posted 04-24-2000 01:15 PM         

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Originally posted by anonymoose:
Is it possible that the recent downturn in the etailing sector could be a good thing for Amazon? After all, the lower-tier players are becoming cheap if Amazon wants to acquire them, and bricks and mortar companies are much less likely to push hard on online projects, giving Amazon an even bigger head start.

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posted 04-10-2000 11:21 AM         

"Amazon.com (Nasdaq: AMZN)
Rating: Strong Sell

Amazon.com, the acknowledged leader in online retailing, has never been profitable. It has brilliantly convinced most investors to remain patient with its ever rolling river of red ink. In the beginning, Amazon's management claimed that the massive investments required to build a brand would create barriers to entry, so it should be excused from the need for profitability. But other companies have run over that vaunted barrier as if it were a white picket fence. The rapid success of companies such as buy.com (BUYX) (which spent very little on marketing and grew sales to $125.3 million in one year) has proven that large marketing expenditures on the Web are not necessary.

Right before Wall Street completely lost its patience with the company, Amazon.com came up with another pie-in-the-sky strategy to keep Wall Street's allegiance. It has established several equity/marketing partnerships with online retailers such as Drugstore.com (DSCM), living.com, pets.com (IPET), Ashford.com (ASFD), and Greenlight.com. In these deals, Amazon.com makes a cash investment in the retailer and the retailer then turns around and uses that cash to purchase advertising. Many bulls on Wall Street believe that these agreements will be highly profitable and have raised their estimates on Amazon.com as a result.

They are overlooking something watermelon-big, though. No one is sure if these marketing agreements will be profitable for the ones that matter, namely, Drugstore.com and the other partners. For instance, in the fourth quarter of 1999, Drugstore.com spent $25 million on advertising to acquire 267,000 customers. This translates into a cost of $94 per customer, and each customer spent only $27 at Drugstore.com. That means that each customer has to multiply his or her average purchases by at least 3.5 to give the company just a 1:1 return in revenue, let alone gross margin or operating income.

posted 04-04-2000 01:29 PM         

Hmmm. Seems like just last year that Amazon built for the new millennium eight super-wonderful distribution centers, comprising approximately four million square feet of warehouse and distribution space. The point was to increase Amazon's control over the distribution process and facilitate its ability to deliver merchandise to customers on a reliable and timely basis.

These centers are highly automated. The two distribution centers Amazon operated prior to 1999 are manually operated. The company acknowledged in its 10-K that it was not previously experienced in operating automated warehouses in distant locations, and that problems could arise.

Apparently, though, those problems are a thing of the past. Bezos said, "Today, a huge competitive advantage for us is that we can do distribution centers purpose-built for e-commerce better than anybody else." Amazon is loath to share its skills with partners for the time being. "If you do that too soon, you may give up your competitive advantage," Bezos said.

OK, so Amazon is going to cement its position as leader in the "purpose-built e-commerce distribution center" space, and then spin it off. The point, as Bezos puts it, is that it's a "structural way of releasing value for shareholders."

It certainly is. Remove costs of fulfillment from your income statement, remove the fixed assets from your balance sheet, and you've got a much lighter business. Bezos invokes Coca-Cola in this context, since it does not manufacture cans and bottles, nor does it bottle or distribute its soda. It makes the syrup and sells it to bottlers, such as Coca-Cola Enterprises, some of which are independent, some partially owned, and others majority-owned by Coke. Coke itself, therefore, owns syrup manufacturing facilities and offices, but doesn't have to worry about bottling facilities, trucks, and all the other nastiness of a distribution business.

How would this work for Amazon? Presumably, the company would purchase inventory and send it to its distributors, who would warehouse and ship it as necessary. Inventory problems, then, would still fall on Amazon's shoulders. Amazon realized lower shipping margins in 1999 because of split shipments from one or more locations, which was caused by its failure to optimize inventory at its distribution centers. Issues like that would still cost Amazon, not its distributors.

Amazon would also have to consider how its devotion to customer satisfaction might suffer from separate distribution entities. Another cause of lower shipping margins last year was an increase in partial shipments to satisfy holiday demand. A distribution company may well not appreciate the costs (often in excess of revenue) of that sort of service. Amazon would probably still be responsible for those costs, too.

posted 03-28-2000 06:40 PM         

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Originally posted by trendy:
Very interesting. A lot of Amazon investors believe that as soon as Amazon wants to it could be profitable simply by cutting back on its marketing expenses. Order fulfillment is probably not one of those "marketing expenses" that they can easily do away with

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