The E-Business Software Weekly is a series profiling trends and developments in software and applications that support e-business, the Internet, and other electronic communication channels. Look for a new story each week in this space.
A Tale of Two Stores
Last week was arguably the most significant in the history of e-commerce. In a week in which Kmart, the nation's second largest big-box discount retailer filed for bankruptcy protection, Amazon.com-the poster child of the dot-com generation-declared its first-ever quarterly profit. The profit was small, to be sure, just a penny per share, but its achievement was nevertheless an event that many Internet skeptics, particularly since the dot-com decimation of 2000, thought the world would never see.
In a single stroke, e-commerce came of age
It is hard to overstate the significance of this event. Amazon CEO and founder Jeff Bezos, a former Time magazine "Man of the Year," has often been ridiculed since his journalistic coronation for his supposed inability to run a business. Just seven years old, Amazon-the media hype went-was supposed to be as profitable as established corporations five and ten times as mature. Because it wasn't, so went the reasoning, e-commerce would be forever condemned to the commercial sidelines. If even Amazon couldn't make a profit, no one could.
Bezos-Bashing
The Bezos-bashing hasn't stopped since Amazon's profitability announcement. "Now they have entered into what you would call the world of grown-ups," one analyst cited by CNN scolded. "That means that now they have to play by the rules of grown-ups."
Another scoffed, "This business has been around seven years. It's high time they learned the ropes." Praising Amazon for achieving a profit is "like you're giving a student credit for not getting an F."
CNN.com reports that, "while the fourth quarter may have proven clean for Amazon, some are concerned that the first quarter will bring fresh concerns about profitability. Amazon became saddled with debt in its early years... Though the debt does not come due until 2008, some are concerned about the company's ability to drive sales growth enough to generate the cash needed to pay its debts."
And Money magazine technology columnist Adam Lashinsky writes that "Amazon has long wanted to be thought of as the next Wal-Mart." But "buried in the pile of data in its fourth quarter earnings release is the key point that Amazon's operating profit margin is just 1.3%... Contrast this with Wal-Mart,... [whose] operating margin... is an impressive 7%."
All of this is true, of course. But one could easily sympathize with Jeff Bezos were he to be wondering, "What's a guy gotta do?"
Market Endorsement
Bezos, who had been forecasting profitability for Q4 2001 for nearly a year, achieved profitability in large part through a serious of canny but difficult business moves. For instance, Amazon cut its operating costs by half during the fourth quarter, allowing the company to reduce prices on its core book, music, and video business. The firm expanded its partnering with mainline retail stores, becoming a key sales channel for such retail giants as Toys 'R' Us, Borders, and Target. And Amazon continued to enlarge its service offerings, bolstering its zStores service and auction site.
Some in the financial sector did take note of this progress. Amazon's profit report "indicates business was pretty solid and far beyond expectations," Deutsche Banc Alex. Brown analyst Jeetil Patel told CNN Money. "It think it's a pretty impressive showing looking at numbers across the board." Indeed, stock buyers bid up the company's stock by 25% in the first day of post-profit trading.
Overall, the market seems to be signaling support for Amazon's efforts. Adam Lashinky notes, almost reluctantly, that "Amazon and Wal-Mart each turned in 15%-plus year-over-year revenue gains" in the fourth quarter. "Amazon is worth about 1.1 times annualized sales...; Wal-Mart, far more profitable, is worth 1.2% times its annual sales... In other words, Amazon already is being rewarded for reaching Wal-Mart's level."
For some, that still isn't enough. "Congratulations, Amazon.com," says skeptic Lashinsky, "You've come a long way. But you've got a long, long way to go."
Kmart's Long Slide
For now, relevant as they might be, such questions about Amazon's future should take a back seat to the basic fact that this most celebrated e-commerce company actually achieved a profit. Given the doubts that so many astute market watchers had held for so long, this must be considered a significant achievement. Few other companies, online or off, have ever achieved the hat trick of category dominance, worldwide reach, and quarterly profitability in less than the seven years it has taken Amazon to accomplish all three. So forget "significant." I think "remarkable" is more appropriate.
But while Amazon was crawling (if only for a quarter) out of its primordial sea of red ink, Kmart was sinking into its own LaBrea tar pit-becoming the second 100-year-old retailer to declare bankruptcy in less than a year (Montgomery Ward did so last year). Founded by retail innovator Sebastian S. Kresge in 1899, the S. S. Kresge company boasted 85 retail stores by 1912 and joined the New York Stock Exchange in 1925. The company launched its first Kmart store in 1962-a move that proved so successful that. 15 years later, the firm changed its corporate name to Kmart Corporation.
Once phenomenally successful, the 2,100-store chain has recently slid into the shadows of market leader Wal-Mart and the rapidly growing Target chain. Like the now-defunct Montgomery Ward, Kmart has suffered in part because it lost its identity among its customer base. While Wal-Mart claimed the mantle as the "low-price leader," Kmart, with its resurrected "blue light specials," came across merely as cheap.
There were other problems as well. One report notes that Kmart's aging stores "are often unkempt and under-stocked, [which] has given its customer little reason to continue shopping there." Another adds that "a lot of Kmart stores have kind of gone to seed. They haven't been renovated, and Kmart never really had a program to do that."
Perhaps most challenging, Kmart has lost its once-firm grip on its customer base. Kmart executives "really have to go through the process to figure out who their customer is, or could be," Mark DiMassimo, CEO of DiMassimo Brand Advertising in New York told CNN Money. "They just kind of just sat there and let everybody eat at their market from all sides. They have to find their new relevance."
In fact, home decorating icon Martha Stewart may be all that is keeping Kmart alive. Her Kmart-exclusive line of home products-including the nation's second-leading bed and bath fashion line-plays an important role in attracting busy housewives, a key Kmart constituency. "If Kmart loses Martha Stewart," Long Island University finance professor Howard Nemiroff told CNN.com, "I think it would be very difficult to recover."
E-Business Lessons
Kmart's failure bears some important lessons for e-business entrepreneurs, but the recent successes of Amazon and a scattered few other Internet companies, I believe, offer even more. In fact, in reviewing the turbulent last two years in the e-commerce space, I believe that three key secrets to success stand out.
First is the ability to understand and exploit the unique benefits of the Internet, particularly as they relate to the needs and preferences of the target customers. One of the greatest causes of collapse in the dot-com era, I believe, is the failure to consistently apply this principle, as a great many companies either tried to force the Internet to do things for which it was not well-suited (e.g., selling pet food) or else attempted to deliver products that did not conform to people's natural behaviors (e.g., most online entertainment). The Internet is a magnificent tool, but it cannot do everything-much as the interstate highway system, great as it may be, is not very good for yachting. A key secret to success on the Internet, therefore, lies in understanding the intersection of what the Internet does well and what people want, developing a coherent strategy for exploiting this convergence, and then painstakingly executing on it.
A second key success secret, I am convinced, is to develop a way to make money directly. Probably the most common criticism of the dot-com business mindset has been of the often blind assumption that popular Web sites could "monetize eyeballs" merely by selling advertising-allowing them to operate, in effect, just like broadcast television. The gambit did work for a while. But the market became saturated (too many sites and too few ads), the tiny banner advertisements proved far less enticing than media-rich television commercials, and, what was worst, the interactivity that was supposed to promote personalization and on-the-spot sales also enabled Web site visitors to easily ignore even the most blatant advertisements in a way that was not as practical on television. In contrast to this badly frayed advertising model, most of the successful Web operations today are those that make money directly, either through e-commerce sales, service fees, or subscriptions (e.g., AOL, eBay, Wall Street Journal, and salesforce.com, to name a few).
A third secret to Internet success, I believe, is to focus on the fundamentals. Too often, Internet companies and even established firms choosing to move their operations onto the Web have forgotten that, at its foundation, the Internet is just another business channel-and that the ordinary rules of business still apply. Foremost among these rules is the delivery of high-quality customer service. A few years ago, Jupiter Communications published a study revealing that fewer than half of online companies provided what, in the offline world, would be considered minimally acceptable customer service. The situation has improved only marginally since then, with the online category leaders delivering exceptional customer service and many second-level players continuing to provide service that can charitably be termed "second-rate."
Revolutionizing the Commercial Landscape
In many ways, Amazon's recent profitability is a result of the company's dedicated adherence to these principles. Amazon's many uniquely online Web site features, ranging from personalized recommendations and customer-submitted reviews to one-click ordering and affiliate marketing, tap the Internet's innovative capabilities in ways that benefit both customers and partners. Its business model, built primarily on direct sales and service fees, is the epitome of soundness in a once extraordinarily crazy space. And its customer service, by all accounts, is among the best on the Internet.
In many of the same ways that Amazon succeeded, however, Kmart has failed. Kmart lost its edge in large part because it ceased providing unique value to its customer base. Its recent business strategy of trying to go head-to-head with Wal-Mart on price proved untenable, as Kmart, with less than one-fifth the sales of Wal-Mart, did not have the resources nor the leverage to compete. And, most disastrously, Kmart let its once engaging shopping experience slip, perhaps irrevocably, into unpleasantness.
While Amazon has not done everything right, the company has done the most important things well, and its profitability is vivid counterproof to the naysayers-a point underscored by the simultaneous stumbling of offline mainstay Kmart. If it keeps on track, Amazon is likely to continue to revolutionize the commercial landscape, and should be around, as a force to be reckoned with, for a long time to come.
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