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BBA(Hons) A CAB Amazon.com Sayed Nadeem !"#! Sir Ati$ Is%tia&

A'A()N CAS* S+, Introduction

Amazon.com, the brainchild of Jeff Bezos, set out to become the worlds largest online bookseller, at a time (199 ! when the traditional model consisted of a high street outlet carr"ing shel#es of books which customers could browse. $n breaking with this tradition, Bezos has forced others to emulate him, or lose custom, and to create inno#ati#e stores that act as much like a coffee house%meeting &lace as a re&ositor" for hard co&" books. Amazon does more than offer chea& books. $t allows readers to &ost re#iews of books, to sell second hand ones or search for those willing to sell their own. $t gi#es the book lo#er access to endless catalogues to browse, organises books b" t"&e and author, and e#en includes &ictures of dust-co#ers. All of this has to com&ensate for the lack of a real &roduct to &ick u&, leaf through, feel the weight. '#er" on-line ser#ice has the same &roblem. (an customers really )udge the &roduct from a &icture and a sam&le &aragra&h or two* +n the &lus side, of course, Amazon addresses a world-wide audience and ne#er shuts. ,o it offers con#enience, one-sto& sho&&ing for those difficult to find authors, and low &rice. ,ince its ince&tion, Amazon has blossomed out into other &roducts. $n &art this has been dri#en b" the low margins on books, and the increasing com&etition from the traditional outlets, and co&"cats. $t has "et to make a &rofit, des&ite e#er-growing turno#er, but argues that &rofit comes at the end of a long growth &eriod, once a strong market share has been secured. Facts and Figures $n -... /.0. booksales totalled about 1- billion. ,ales in the /.,.A. reached 1-. billion. 2a&erbacks dri#e the ma)orit" of sales, with te3ts and technical books limited to a handful of sales. 4ibraries act as com&etition, since the" are not a#erse to stocking &a&erbacks to lower costs and increase readershi&. 5h" bu" when "ou can borrow* 2ublishers carr" the risks in the sector, &a"ing authors in ad#ance of sales, and taking unsold co&ies back from outlets. /& to 6.7 of books can be returned, though the a#erage is -.7. 8he conse9uence is that the" carr" stocks. :istribution consists of a wide #ariet" of outlets. $n America large book su&erstores e3ist, often combining book sales with music sales. 8he largest chains are Barnes and ;oble, and Borders, and these are e3&anding into the /.0. $n the /.0. 5aterstones%:illons is the market leader, with 5< ,mith trailing in second &lace. <owe#er, 5< ,mith does ha#e a stranglehold on air&orts and railwa" station outlets. Another la"er of outlets is offered b" the smaller, inde&endent booksho&s. 8he" are su&&lied b" wholesalers, and sometimes directl" b" &ublishers. ,u&ermarkets now offer a limited range of books and magazines. =eaders can )oin a bookclub, or a librar". /ni#ersit" booksho&s (5aterstones is the /.0. leader!

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&ro#ide s&ecialist books to students. And finall", all the large outlets, and a number of s&ecialist firms, ha#e a web &resence.

Books are nowada"s t"&icall" sold at a discount on the recommended retail &rice. 8his hits the &ublisher, as can be seen from the t"&ical figures gi#en below. a! b! c! d! e! >anufacturing cost +#erheads inc ad#ts. =eturn and allowances Author &a"ments +&erating &rofit -.7 of selling &rice 6.7 -.7 1.--.7 ?-1?7

Bearing in mind that other costs ma" need to be borne (bank interest, di#idends, ta3, etc! the final return can be derisor". Add to this that the growth e3&erienced in the 199.s is not e3&ected to continue into the new centur", and the &icture is not a ha&&" on.

Jeff Bezos
Jeff Bezos left a successful career in 5all ,t. as an in#estment banker ("oungest e#er senior #ice &resident at :.'.,haw! because he saw the startling growth of the internet as a ma)or business o&&ortunit". 8he onl" 9uestion was the t"&e of business to start. Jeff started with a list of -. &ossibilities and narrowed them down to music, and books. <e a&&reciated that in each case the number of a#ailable titles far e3ceeded the ca&acit" of an" retailer to carr". $n books, for instance, some 1.? million 'nglishlanguage books were in &rint, with an e9ui#alent number in other languages. @et the largest outlet carried onl"(A! 1B?,... titles. Jeff set out to offer a single &oint of sale for book lo#ers, at wafer thin margins, in the ho&e that e#entuall" #olume would "ield a &rofit. (hoice of location was im&ortant too. Jeff had a number of criteria to satisf"C a! b! c! An attracti#e &lace to li#e Access to highl" 9ualified &eo&le in the localit" A small ,tate (since &eo&le li#ing in it would be charged a sales ta3, but those outside would not!

8he lot fell on ,eattle.

The Early Company

As is traditional with new $8 com&anies, Amazon started in a garage. $ronicall", he used the coffee sho& of a nearb" bookstore to inter#iew staff. Denture ca&ital of se#eral million dollars allowed him to take a modest office, and trading began in Jul" 199?. 5ithin si3 weeks he needed to mo#e to larger &remises (-.. s9. m! and si3 months later he took o#er a twel#e stor" former hos&ital. $n the first "ear of trading Amazon en)o"ed an income of E? million, about e9ual to a book su&erstore. Fi#e "ears later it had still to make a &rofit.

$t went &ublic in 199B, suffers from a #olatile share &rice, and has in its time been #alued at E-B billionC a trul" e3traordinar" figure. 'arl" in -..- this #aluation had dro&&ed to E?.6 billion, based on sales of E6.1 billion in -..1. A long wa" from the garageG

What Amazon Offers

Amazon offers con#enience, selection, ser#ice, and low &rices. 8heir book catalogue is one million titles, and the browser can search b" to&ic and author. ,hort descri&tions are &ro#ided, as well as re#iews b" readers, s&ecialists, and Amazons own staff. +nce the customer finds an item the" like, it can be ordered b" credit card. As an alternati#e, customers can reser#e books on the website, and then &hone in credit card details. Amazon does not carr" large stocks of booksC instead the" order from a wholesaler or &ublisher, e3ce&t for best sellers where a small stock is ke&t. 8his ordering s"stem allows same-da" des&atch of best sellers, and deli#er" of others within a week or so. :iscounts on best sellers are usuall" 6.7, though sometimes this rises to ?.7 to com&ete with offers from com&etitors. +ther books en)o" a discount of 1.7 of the co#er &rice. Amazon can offer these discounts because it does not ha#e to co#er high stock-holding costs. B" contrast, a t"&ical high street store carries about three months worth of books all the time. <owe#er, Amazon must ad#ertise (though less so now it is well known!, whereas the high street store need not. $n addition, Amazon has shi&&ing charges to co#er. +n the &lus side, it carries no sales&eo&le. Amazon ho&es that the bu"ing e3&erience is so hel&ful and &ainless that customers will return again and again. $t is much easier to sell to an e3isting customer than to attract new ones. Amazon hel&s this &rocess along b" offering a weekl" &rize for the most amusing and obscure titles ordered. 2ast winners include Training Goldfish Using Dolphin Training Techniques, and How to Start Your Own Country.

Running the Business

Amazon was not the first internet com&an" to sell books on the internet, but it aims to be the biggest and the most successful. $t also sets out to be welcoming and eas" to use. ,e#ent" &ercent of those who #isit the site become regular customers. +#er the "ears, though, Amazon has changed from bookseller to Han"thing seller. $n &art this is due to the recognition that a website is reall" a &lace through which an" &roduct or ser#ice can be sold. $t offers electronic greeting cards, music, #ideos, &harmaceuticals, &et su&&lies, to"s, tools, film &rocessing, health and beaut" &roducts, handcrafted items and more. ,ome of this comes from ac9uisition of ecommerce businesses, the rest from closer relationshi&s with manufacturers. Amazon &ro#ides the core com&etence of site management, and customer focus, offering &otential &artners eas" access to millions of &otential bu"ers. Admin

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Amazon has fi#e di#isionsC marketing, o&erations (handling order &rocessing and warehousing!, business e3&ansion (new &roducts and markets!, and editorial (website design and content!. <is fi#e #ice &residents are all from senior &ositions in industr", and elsewhere (Black and :ecker, Barnes and ;oble booksellers, a man who launched 2( >agazine on the web, someone from (innabon 5orld Famous (innamon =olls, and a hardware and software e3&ert!. $n 1999 Amazon ran fi#e warehouses in the /.,. and one in the /.0.

!a"ing !oney#
B" -... Amazon had grown to be the internets third largest bookseller, without e#er ha#ing made a &rofit. 8wel#e million customer accounts and a brand name that is well known ha#e led to a com&an" that can now market an"thing. Bezos boasts that he now offers the worlds largest selection of goods. $n so doing, of course, he has entered a different com&etiti#e arena. From its inception Amazon has seen astonishing sales growth. Initially, sales o!"le every ten wee#s. In 1$$% sales amo!nte to &1% million. In 1$$' they rose to &1() million, an in 1$$* they were nearly +o!r times that. 1$$$ "ro#e the "illion "arrier, to ret!rn sales o+ &1.%4 "illion, "!t losses o+ &3$) million. ,arnes an No"le, "y contrast, en-oye sales o+ &3 "illion in this perio . .he ta"le "elow compares Amazon with its two larger rivals, !sing a percentage o+ sales +orm!lation +or res!lts in 1$$'.

,ales (ost of goods sold Jross margin 7 +#erheads 2rofit%(4oss! 7

Amazon 1.. I..? 19.? 69.6 (19.I!

Borders 1.. B-.1 -B.9 - .6 6.K

Barnes $ %o&le 1.. B-.-B.I --.. ?.I

8he o#erheads in Amazons case are largel" marketing and &roduct de#elo&ment, costs which are not borne b" the com&etitors. ;otice, too, the high cost of goods sold in Amazons case. ;ote also that the &rofits made b" e#en the largest com&anies are single figure &ercentages. $n -... Amazon continued its growth, &roducing sales in the first si3 months nearl" double those for the same &eriod in 1999. <owe#er, this growth did not come from the core &roducts of books, music and #ideo, which rose onl" 6I7. 8he suggestion arose that Amazons strateg" needed a re-think.

'trategic (e)elopments
,enior &eo&le at Amazon knew full well that the internet would allow a multitude of small, low-o&erating-cost com&anies to a&&ear, some of whom would com&ete with, or be com&lementar" to Amazon. $ts strateg", therefore was to absorb some of these, and to form alliances with others. 8his means that customers #isiting an Amazon Associate com&an" can link to the home Amazon site. 8here were some K.,... Associate sites in -.... An e3am&le would be a good food site linking to books on cooking, or outdoor clothing linking to books on guides, ma&s, and so on. Amazon &a"s the Associates between ? and 1?7 of sales #alue for such referral.

4ate in 1999 Amazon o&ened its site, and customers to &roducts being sold b" other com&anies. $t became, in essence a doorwa" to a large number of businesses. 8his is the re#erse of the Associate idea, and Amazon charges a small monthl" fee and -?7 of sales for the ser#ice. Beaut" &roducts, &et foods, branded s&orts wear and anti9uarian books were among the earl" ado&ters of this a&&roach. Amazon went further, and bought shares in these businesses to strengthen the relationshi&. Also in 1999 Amazon entered the electronic auction arena. $t &ro#ides a #enue for &eo&le who wish to auction goods on the internet. 8here are, of course, others who &ro#ide such a ser#ice, but Amazon has the ad#antage of a large, read"-made customer base. $n August -... Amazon formed a ten "ear strategic alliance with 8o"s = /s, the worlds largest to" store chain. $n this case, Amazon would actuall" &ro#ide warehousing s&ace for to"s, and the distribution network. $t would act as the sho& window, ser#ice the customers, and be su&&orted b" 8o"s = /s, which would select, &urchase, and manage the in#entor". For this ser#ice 8o"s = /s &a"s Amazon a fee. Amazon also agreed with >icrosoft to distribute electronic books based on >icrosofts =eader software.

A Ris"y Business
Jrowing and di#ersif"ing was tried as a strateg" man" "ears ago in the age of the conglomerate. 8he danger is that in#estment must &recede return (so &rofits continue to recede into the future!, and no management can run a large &ortfolio of different businesses with different c"cles, ad#ertising needs, customer &eculiarities, etc. ,o we could see a growing Amazon that ne#er e#er makes a &rofit. >argins in books are #er" low, and Amazon is gi#ing some of theirs awa" to Associates. (an the" afford this* Again, Amazon ma" lose its core business of books if it is seen as no more that an internet su&ermarket. Jeff Bezos recognises this and saidC H(ustomers are lo"al right u& to the &oint somebod" offers them a better ser#ice.