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INNOVATION
& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads | | MARCH 22, 2001 STREET WISE By Amey Stone Eight Options for Amazon From partnering with Barnes & Noble to bringing in Jack Welch, here are some ideas that could help the e-tailer become profitable
But so far in 2001, its sixth year in business, the company says sales growth will slow to 20% to 30%, down from 68% growth a year earlier. At that rate, many financial analysts think it will be lucky to hit its target for reaching profitability in its fourth quarter -- usually a high-volume time. Actually, it had better deliver on that goal, or else its current $10-a-share stock price may seem like a dim memory from the glory days. Not surprisingly, the company won't publicly discuss its options -- no ifs, ands, or buts. "We just don't talk about what might or might not happen," says Amazon spokesman Bill Curry. But plenty of experts following this lightning rod of a company aren't shy about offering their opinions. So I spoke with a range of analysts and consultants in industries including retail, finance, software, marketing, and, of course, e-commerce. The problem, these experts say, is that Amazon's current plan to whip its business into shape seems rather piecemeal. True, it still has hundreds of millions in cash on hand. It recently cut staff and closed a distribution and customer-service center. And it's making sure handling costs are kept low so that all its products can be sold at a profit. Case in point: It recently persuaded the manufacturer of a folding chair to supply the item already boxed up, so Amazon would just have to slap on a mailing sticker, says Curry. "WATER TORTURE." Great story. But that's not the path to profitability most investors are looking for. To really get the stock moving, Amazon needs to make some serious strategic shifts, many analysts say. Of course, no one thinks the company will disappear. The worst case is that its value will slowly erode over time, as it fails to meet its goals. Internet-strategy consultant and author Peter Cohan describes this scenario as Amazon's "Chinese water torture." At some point, the stock could get so cheap that some larger company, probably a retailer, would buy it. But for now, the clear consensus among observers is that the company has plenty of value for management to unlock -- most notably in its customer base of 29 million and the online systems Amazon has developed for serving them. In fact, much of the advice for Amazon boils down to scaling back its ambitions and focusing on what it does best -- customer service on the Web. What are Amazon's options? Let's look at several: Option No. 1: Partner Like Crazy This is the tactic investors are looking for now. It essentially means Amazon doing more deals similar to its current partnership with Toysrus.com, in which Amazon provides the front-end Web interface and a bricks-and-mortar retailer handles the back end and delivery. "The strategic partnerships make a lot of sense," says Holly Gustafson, an analyst with Legg Mason who thinks Amazon's model will work in time. Amazon has indicated it's willing to consider more partnerships. The problem, says Sanford C. Bernstein analyst Faye Landes, is that in the current environment, Amazon may not be able to sign deals that are quite so advantageous as the one inked with Toys 'R' Us last August. The goal, however, would be for Amazon to partner with leading bricks-and-mortar companies that could select merchandise and negotiate volume discounts with vendors. Then, Amazon could market the goods online and handle the customer service. With a strong technology platform capable of handling millions more customers, Amazon could partner, for example, with a retailer like Best Buy on electronics (a current market rumor) or BarnesandNoble.com (just an idea) on books. "It is so good at online sales, it could become a provider of online-sales services for other people," says Eric Kintz, an associate partner at Roland Berger Strategy Consultants. "If it had the leader for each category, it could be very powerful, and [that] would really leverage what Amazon is best at." Option No. 2: Ditch the "Earth's Biggest Selection" Goal Amazon has actually trademarked that slogan, but it grates on investors. Many analysts believe it's time for Amazon -- which is currently advertising a sale on woodworking tools, of all things -- to get out of whole categories of merchandise. The company boasts that in the fourth quarter of 2000, 35% of U.S. customers purchased items from its combined electronics, kitchen, tools and hardware, and toys and games categories. But does the company really need to sell everything? Right now, Amazon isn't providing enough detailed information, analysts say, for them to figure out which business lines have the most potential -- for example, maybe the bulk of those 35% of customers bought toys and not tools? Just a guess. But it's a pretty safe suggestion that Amazon should figure out which high-margin products its core customers will migrate to and focus on those. "I do not have any sense at all that the company has retrenched from its goal of being the source for everything," Bernstein's Landes says. Option No. 3: Cut Loose Low-Margin Customers Ever heard of the 80/20 rule? That's the theory that retailers should identify the 20% of customers who provide 80% of the profits and market specifically to them. In Amazon's case, it means the company should stop emphasizing its 29 million customers and identify which ones are really profitable to do business with. "If I were CEO, I would really try to understand who the best 20% of their customers are," says Cohan. This is really a corollary to Option 2. "They should sell the product lines that those 20% are buying and get out of all the other stuff," says Cohan. Option No. 4: Raise Prices Sorry, Amazon customers, but this is an easy strategy shift that could really make the company's financials perk up. David Sable, president and CEO of marketing-services firm Impiric New York, thinks a good percentage of Amazon's customers would still shop there even if Amazon didn't provide such a deep discount. Already there are cheaper places on the Web to get much of what it sells, and yet it's still the e-commerce leader. If it loses some discount customers, all the better (see Option 3). Plus, Amazon customers might be willing to pay a premium for certain services, such as locating hard-to-find books or taking advance orders on upcoming DVDs. "I was showing Gladiator at my house when most people didn't even know it was in the stores," says Sable, who says he would pay an extra $1 for that service. "That was cool." Option No. 5: Focus on Digital Distribution Here's a way for Amazon to eliminate all the costs and headaches associated with managing inventory and shipping products: just sell items that can be delivered electronically. In the broadband world of the future, this would mean books (or at least electronic books), music, videos, and software -- just for starters. Clearly, this is already in Amazon's game book. What's missing is the other half of that decision: paring the stuff that needs to be stored, boxed, and shipped. Another somewhat radical idea along these lines: Kintz suggests that Amazon sell other high-margin services to its customers, such as stock brokerage or life insurance services. Again, no inventory to worry about there. Obviously, this would be a long-term shift in strategy -- not something the company could do tomorrow. But the idea does have the beauty of simplicity to it. "The best course is to pare down and do what they do well," says Thomas Friedman, publisher of the Retail Systems Alert newsletter, "then gradually move to a digitized economy." Option No. 6: Turn Into an E-Commerce-Services Company Essentially, this is Option 1 writ large. The idea is that Amazon could become a front-end e-commerce platform for a range of retailers -- maybe hundreds of them, suggests Friedman. After all, lots of bricks-and-mortar retailers are already tempted to cut back on their dot-com efforts since few are making any money. Why not hook up with Amazon? "There is a great role in the retail industry for a company that has transactional capabilities to enable the consumer to buy online without going directly to the company," says Friedman. Option No. 7: Sell Out While this may seem the most obvious solution to Amazon's woes, it is actually one of the most far-fetched. Right now, with a $4 billion market cap, $2 billion in debt, and ongoing losses, there are no likely buyers for the company. Wal-Mart Stores and France-based Carrefour, the world's No. 1 and 2 retailers, could afford it but are considered uninterested at this point. For it to be cheap enough for any other retailers, Amazon would have to be in a lot worse shape than it is now. At the moment, bricks-and-mortar companies that are eyeing dot-coms "are looking for three things: cash flow, cash flow, cash flow," says Tim Miller, president of Webmergers.com. The only e-commerce sites that are selling are ones that are profitable or near break-even -- and even then, some deals are done for less than the value of trailing 12-month sales. Amazon's stock price would have to drop by an additional third for it to get in that range. The other thing buyers are looking for: Web infrastructure. "There is no doubt that there is value in Amazon's systems," says James Governor, a software analyst with research firm Illuminata. "They work great and have scale." Governor says he recommends that companies purchase ailing dot-coms rather than go out and buy expensive Internet applications from software companies. He thinks Amazon will make it without such a drastic measure. And really, this is a fire-sale scenario. Let's not forget: CEO Jeff Bezos owns 32% of the stock, which gives him a great deal of control, and he is considered highly unlikely to part with his baby. Which brings us to: Option No. 8: Bring In a New CEO Hey, Jeff, evidence is mounting that you aren't the guy to initiate the changes Amazon needs. (see BW Online, 3/12/01, "Will Jeff Bezos Be the Next Tim Koogle?"). "If he stays, the reality is he probably won't change the company's strategy that much," says Cohan. Friedman agrees: "Bezos has obviously learned the retail business and is a very good financier." he says, "But at this stage, they are going to need someone who knows how to integrate businesses." Any takers? Cohan has a candidate: "Put someone in there like [retiring GE CEO] Jack Welch, who might see it as a post-retirement challenge." That idea may sound like it's out of left field. But Amazon has a tough future ahead and needs to consider all its options, no matter how radical they may sound. Says Bernstein's Landes: "Everything is on the table" at this point. And the clock is ticking.  Stone is an associate editor of BusinessWeek Online and covers the markets in our daily Street Wise column. Questions or comments? Join in the discussion at our Ask Amey Stone interactive forum Edited by Beth Belton  | | |
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