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Is Amazon Shopping for Profits at Its Zshops? Bezos says no way -- it's more a customer-service move. But it just may reflect a changing mindset at the money-losing cyberseller As investors cheered the news a few days ago that Amazon.com has decided to let anyone sell anything but guns and live animals on its Web site in exchange for a small fee plus a cut of the transaction, the online retailer's stock soared 23%, to 80 3/4. And by Oct. 11, Amazon.com (AMZN) was up an additional 10% or so, closing at 88 3/8. Analysts heralded the move as a great way for the company to not only wring more revenue from its 12 million customers but also broaden its product selection without having to take on extra inventory or incur the high cost of expansion. Most important, they said, the new initiative could mean better gross margins for the money-losing company, plus faster revenue growth. Indeed, Amazon's addition of third-party stores, called Zshops, could be just what it needs to turn its bottom line -- eventually -- from red to black. It could also be evidence of something Amazon doubters have predicted since the company went public in 1997: the recognition by Amazon founder and CEO Jeffrey Bezos that he needs to start making a profit. In a recent interview with Business Week Online, Bezos insisted that the creation of Zshops didn't reflect a search for profits. "[Profitability] is not a motive for doing this at all," he said. "The No. 1 problem customers have online is that they can't find what they're looking for. Our primary motive is to provide universal selection." "A BROKEN RECORD." Of course, this mantra is vintage Bezos, who has long emphasized Amazon's goal of being the most customer-friendly place on the Web over its quest for earnings. "We're a broken record on customer satisfaction -- it's our No.1 cultural value," he says. And so far, that emphasis has paid off. Amazon has a market value of $28 billion, and most analysts see it as the dominant retail player on the Web. Still, turning Amazon into a mall may not be the best way to broaden the customer base of a company whose success to this point rides on its reputation for providing better-than-mall service. That reputation will be harder to maintain as Amazon rents space to any merchant willing to pony up the required $10 a month. Even if such merchants decide to let Amazon process their credit-card transactions (for an extra $0.60 per purchase and a higher cut of sales), the seller is still responsible for the quality of the product and its timely delivery. Only after something goes wrong, Bezos says, will Amazon step in to "investigate the situation and possibly ask the merchant to go sell somewhere else." Forrester Research analyst David Cooperstein thinks this strategy will endanger Amazon's customer-service reputation. "When Amazon's 12 million customers go to the site today, they get great search, a validated product assortment, and consistent customer service from home page to home delivery," wrote Cooperstein recently. Then he groused: "Zshops will ruin Amazon's still-nascent brand by protecting the customer only after the purchase is made and only at a high cost to Amazon." CROWDED MARKET. Even if that's an exaggerated assessment, the Web mall business is getting hypercompetitive. Portals such as Yahoo!, which acquired ViaWeb in June, 1998, and Excite@Home, which recently bought iMall, already have huge shopping channels. (Yahoo! currently boasts more than 6,000 retailers and 3.8 million products, vs. Amazon's undisclosed number of retailers and more than 500,000 products.) Lycos has announced plans to launch a mall called Lycos Shop in November. And America Online has beefed up its shopping channel, Shop@AOL, as part of its latest client software, version 5.0. Why would Bezos risk weakening Amazon's reputation for excellent customer service while at the same time leaping into markets where competition is already fierce? One logical answer might be a search for earnings, which are quickly becoming a necessity, even on the Web. For instance, big competitors such as AOL, Yahoo!, and eBay are already in the black. By contrast, Amazon is expected to lose $295 million this year on revenues of $1.34 billion. How long can it lose money while its competitors show a profit without the market exacting a toll on its stock? No one knows, but Bezos has to figure that as more Web companies move into the black, the pressure will rise on him to do the same. "[Zshops] is the first big move by Amazon that doesn't require a significant investment or big losses on their part," says Tom Courtney, an analyst with Banc of America Securities. "We're finally starting to see them monetize their traffic." One motivation for the recent initiative, Courtney says, is the appeal of a new business model -- more akin to that of eBay -- that could be "a big margin enhancer." Amazon's operating margins, currently a negative 25%, could improve by about two points as a result of Zshops, Courtney says. WAL-MART WARNING. Producing earnings will be a challenge, though, given the list of projects on Amazon's plate. Those include monitoring its investments in Drugstore.com, Pets.com, and Homegrocer.com, plus building a $300 million, 5 million-square-foot book warehouse. And Bezos no doubt wants to rekindle Amazon's quarter-on-quarter revenue growth, which in the just-ended third quarter slipped to only 7%, vs. 33% a year earlier. ZShops could get growth back on track by providing Amazon with a cheap source of millions of new customers -- at a price per name far below the $15 each new customer now costs Amazon. Amazon's need to make a profit might also gain urgency from Wal-Mart's anticipated redo of its Web site, which the $246 billion retailer says it will roll out in January. Already, Wal-Mart has installed kiosks in more than 100 stores where customers can buy computers and computer accessories via a touch-screen pad. Eventually, the kiosks will be in-store versions of Wal-Mart.com. The new site will also beef up Wal-Mart's electronics and toy offerings, says a company spokeswoman, as well as try to attract a more upscale audience than Wal-Mart stores do. It will also feature a new personalization function and richer integration with Wal-Mart's bricks-and-mortar outlets. Let's face it: Profitability will matter in online retailing, especially as more e-commerce companies climb into the black. Bezos may have to concede this sooner rather than later -- if he hasn't already with his latest move. Eads is a staff reporter for BW Online _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ |
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