Is Amazon Overgrown?
Amazon.com was criticized last week for over-expanding its product offerings. Today, Amazon's Chairman and Chief Executive Officer Jeff Bezos answered the charges, and said his company intends to expand into many more product categories. What do Fools like Jeff Fischer and members of our community think of all this? Read on to find out.
By
Motley Fool Staff
October 9, 2000
Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %>, the online retailer of everything from books to buckets to beauty supplies, thumbed its nose today at criticisms that it's overextending its product reach. In an interview with Reuters, Amazon's Chairman and Chief Executive Officer Jeff Bezos said: "We will continue to do deals like the photo deal and we'll also continue to enter new product categories."
"This model works," continued Bezos. "Selection is an advantage, not a disadvantage." He went on the say that he was sure his company would be profitable eventually, but wouldn't disclose when that might actually occur. He said the company will continue to expand its product offerings both on its own, and through partnerships like the one it has with Toys "R" Us <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TOY)") else Response.Write("(NYSE: TOY)") end if %>.
Who's right? Will Amazon succeed by being your one-stop shop for everything online, or should it retrain its focus on meeting more limited online shopping needs? Read what some Fools, community members, and the analyst who ignited the fire last week think, and then let us know what you think by posting to our Amazon discussion board.
Jeff Fischer, Motley Fool Research Writer and Manager of the Rule Breaker and Drip Portfolios
Talk about ambitious! In an interview today, Jeff Bezos said that Amazon would eventually have "thousands and thousands" of partners and wants to have a local presence in every country in the world. This is part of Amazon's "multi-decade goal" of selling everything possible from its site. Recently, it began offering cars. Judging from today's interview, how long until Amazon sells homes, boats, and even small airplanes?
One question I have: Can Amazon's brand continually expand in consumer's minds to include all the new product offerings? So far, the brand seems to have expanded fairly well, and Amazon claims that its new product divisions are performing.
Given this, I do like the idea of Amazon partnering with strong inventory-carrying companies to obtain the site's diverse product goal. Bezos said that they will enter partnerships because they can't do it all on their own. I would prefer, however, that he would say, "We will partner because there are many product categories that we would not want to carry ourselves, no matter what." It seems, however, that they'll not sell certain products simply out of necessity, rather than due to good business decisions. That raises a concern, because if true, it means that Amazon will still enter less-than-attractive product lines to reach its diversity goal.
I'd rather have Amazon partner for any and all product lines that are not healthy to the bottom line in a meaningful way long term. I would be encouraged, for example, if Amazon stopped selling lawn and patio furniture itself and only partnered to sell it, because I find it hard to imagine Amazon being very profitable when stocking and shipping this kind of inventory. So, I want to hear Amazon say that it will only carry inventory that is most beneficial to carry, and it will leave all the low margin, risky items to partners. This type of attitude would prove that Amazon sees itself in the position of power that I believe it should be in and leverage.
Overall at this point, if Amazon eventually proves with financial results that it has a sustainable, profitable, strategy -- one that can keep growing -- the stock is going to take off, because I don't believe that many people think Amazon will ever be very profitable, or profitable at all. Three years ago, many people believed that it could be. Today is a different story. So, until we see positive numbers, what Amazon says about profits "some day" will continue to be met with skepticism from most.
Brian Lund, Co-manager of the Rule Breaker Portfolio
Amazon has gotten itself in trouble in the past through diversifying into new product categories. Part of the problem was that they got into categories that they didn't fully understand, causing inventory inefficiencies in departments like toys and electronics, which wreaked havoc on their working capital management. Another problem is that some of the categories didn't fit Amazon's medium very well. It's just not easy to sell table saws profitably on the Internet.
That doesn't mean, however, that Amazon should cease expansion. It just needs to be more selective when it chooses new product categories and to form partnerships with companies experienced in those categories.
Paul Commins, Rule Breaker Portfolio Writer
As a parent, I always enjoy a good Jeff Bezos interview. I find that he's the only man I know who says "Just wait until Christmas!" more often than I do. I don't know about you folks, but now that the Y2K scare is over, I'm always looking for a good price on over-stocked survival gear. Perhaps I'll find a 9000 Watt, Tri-Fuel Generator in my Christmas stocking this year? Are you reading this honey? You can pick one up for only two grand from Amazon.com!
C'mon, Jeff. This Amazon thing isn't about this year's Christmas sales. Gimme a break. And, recent Wall Street reports aren't telling us anything that wasn't well known already. This is all a bunch of hot air. Anyway you slice it, Amazon has become the ultimate risky stock bet. Now featuring a negative book value and junk-bond class debt, Amazon has never been closer to not making it.
Given the suddenly empty e-tailing field, this seems like prime time for a re-focused emphasis on high-margin products and partnerships that get Amazon out of the inventory and fulfillment business entirely. Certainly the photo-finishing piece of the recent store addition fits this bill, but it's just one small step. A nice next step would be for Jeff to realize that he'll never make a profit selling weed wacker replacment spools over the Internet. Expansion is fine, even necessary. But the ultimate Amazon answer can't be big retail alone. It's the high margin retail that defines the promise.
Paul Larson, Motley Fool Research Writer Covering Amazon
I think today's news comes as little surprise to those of us who have followed Amazon for some time now. Amazon has always been, for better or worse, an extremely aggressive company, and I don't see its lofty goals changing just because an analyst or two has concerns about Amazon overextending. Amazon still wants to be the place to shop for just about anything online
I have to agree with Jeff Bezos that selection is a competitive advantage, not a disadvantage. Plus, opening new stores gives the company the opportunity to leverage its online expertise and its enormous amount of customer intelligence. That said, I think it needs to move very carefully into its newest categories. The last two major deals that Amazon announced -- its joint venture with Toys "R" Us and its online photo shop -- make a lot more sense to me than some of its earlier store openings, say the lawn and patio store.
The Motley Fool Community
One of the main reasons for the assertion that there is no way Amazon can make money distributing goods this way is that (shock!) different products ordered at the same time by the same customer arrive in different shipments. This must be bad. Well, what if Amazon, which has a little bit of a track record in delivering products to customers, determined that the best economy of delivery was based on delivering distinct product lines from different distribution centers? In scale, a DC [distribution center] built to deliver thousands and thousands and thousands of tools might just be cheaper than one DC that delivers tools, books, grills, and DVDs. I would bet that Amazon spent all of last year acquiring key distribution center space (and no, I bet none of it is "unused") and has by now created several key BMV distribution centers, and several key specialty DCs. -- majormouser
What might a profitable business model be? I think to go back to it's core competencies -- selling books, music, and videos. Bezos did say that at one point, in 1997, that they had become profitable selling books and music. That's when they lost their way by trying to become Wal-Mart. And it was through no fault of his own. Wall Street kept throwing money at him and to catch it, he threw back every hook he could think of, from lawn furniture to RV accessories. Everyone was drunk with the promise of the Net and it was an easy trap (only obvious in hindsight) to fall into. And I guess he just kept thinking that with all this money available to us, something will stick, something will click and we'll be home free. -- Crisvin
The Media and the Wise
Robertson Stephens retail analyst Lauren Cooks Levitan took some shots at Amazon last week over its expanding product base. In a Reuters story, she questioned Amazon's ability to ever achieve and sustain profitability with its current desire to sell everything to everyone. Selling so many disparate products to customers will be a strain on Amazon's resources, and according to Levitan, the company will have a hard time becoming efficient enough to stay profitable. She also specifically questioned the costs Amazon incurs for shipping.
Your Turn:
Do you think Amazon should be focusing on books, videos, and CDs, or do you think the company can succeed by selling tons of different products? Talk about it with other Fools on our Amazon discussion board, plus take our poll below.
What do you think is the best path for Amazon to follow from here?
* Go back to focusing on just books, and maybe CDs and videos
* Keep expanding, but mainly through deals like the one with Toys "R" Us
* Stop planning additional product categories altogether
* There's no hope for Amazon no matter what
* Other (post your reply!)
Vote now!
