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AMAZON.COM: E-TAILING GROWS DESPITE
THE SLUMPING ECONOMY

The Opportunity
Anldzon.com (amazon. com) reported that its annual profit for 2008 had doubled, witll a 41 percen t revenue increas e, de spi te adverse
U.S. ilnd global economic condition s.
Entrepreneur Jeff Sezos fa ced an opportunity rather than a business problem. In the early 1990s, Sezos saw the huge potential for
retilil sales over the Internet and identified books as the most logical prod uct for e-tailing. In July 1995, Sezos started Amazon.com , an
e-tail ing pioneer, offeri ng books via an electronic catalog from its Web site. Over the years, the compallY has recognized that it must
continually enhance its business models and online storefront by expanding its product selection, improving the customer experience,
and adding services and alliances. In addition , the company recognized early on the importance of order fulfillm ent and wa rehousing.
It has invested hundreds of millions of dollars in building physical warehouses designed for shipping sm all packages to hundreds of
tho usands of customers. Amazon.com's challenge was, and remains, how to succeed where many have faile d- namely, how to sell
consumer products online, at a profit, and show a reasonable rate of return on investment.

The Solution: Reaching
Out to Customers
In addition to its initial electronic bookstore, Amazon
ha s expanded its offerings to a vast array of products and
services segmented into three broad categories: media
(books, music, DVDs, etc.); electronics and other merchandise
(including its new wireless reading device, "Kindle"; office
supplies; cameras; toys; etc.); and other (nonretai l activi-
ties, such as Web services, Amazon Enterprise Solutions,
etc.). Key fea tures of the Amazon .com superstore are easy
browsing, searching, and ordering; useful product informa-
tion , revi ews , recommendations, and perso nali zation; broad
selection; low prices ; secure payment systems; and efficient
order fulfillment.
The Am azon.com We b site has a number of features that
make the online shopping experience more enjoyable. Its "Gift
Ideas" section features seasonally appropriate gift ideas and
servi ces. AmazonConnect allows customers to select their
favorite authors, read about them , and then receive e-mails
from those authors.
Amazon also offers various marketplace services. Amazon
Auctions hosts and operates auctions on behalf of individuals
and small bu sinesses throughout the world. The Shops service
hosts electronic storefronts for a monthly fee, offering small
businesses the opportunity to have customized storefronts sup-
ported by the richness of Am azon's order-fulfillment processing.
Customers can use Web-enabled cell phones, PDAs, or Pocket PCs
to access Amazon .com and shop anywhere, anytime. Amazon.com
also can be accessed via AT&T's #1 21 voice service.
Amazon is recognized as an online leader in creating
sa les through customer intimacy and customer relationship
man agement (CRM), which are cultivated by informative
marketing front ends and one-to-one advertisements. In addition,
sales are supported by highly automated, efficient back-end
systems. When a customer ma kes a return visit to Amazon , a
cookie file (see Chapter 4) identifies the user and says, for
example, "Welcome back , Sarah Shopper," and then proceeds
to recommend new books from the same genre of the cus -
tomer's previ ou s purchases and a range of other items . It also
provides detailed product descriptions and rating s to help
consumers make informed purchase decisions . The site has an
efficient search engine and other shopping aids. Amazon.com
has a superb wa rehousing system that gi ves the company an
advantage over the competition.
Customers can personalize their accounts and manage
orders online with the patented "l-Click" order feature. l-Click
includes an electronic wallet (see Chapter 11) , which enables
shoppers to place an order in a secure manner without the need
to enter their address, credit card number, and other information
each time they shop and allows customers to view their order
status, cancel or combine orders that ha ve not yet entered the
shipping process, edit the shipping options and addresses on
unshipped orders, modify the payment method for unshipped
orders, and more.
In 1997, Amazon.com started an extensive associates
program . Sy 2009, the company had more than 2 million part-
ners worldwide that refer customers to Amazon .com. Amazon.com
pays a 4 to 10 percent commission on any resulting sale.
Starting in 2000 , Amazon.com has undertaken alliances with
major "trusted partners" that provide knowledgeable entry into
new markets. For example, clicking "O ffice Supplies" allows
customers either to select from Amazon. co m's office supplies
or to browse those of Office Depot; clicking "Health and
Personal Care" allows customers to benefit from great deals
offered by Weight Watchers. In yet another extension of its
services, in September 2001 Amazon signed an agreement with
Sorders Group Inc. , providing Amazon's users with the option
of picking up their merchandise at Sorders' physical bookstores
(In-Store pi ckup). Amazon.com also is becoming a Web fulfill-
ment contractor for national chains such as Target. Am azon
also has its own se arch engine, called A9 (a9.com), and offers
a range of Web services to developers (Amazon Web Services) .
•
Part 2: Internet Consumer Retailing

T he Result s titles. Amazon.com maintained its position as the number

In 1999, Time magazine named Sezos "Person of the Year," recog- one e-tailer in 2008, generating revenues of $19.2 billion,
nizing the co mpany's success in popularizing online shopping. with a net income of $645 million. In 2009, the Amazon.co l
In January 2002, Amazon declared its first profit-for the 2001 Web site attracted at least 615 million visitors . Like
fourth quarter. Since then , the company has remained profitable. all businesses , Amazon. com, the ki ng of e-tailers, which
Annual sales for Amazon.com have trended upward, driven has shown all others the potential of B2C E(, will continue
largely by produc.t diversification and its international presence. to walk the fine line of profitability, at least in the
This pioneer e-tailer now offers over 17 million book, music, and short run.
DVDjvideo titles to some 20 million customers.
Amazon also offers several features for international Sources: Compiled from Reuters (2008), Dignan (2008), and amazon. cor
customers, including over 1 million Japa nese-language (accessed February 2009) .

The Vast Range of Products and Services

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C~_W_H_A_T__W_E__CA
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The case of Amazon .com, the most recognized and the largest e-tailer in the world, demonstrates the evolution of e-tailing, some of the
problem s encountered by e-tailers, and the solutions employed by Amazon .com to expand its business. It also is indicative of a key trend
in Internet retailing : that the biggest online retailers are still growing and becoming rnore dominant, with the top 500 e-retailers
accounting for 61 percent ($83.6 billion) of all online sales in 2007 (Hanks 2007). E-tailing , as dernonstrated by the Amazon case, con-
tinues its double-digit, year-over-year growth rate despite the global econornic downturn. This is, in part, because sales are shifting away
from stores and also because online shoppers are, in general, more affluent. However, some expe rts argue that online retailers will need
to better understand customer behavior and preferences if they are to achieve a better convergence between technological capability
and custo mer desires. In this chapter, we will look at the deli ve ry of both products and services online to individual customers. We also
discuss e-tailing successes and failure s.
 Openjng Case
HOW AMAZON.COM FULFILLS ORDERS

The Problem
With traditional retailing, customers go to a physical store and purchase items that they then take home. Large quantities are delivered to
each store or supe rillarket; there are not too Illany deli very destinations . With e-tailing, custo illers want the goods quickly and to have
them shipped to their homes. Deliveries of sillall quantities need to go to a large nUlllber of destinations. Too, items must be available for
imillediate delivery. Therefore, Illaintaining an inventory of iteills becoilles critical. Mailltaining inventory alld shipping products cost
Illoney and take tillle, which Illay negate sOllle of the ad va ntages of e-tailing . Let's see how Aillazon .colll, the "king" of e-tailing, handles
the situation .
When Aillazon.coill launched in 1995, its business Illodel called for virtual retailing-no warehouses, no inventory, no shiPlllents.
The idea was to take orders and receive paYlllents electronically and then let others fill the orders . It soon became clear that tilis Illodel,
although appropriate for a small cOlllpany, would not work for a giant e-tailer.

The Solution system that is mo re than 10 miles long in each ware-

Aillazon.coill decided to change its business Illodel and handle
its own inventory. The coillpany spent close to $2 billion to build
warehouses around the country and beca ille a world-class leader
in warehouse Illanagement, warehouse automation, packaging,
and inventory management. Amazon.com outsources the actual
shipment of products to UPS and the U.S. Postal Service (USPS).
How is Amazon.com able to efficiently fulfill millions of
orders every month?
( Step 1. When a customer places an order online, a com-
puter program checks the location of the item. It identi-
fies the Amazon.com distribution center that will fulfill
the order. Alternatively, it may identify the vendor that
will fulfill the order in those cases where Amazon.com
acts only as an intermediary. The program transmits the
order automatically and electronically to the appropriate
distribution ce nter or vendor. Here, we describe what
happens in Amazon.com's di stribution centers, such as
the 800,000-square-foot facility in Fernley, Nevada.
• Step 2. A "flowmeister" at the distribution center
receives all orders and assi gn s them electronically to
specific employees.
" Step 3. The items (such as books, games, and CDs) are
stocked in bins. Each bin has a red light .and -a button.
When an order for an item is assigned, the red light turns
on automatically. Pickers move along the rows of bins
and pick an item from the bins with red lights; they press
the button to reset the light. If the light returns, they
pick another unit until the light goes off.
• Step 4. The picked items are placed into a crate moving
on a conveyor belt, which is part of a winding belt
house. Each crate can reach many destinations; bar code
readers (operated automatically or manually) identify
items in the crate at 15 different points in the conveyor
maze. This trac ks the location of an item at any given
time and reduces errors to zero.
, Step 5. All crates arrive at a central location where bar
codes are matched with order numbers. Items are mo ved
from the crates to chutes, where they slide into card-
board boxes. Sophisticated technolo gy allows items
picked by severa l people in different parts of the ware-
house to simultaneou sly arrive in the sa me chute and
be packed in one box.
c Step 6. If gift wrapping was selected, this is done
by hand .
< Step 7. Boxes are packed, taped, weighed, labeled,
and routed to one of 40 truck bays in the warehouse.
From there, they go to UPS or the USPS. The items are
sca nned continuously.
Amazon.com rents out space in its wa rehouse and provides
logistic services to other companies. It takes orders for them,
too. How does it work?
1. Sellers label, pack, and ship items to Amazon.com.
2. When Amazon.com receives sellers' items, they store
them until an order is placed .
3. When an order is placed, Amazon.com will pick, pack,
and ship the item , and may combine it with other items
in the same order.
4. Amazon.com manages postorder customer service
and handles return s as needed.

The Results
Each warehouse can delive r 200,000 or more pieces a day. All
five warehouses must handle more than 3 million pieces a day
during the busiest part of the holiday seas on. However, in
2004, the warehouses were able to deliver only 1 million pieces
a day, creating some delays during peak periods. Amazon.com
leases space to other reta ilers with online bu si nesses, such as
Target and Toys uR" Us. The system gives Amazon.com the
ability to offer lower prices and stay competitive, especially
beca use the company is becoming a huge online marketplace
that sells thousa nd s of items. As of 2007, profitability was
increasing steadily.
To increase efficiency, Amazon.com combines items into
one shipment if they are small enough. Shipping warehouses
do not handle returns of unwanted merchandise-the Altrec.com
warehouse in Auburn , Washington , handles returns .
Sources: Compiled from news items at amazon. com (accessed
March 2009), Heizer and Render (2007), and LaMonica (20 06).

'---
510 Part 5; EC Support Services

( W HAT WE CAN LEARN ..• )

The Amazon.com case illustrates the complexity of order fulfillment by a large e-tailer and some of the solutions employed. Order fulfill-
ment is a major EC support service, and it is the topic of this chapter. This chapter examines other support services, primarily acquisi-
tion of products and services, finance and accounting services, and customer services and customer relationship management (CRM).

12.1 ORD ER FU LFILLME NT AND LOGISTICS-

AN OVERVIEW
The implementation of most EC applications requires the use of support services. The most
obvious support services are security (Chapter 10), payments (Chapter 11), infrastructure and
technology (Online Chapter 18), and order fulfillment and logistics (this chapter). Most of the
seryices are relevant for both B2C and B2B . Exhibit 12.1 summarizes the major services
described in these chapters, which organizes services into the following categories, as suggested
by the Delphi Group (delphigroup .com); e-infrastructure, e-process, e-markets, e-content,
e-communities, and e-services . The exhibit shows representative topics in each category.
The first three sections of the chapter give an overview of order fulfillment and logistics.
T aking orders over the Internet could well be the easy part ofB2C. Fulfillment and deli-
very to customers' doors can be the tricky parts. Many e-tailers have experienced fulfillment
problems, especially during the 1990s . Amazon.com, for example, which initially operated as
a totally virtual company, added physical warehouses w:ith thousands of employees in order to
expedite deliveries and reduce order fulfillment costs.

EXHIBIT 12.1 E·Commerce Services _ _ _ _

E-Infrastructure E-Process E-Markets

Order Marketing , Affiliate

Consulting Fulfilfment and Sales, Programs, Data
'----
Services Logistics Advertising Mining

I System
I I
j
Development
Web Site Design

Integration
Standards
t---

r---
I E-Commun ities

Business Partners

EC Applications Government
Portals, Buy-Side, Sell-Side,
Web Hosting, Auctions, Exchanges
-- Customers
Security, Others

Suppliers

~
Networks,
t---
EDI, Extranets
E-Services
__Lr-----------~--~I
~G
E-Catalogs Other Directory
Services Services

Management and Analysis

Sources : Adapted fro m ChiD (19 97) , p. 18, fro m Murphy (2004), and From Natural Fusio n ( lI atll ra lFli sioII. COIll) .