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Can Amazon become the Wal-Mart of the Web?

Can Amazon become the Wal-Mart of the Web?
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First Published: Sun, Sep 20 2009. 09 51 PM IST

Inventory advantage: An Amazon employee in the Internet company’s Phoenix warehouse. Amazon is shaking up retailers as it moves beyond books to its goal of becoming a Web-size general store. Jim Wilso
Inventory advantage: An Amazon employee in the Internet company’s Phoenix warehouse. Amazon is shaking up retailers as it moves beyond books to its goal of becoming a Web-size general store. Jim Wilso
Updated: Sun, Sep 20 2009. 09 51 PM IST
Phoenix: The hum of 102 rooftop air conditioners and a chorus of beeping electric carts provide the acoustic backdrop in Amazon.com’s 605,000 sq. ft distribution facility on this city’s west side. But the centre’s employees can almost always hear Terry Jones.
On a recent summer afternoon, Jones, an “inbound support associate” making $12 (around Rs585) an hour, steered a hand-pushed cart through the packed aisles and shouted his location to everyone in earshot: “Cart coming through. Yup! Watch yourself, please!” Jones explained that he was just making his time at Amazon “joyful and fun” while complying with the company’s rigorous safety rules.
But his cries might double as a warning to the retail world: Amazon, the Web’s largest retailer, wants you to step aside.
Inventory advantage: An Amazon employee in the Internet company’s Phoenix warehouse. Amazon is shaking up retailers as it moves beyond books to its goal of becoming a Web-size general store. Jim Wilson/NYT
Fifteen years after Jeffrey P. Bezos founded the company as an online bookstore, Amazon is set to cross a significant threshold. Sometime later this year, if current trends continue, worldwide sales of media products—the books, movies and music that Amazon started with—will be surpassed for the first time by sales of other merchandise on the site. (That transition already occurred this year in its North American business.)
In other words, in an increasingly digital age, Amazon is quickly becoming the world’s general store. Alongside the books and CDs and DVDs are diapers and power drills, not to mention replacement car clutches and more arcane items such as the Jackalope Buck taxidermy mount.
“Amazon has gone from ‘that bookstore’ in people’s mind to a general online retailer, and that is a great place to be,” said Scot Wingo, chief executive of ChannelAdvisor, an eBay-backed company that helps stores such as Wal-Mart and J.C. Penney sell online. Wingo envisions e-commerce growing to 15% of overall retail in the next decade from around 7%. “If Amazon grows their market share throughout that period, and honestly I don’t see anything stopping it, that is pretty scary,” he said.
Indeed, Amazon has been gobbling e-commerce market share since 2006, taking away customers from eBay in particular. But its advances are shaking up the entire retail world. Giants such as Wal-Mart are warily replicating elements of its strategy, while small independent retailers in sporting goods and jewellery now worry their fate will be similar to that of small bookstores and independent video rental shops (remember those?).
Amazon’s expansion strategy has allowed it, almost alone among retailers, to thrive during the recession, even while its own media business has stagnated.
Over the last year, shoppers have bought fewer books, CDs and DVDs, in many cases opting for cheaper digital downloads. In the quarter ended June, for example, Amazon’s worldwide media sales grew only 1%, to $2.4 billion, highlighted by a slowdown in video games.
But during the same quarter, sales of other products, which the company lumps together on its balance sheet in a grouping dubbed “electronics and general merchandise”, grew by 35%, to $2.07 billion.
Its relentless ambition to sell more of everything is constantly on display these days. In July alone, Amazon introduced separate hubs on its site for outdoor sporting goods and cell phones and wireless plans. Then it capped the month by buying an emerging competitor, the online shoe and apparel retailer Zappos.com, in a stock exchange now worth at least $930 million.
Aside from using its stock and $3.1 billion in cash and marketable securities to make acquisitions, Amazon has fuelled its growth as a general retailer by nudging loyal customers to buy a greater variety of products by offering free shipping and speedy delivery with clubs such as the $79-a-year Amazon Prime.
Amazon executives are nonchalant about the shift to general retailing, regarding the moment as preordained destiny ever since the company announced its ambition to offer the biggest selection of goods on earth, before going public in 1997. But they have reason to feel vindicated: After the dot-com bust, some analysts thought the company could go broke trying to stock such a wide array of merchandise.
“It means we are becoming increasingly important in the lives of our customers, which has been our mission from the beginning,” said Jeff Wilke, Amazon’s senior vice president of North American retail. “We had the chance to earn the trust of the customer beyond media, and we took it.”
Amazon’s profit and margins have always been slender; it earned only $645 million in 2008, up 36% from the year before, compared to Wal-Mart’s $13.4 billion, up 5%. But Wall Street is more enamoured by the promise of the online retailer, valuing Amazon at around 60 times earnings and Wal-Mart at 15 times earnings.
“They don’t have to incur huge inventory carrying costs and can add product categories almost ad infinitum,” said Jeffrey Lindsay, an analyst at Sanford C. Bernstein. “Amazon has an almost magical business model in terms of inventory management.”
Like many small business owners, Ken Lombardi, the chief executive of his family’s 60-year-old Lombardi Sports in San Francisco, views Amazon as a source of some of his business troubles. Though his store has been hit hard by the recession and the expansion of a sporting goods chain in the Bay Area, Lombardi says that it is Amazon that has helped depress profit margins and snagged sales for basics such as silicone swim caps, undershirts and running shoes—which, he adds, Amazon can offer without California’s 8.25% sales tax.
“People used to come in to buy a pair of running shoes and we would sell them a shirt or a workout outfit. We’re losing that,” said Lombardi, who was recently forced to lay off a quarter of his 75-member staff.
In response to the gathering storm, Lombardi has overhauled his store, shrinking space for lagging items such as Crocs clogs—which are offered cheaply on Amazon. He has added space for newer, hotter-selling items such as Sanuk sandals, which are for sale on Amazon at about the same price. He also recently commissioned a new website to replace the static old one, which had not changed much over the years.
“All we can do is tell a story physically and let people touch and smell and feel the product, which they can’t do online,” Lombardi said, lamenting his store’s future. “I think we are doing everything we can.”
©2009/THE NEW YORK TIMES
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First Published: Sun, Sep 20 2009. 09 51 PM IST
More Topics: Amazon.com | Wal-Mart | Retail | Supermarket | Internet |