plenty of time to stock inventory before the start of the holiday shopping season. But eToys already controls about 25% of the online toy market, and the category is becoming saturated with other major competitors, including KB Toys, Mattel, Toys “R” Us, Toysmart.com and Wal-Mart. (Internet Retailer, Sept./Oct.)
“It’s very haughty for Amazon to think it can just go into any market it wants simply because it has the marquee retailing name on the Internet,” says Maxwell H. Sroge, CEO of Maxwell H. Sroge & Associates, a retail consulting firm in Evanston, Ill. “There are chains and brands in toys and electronics that know far more about that space than Amazon can ever learn in just a few months. They should be more worried about what’s up with Barnes & Noble.”
While Amazon is out to leverage its brand as quickly as possible in the hunt for more sales and, eventually, profits, analysts point to the retailer’s aggressive warehouse expansion plan as another example of just how Amazon is over-extending itself by doing too much too soon. Like other Internet retailers who want more control over their inventory and product distribution, Amazon is shifting its order fulfillment away from outside third parties and acquiring its own warehouses.
But few Web merchants are building or acquiring space as fast as Amazon. To support its ambitious merchandising plans, Amazon needs almost 4 million square feet of warehouse space and is pumping an estimated $300 million into a construction and leasing program to obtain it in less than a year. So far, Amazon has opened just over 3.5 million square feet and plans to build or lease 500,000 more in the next few months.
In and out
But Amazon’s whirlwind plans to expand its distribution aren’t going as smoothly as anticipated. For instance, the e-retailer is having trouble integrating the new distribution facilities into its core computer systems. And just when the company thought it was getting its warehousing program back on track, Jimmy Wright, a former Wal-Mart operations executive recruited by Amazon two years ago as its chief logistics officer, abruptly resigned.
Amazon says Wright’s parting in September was amicable and he was quickly replaced with Jeffrey Wilke, who was general manager of Allied Signal’s pharmaceutical fine chemicals unit. Still, some analysts insist that Wright left because of problems in meeting Amazon’s fast-track warehouse expansion schedule. “I think Jimmy looked at his stock options and decided to go home,” says Kenneth J. Orton, chief strategist for e-business at Cognitiative Inc., a San Francisco e-commerce consulting firm. “A retailer should be pretty worried if its chief architect suddenly leaves before Christmas. It’s a sign there’s too much happening too fast.”
Amazon won’t talk openly about its various expansion plans and is even more reticent responding to analysts’ charges that it’s alienating customers and Wall Street by spreading itself too thin. But even though Amazon has yet to show substantial gains in any of its new markets, some observers contend the company’s expansion is right on track. They argue that Amazon doesn’t have to be the biggest player in every e-commerce category imaginable to become the public’s Web shopping portal of choice.
Leapfrogging
Amazon’s strength is its brand, its quickness to exploit new customer service technology and make acquisitions that make shopping its site easier and faster than other online retailers. For instance, Amazon was an early user of personalization software Net Perceptions Inc. in Eden Prairie, Minn.—a tool that allows Amazon to analyze its shoppers’ new and repeat buying patterns.
And in the past year Amazon has enhanced its technology base by acquiring Sage Enterprises, a Web gift reminder and calendar service, and other companies.
By acquiring companies and launching programs that draw customers to its site to shop for what they want when they want it, Amazon plans to leapfrog the competition and establish itself once and for all as the Internet’s ultimate retailing brand. “Amazon is already the Web’s biggest single retailer, and with all this expansion they’re bent on becoming the biggest mall,” says John Segrich, an e-commerce analyst at CIBC World Markets, New York City. “They think they can pull it off and so do I.”
With its new initiatives, CIBC projects, Amazon will hit $3.3 billion in sales by 2001, compared with $610 million in 1998. But sales aren’t the same as profits, and until Amazon can justify that its expansion plans will put the company into the black, many experts insist that Amazon is in over its head—pouring money into ventures such as auctions that will ultimately break even at best.
Says net.Genesis’s Berkman: “Expansion is good when you know where you’re going, but to me, Amazon is pretty unfocused.” 
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