Amazon: Armed to Beat the Recession

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Virtual Sales Rep

That's because, in several categories where Amazon competes, such as electronics and apparel, consumers want to touch and try out the items they're considering. You can't do that on the Web site. With the iPhone application, Amazon customers can enter brick-and-mortar stores armed with a virtual sales representative and checkout counter from Amazon. "Amazon has now put a kiosk in [brick-and-mortar] stores through mobile devices," says Bill Mirabito, a consultant with e-commerce researcher B2C Partners.

In a first, the iPhone application uses outsourced workers to match photos of products in the real world to Amazon's offerings. So when Gary Bacon snapped a photo of Jim Collins' book Good to Great in Barnes & Noble, a contractor who had signed up to perform the task on Amazon's "Mechanical Turk" program (a crowd-sourcing service open to anyone) received 10¢ to match the cover to the book's product page on Amazon.com. "Within a few moments, the Amazon app updated [with the price], and I added it to my 'Wish List,'" Bacon says. Amazon's Berman says this service is still considered experimental and that it was introduced "to gauge the interest in and typical usage of such a service and to gather feedback from users on what they like and do not like about the service."

Mobile shopping is in its early days, and analysts don't expect the iPhone application to make a big impact on the company's bottom line soon. "In the short term, at least in the U.S., people aren't going to be buying a lot of big-screen televisions on their cell phones," says Stephen Baker of NPD Group. Still, the iPhone app is one way for Amazon to up the ante on brick-and-mortar stores that are fast becoming its toughest competition. In a November survey, JPMorgan Chase (JPM) asked consumers what specific sites they plan to use for holiday shopping, compared with last year. While Amazon was the top response for the second year in a row, with about 50% of consumers planning to shop there, the sites of traditional brick-and-mortar retailers, including Sears (SHLD), Target (TGT), and Wal-Mart (WMT), had their biggest gains.

Some investors are warming to Amazon, too. On Dec. 8, Amazon's shares closed at 51.41, up 38% since Nov. 20 and outpacing Wal-Mart, eBay, Barnes & Noble, Overstock.com (OSTK), and Best Buy (BBY) in the same period. Stifel Nicolaus' Devitt rates Amazon's stock a "buy" with a target price of 63. Michael Souers, an analyst at Standard & Poor's who also rates the stock a buy, expects earnings of $1.30 a share in 2008 and $1.63 in 2009, compared with $1.21 in 2007. S&P, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP).

Wal-Mart: A Strong Rival

How long can Amazon outpace the likes of Walmart.com? "I'm hard-pressed to see anything on the immediate horizon that's going to chip away at Amazon's leadership, but the company that is most likely to challenge that over the medium to long term is going to be Wal-Mart," says Cassar. In recent years the big-box retailer has expanded its online operations, garnering nearly as much traffic as Amazon and eBay. It also uses strong ties to suppliers to offer products no one else has. On Dec. 8, for example, the chain announced it would begin selling tens of thousands of Nintendo (7974.T) Wiis—a highly coveted product for the holidays that's sold out at Amazon.com—exclusively at Walmart.com.

And should Amazon survive the recession with its place in online retail strengthened, the landscape is likely to look different by then: Many online-only competitors may not survive, while offline retailers shutting brick-and-mortar stores are likely to follow Wal-Mart's example and strengthen their position on the Net. Many of these companies will find themselves repeating some of Amazon's experiments.

Still, they'll have a lot of catching up to do. "History has not been kind to the followers in the Internet sector, and we believe Amazon's investment has provided the company with a sustainable competitive advantage," says Cowen & Co.'s Friedland.

Business Exchange related topics:
Amazon.com
Consumer Credit Spending
iPhone
E-Commerce and eBay
Wal-Mart

Douglas MacMillan is a staff writer for BusinessWeek in New York.