December 26, 2000, 9:55 AM

Who Likes Amazon`s Expansion Drive?

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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, 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.


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.

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