Sunday , September 20 2020

Exploring the Amazon

Since we have hitched our wagon to their star, I can’t be called neutral, but I think Amazon is a reliable, generally customer-friendly company that has blazed the trail for general online retail for the masses. That they are actually making money at it is impressive and reassuring for e-business in general.

Wharton has a mixed view of Amazon’s current status:

    Given the 86 million consumers that Jupiter Research predicts will be buying gifts online this holiday season, Amazon should be throwing off good cheer all around, right? Not exactly. Wall Street is acting like Scrooge as it frets about slowing revenue growth and diminishing profit margins in 2005. The big problem: Analysts are belatedly coming around to the idea that Amazon may be just a retailer, not some Internet high-flier that will dominate e-commerce. That means Amazon shares should be valued lower. Wharton experts, however, say these short-term worries are overblown although Amazon’s business model does raise some concerns. Is being viewed as a retailer really so bad?

    The bah-humbug crowd emerged shortly after the company announced its third quarter earnings in October. Amazon reported net income of $54 million on revenues of $1.46 billion, compared to net income of $16 million on revenues of $1.13 billion a year earlier. For the all-important fourth quarter, Amazon predicted revenue growth of at least 31% to $2.29 billion-$2.54 billion. For 2004, sales are expected to be up 32% to $6.67 billion-$6.9 billion.

    While those results were strong, analysts panned the company’s 2005 projections of sales between $7.4 billion and $8.15 billion, and operating income between $500 million and $625 million. The rub: Amazon’s percentage increase of revenue growth falls “significantly to the mid-teens next year while the company increases its operating expenses to build up an even bigger infrastructure,” wrote Piper Jaffray analyst Safa Rashtchy in a research report following Amazon’s earnings report. “The result is that Amazon is making less money on each incremental dollar of sales.”

    ….According to William Cody, managing director of Wharton’s Jay H. Baker Retailing Initiative, Amazon’s department store approach could backfire, although he suggests that it’s too early to determine how the Amazon saga will play out. “One-stop shopping works well in a department store. But online, another department store is just a click away.”

    For Wharton marketing professor Peter Fader, this angst over Amazon sounds familiar. In the heady dot-com era of the late 1990s, Amazon couldn’t make money but still hit a $400 price target. Then the bubble burst and Amazon was allegedly washed up. Now it’s a profitable semi-mature company that is expanding and facing slowing growth. “I don’t put a lot of faith in the stock market to value Amazon,” says Fader. “And if it is seen as a retailer – which it is, after all – I think that’s great because Amazon stacks up well next to other retailers. Compare Amazon to Kmart and Sears with [their] aging companies and customer bases.”

    Wharton marketing professor Jerry Wind agrees, noting that Amazon still offers features other retailers can’t or won’t, including 24/7 shopping convenience, customized shopping lists and an easy-to-follow format. “Amazon can capitalize on” these capabilities, says Wind.

    ….Amazon has taken on two personalities. When it comes to books and music, the company is like any other retailer building fulfillment centers and distributing goods. Other parts of its sites are like a shopping mall, where one can buy goods from partners such as Target and Toys ‘R’ Us. Amazon also sells electronics, a cutthroat business, and apparel, often through partners. In the end, Amazon becomes a department store. “With Amazon there is always a danger that it is spread too thin,” says Wind. “The company is definitely established in books and music, but whether it is viewed as a place for other products remains to be seen.”

    ….Meanwhile, Amazon keeps investing. Third quarter operating profit margins were 6.5%, lower than some Wall Street projections, because of spending on technology, content improvements and a new fulfillment center in Scotland. The company continues to fare well with consumers, earning a score of 88 out of 100 on the American Customer Satisfaction Index. “Amazon has made free shipping, low prices, good service and order accuracy a hallmark. Our decision to put dollars into lower prices and free shipping instead of TV advertising continues to be embraced by customers,” said Jeff Bezos, founder and CEO of Amazon.com, in the company’s earnings release. “Customer adoption of free shipping hit another record high this quarter.”

    ….While the current concerns are important, one needs to put the company’s moves in context, according to Fader. Amazon could quickly win over Wall Street analysts like Rubinson by honing selection and delivering better profit and revenue growth. Amazon is distinct right now because “it is viewed as an online technology company,” says Fader. “Sooner or later that distinction will fade and Amazon will be viewed by what it sells and how it does it.”

The bottom line is that when the average Internet user thinks of online retail he/she typically thinks of Amazon – that is gold.

About Eric Olsen

Career media professional and serial entrepreneur Eric Olsen flung himself into the paranormal world in 2012, creating the America's Most Haunted brand and co-authoring the award-winning America's Most Haunted book, published by Berkley/Penguin in Sept, 2014. Olsen is co-host of the nationally syndicated broadcast and Internet radio talk show After Hours AM; his entertaining and informative America's Most Haunted website and social media outlets are must-reads: [email protected], Facebook.com/amhaunted, Pinterest America's Most Haunted. Olsen is also guitarist/singer for popular and wildly eclectic Cleveland cover band The Props.

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