August 27, 2008, 12:00 AM

Advantage: Amazon

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“We found by adding a trusted payment option we can increase conversion on the site,” Smith says. “Amazon has a very large installed base of customers that have stored cards and addresses, and it can make the checkout process very easy.” Jockey also has been selling on Amazon for eight months, and Smith says the sales have been “additive,” although he would not provide details.

Fulfillment by Amazon

Retailers have similarly mixed views about Fulfillment by Amazon, a service launched two years ago. Amazon holds inventory for participating retailers and ships out orders, in some cases putting another retailer’s items in the same box with items the consumer buys from Amazon itself. Amazon has not said how many retailers participate, but has disclosed shipping a half million items on behalf of other merchants during the fourth quarter of 2007.

A big selling point for the service is that Amazon Prime customers get free shipping on all items Amazon fulfills, and the Super Saver offer of free shipping on orders above $25 also applies to merchants using Fulfillment by Amazon. For video game retailer NextGen Games, sales doubled when it signed up for Fulfillment by Amazon, although owner Adam Hunter says part of that increase came from adding items to his Amazon selection. Amazon accounts for 90% of his sales, and Hunter says Amazon’s fulfillment service saves him 25% to 30% over what it would cost him to ship the goods himself.

But other retailers are leery of the fulfillment offer. Carson of Fat Brain Toys says that if Amazon is holding his inventory, selling his goods and shipping his order, “what need do they have for us?” Nor does Jockey International participate. Smith says Jockey distribution center workers take pains to fold and pack items in the most attractive way, and include in each box a Jockey catalog that can help win new customers.

How to compete

While the lure of 81 million consumers may override competitive concerns for smaller retailers, most big brands remain intent on competing with Amazon, which means trying to exploit Amazon’s weaknesses. There are at least three ways to compete with Amazon, observers say: a larger or better edited assortment, better customer service, and, for retailers with stores, offering services that an online-only merchant like Amazon can’t provide.

With Amazon now selling everything from patio furniture to pet supplies, it’s hard to offer great depth in every category. David Goldsholle, founder of, says his site offers 100,000 SKUs, while he estimates Home Depot offers 12,000 items in this category and Amazon 2,000.

On popular products, like power drills, Amazon’s buying clout enables it to offer a lower price, Goldsholle says. “On power tools, we can’t touch them, but on power tool accessories we can,” he says. Part of his strategy is to move into the business-to-business space, where Amazon doesn’t currently compete, when he launches a new site next year aimed at selling tools to contractors and other companies.

Taking the approach of a specialty store that presents a well-chosen assortment is another way to compete with Amazon, says Lauren Freedman, president of research firm The E-tailing Group. “They’re overwhelming in a lot of instances,” she says of Amazon. “Good retailers are all about the picking of the merchandise. I don’t need 5,000 pairs of shoes for my daughter.”

Freedman also says retailers can compete with Amazon by offering better customer service. Amazon gets below-average marks in customer service in The E-tailing Group’s annual mystery shopper survey because it does not display a toll-free phone number prominently on its site, and did not respond to e-mail questions from the firm’s mystery shoppers. “They’re not going to deliver Nordstrom-type customer service,” Freedman says. “That’s not the business they’re in.” Nonetheless, Amazon remains near the top of the list in customer satisfaction, ranking third last year among the 100 largest e-retailers in a survey by ForeSee Results Inc.

Nor does Amazon provide the depth of information about complex products like computers that some electronics sites offer, says e-commerce analyst Sucharita Mulpuru of Forrester Research. “Amazon has customer reviews, but not a lot else,” she says. “If you can provide more information on high-consideration purchases like electronics you can make people more comfortable with those transactions.”

For retailers with stores, Mulpuru advises, “Focus on the multi-channel piece. Drive customers into your stores where the most lucrative transactions will happen and where you have the strongest ability to convert customers.” For instance, enabling customers to order online for in-store pick-up is a way for a multi-channel retailer to offer a service Amazon can’t.

At least, Amazon can’t offer such services for now. But with sales and profits soaring, a large and loyal customer base, and a management team bent on innovation, there’s no reason to think Amazon is planning to stand pat.

The Amazon Way

Many retailers claim to be customer-focused. At Amazon, the first of the company’s six “core values” is: “Customer obsession: We start with the customer and work backwards.”

The other five building blocks of Amazon founder Jeff Bezos’s business philosophy are innovation, a bias for action, ownership, setting the hiring bar high and frugality. These guideposts are taken seriously within Amazon, and employees are reviewed every six months on how their performance stacks up against them, says a former employee who asked not to be named.

“This is Jeff’s way of codifying what keeps a company alive and spirited and keeps people innovative, as if they had the high dreams you associate with start-ups,” he says.

Bezos believes strongly in employees taking ownership of their work, which made him reluctant, even as the company grew dramatically, to hire temporary contractors and to create separate teams to maintain software developed by others, the former employee says. “He was concerned that if the people who create the user experience, the web pages, are divorced from the long-term maintenance, they will become separated from the actual costs of customer complaints and bugs,” he says. “And that will lead to lower-quality software.”

As for frugality, Amazon uses Linux as the operating system for its thousands of servers, which means it does not have to pay license fees for operating system software.

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