Amazon: 'We’ve Never Said We Had to Do It All'

On any other day, it would’ve been big news. Pressured to show a path to

profits after years of losses, Amazon.com was to announce that discounter Target

Corp would open an on-line store on Amazon’s home page this fall. Target would

pay the e-tailer to sell products such as apparel and jewelry, and would hire it

to run the Target website. For Amazon, the timing seemed perfect since the deal

promised millions in high-margin business. Just one problem: The news crossed

the wires at 8:39 am September 11, six minutes before the first hijacked jet

crashed into the World Trade Center.

Far from getting a boost from the scarcely noticed deal, Amazon now finds

itself deeper in the soup. Fears that the tumbling economy will send consumer

spending into a slump have prompted most analysts to cut Amazon sales estimates

for the just-ended third quarter to less than $650 million, nearly flat vs a

year ago. Worse, many increasingly question whether the e-tailer will earn a

promised fourth-quarter pro forma operating profit. Investors have knocked down

Amazon’s stock by nearly 60% since mid-July, to around $7 a share, on concern

that Amazon could run out of cash early next year.

Analysts now say Amazon could still earn the $6 million fourth-quarter

operating profit most had expected before September 11, especially if the

benefits from the Target and other similar deals start to kick in. Even if they

do pay off, Amazon won’t be off the hook. For the company to remain

independent, founder and Chief Executive Jeffrey Bezos needs to scale back his

oversize ambitions. By its own definition of pro forma operating profits, Amazon

earned $39 million selling books, CDs, and videos in the second quarter. But

that was wiped out by the $41 million in domestic losses from trying to sell

everything from drill presses to KitchenAid mixers. So, Amazon increasingly aims

to get other retailers to sell their wares on the Amazon site. "We want to

be the place for people to find and discover anything they want to buy

on-line," says Bezos. "But we’ve never said we had to do it

all."

Maybe so. Still, it’s a big comedown: Amazon is attempting to become less

of an on-line department store and more a retailing back office. The upstart

many people thought would knock off brick-and-mortar giants now aims to be their

best friend. These days, servicing other retailers using its existing logistics,

customer service, and website operations looks like a surer route to profits

than selling lawn furniture.

Amazon is well into the process of discarding the sell-everything retailing

concept. Last year, it inked a deal to take over the Toys ‘R’ Us on-line

site, running it as a store on Amazon and handling fulfillment. Earlier this

year, Borders did the same, on-line travel provider Expedia began offering

products on Amazon’s site, and Circuit City said it will start selling on the

site in November. In July, AOL Time Warner bought a $100 million stake in Amazon

and will use its technology in AOL’s shopping areas. All told, services deals

are expected to total sales of more than $200 million this year.

High impact

With gross margins of 60% and up, more than double Amazon’s overall gross

margins, such deals have an outsize impact on earnings. In the second quarter,

$4.3 million in services profits were enough to tip the entire US business into

the black. In the fourth quarter, Rashtchy reckons the Target and Expedia deals

alone will bring in up to $7 million in operating profit–potentially enough to

produce that promised companywide profit.

At just 7% of sales, services remain small potatoes. They alone probably won’t

get Amazon over the hump. Bezos will also have to slash costs. One worry: If a

sales slump persists, Amazon could run out of cash as bills for holiday

inventory come due in January. So, Bezos may do best to ditch money-losing

items, such as kitchen products–and the sooner the better.

The question is whether he can do enough of them, fast

enough, for Amazon to survive on its own.

By Robert D Hof in San Mateo in BusinessWeek. Copyright 2001 by The McGraw-Hill Companies, Inc