Amazon, Will It Survive?

  • Category: Business
  • Words: 1559
  • Grade: 100
Background

Amazon.com opened its virtual doors in July 1995 with a mission to use the Internet to transform book buying into the fastest, easiest, and most enjoyable shopping experience possible. While their customer base and product offerings have grown considerably since their early days, they still maintain their founding commitment to customer satisfaction and the delivery of an educational and inspiring shopping experience.

Today, Amazon.com is the place to find and discover anything you want to buy online. They have been successful at getting 29 million people in more than 160 countries so far to make a purchase at their online shopping site.

Yet the questions on everyone's mind are, will they survive? Will they ever generate a profit? And If so when?

AMAZON'S POSITION IN THE MARKET

Consumers spent between $6.6 and $7.2 billion online in the fourth quarter of 2000, and an additional $9 to $10 billion offline as a direct result of their online shopping, according to the ecommercePulse report by Harris Interactive. (Robbins 2001)

Unsurprisingly, Amazon emerged as the biggest winner of the season. According to the report, Amazon captured 10 percent of all e-commerce sales made in the fourth quarter of 2000, and Amazon has also become the new market leader in two markets: Music/Video and Electronics.

"Amazon's strategy of leveraging its best-of-breed customer base into new vertical markets appears to be highly successful," said Marc Engel, E-commerce analyst at Harris Interactive.

Amazon increased its leadership position as a seller of books over BarnesandNoble.com, generating 61.5 percent of all online sales; overtook ColumbiaHouse.com in sales of music and videos with 24 percent of sales; and surpassed Sony.com, Crutchfield.com, and ValueAmerica.com in the Electronics category with 8.3 percent of the online market. Amazon improved its online Toy market ranking, gaining a 7.6 percent share in the fourth quarter for 1999. Amazon took a 3.6 percent share in Auctions. (Pastore, 2001)

All these figures lead me to believe that they are definitely the leaders in e-tailing. So why haven't they generated any profits? It sounds bizarre. these figures seem so strong yet they are still struggling. I'm not an expert but there is no doubt that their online capabilities are the best, maybe their overheads are too high? Maybe they employ to many people?


RETURNING A PROFIT IN THE FUTURE?

In my opinion Amazon is considered as the market leader of online e-tailing. Their web site is easy to use, their security and assurance policies are well set up and their one to one marketing and mass customerisation capabilities are great, they have managed to continue to increase revenue margins however they have not yet been able to generate a profit.

In the fourth quarter of last year, Amazon trimmed losses while sales grew. That quarter's revenue of $972 million marked a 44% increase over the same period in 1999. The good news however, is that executives foresee profitability in the fourth quarter of this year. The bad news is that achieving those profits will require cutting 15% of the workforce, or 1,300 jobs. Amazon's stock has sparked the shares to double in one month. From a low of $8 on Apr. 4, the stock is now trading at around $16. (Kontzer 2001)

It is also interesting to note that their losses are getting smaller. Amazon's operating loss narrowed to $49 million, from $99 million in the first quarter of 2000. While on the flip side their gross profit margins increased to 26.1%, up 3.8 points, due to improved inventory management and better deals with vendors.

As a result, based on my humble little opinion, I think they will be able to do it. I get the feeling that because Amazon is so big, all their problems arise out of poor management systems. The above figure outlined that once they improved their inventory management their gross profits increased. I also think that by cutting down staff and implementing better marketing strategies, they will be able to begin generating a profit.

E-Tailing and Its Future #1: Sense and Response

Determining weather E-tailing is going to survive is a very hard question to answer when all you base your opinion on is a pile of articles that could be biased anyway. So as a result I'm going to give my own humble little opinion.

Firstly we all know what E-Tailing is, no need for discussion there.

I think that there are a few issues that these e-tailing companies need to address in order for them to survive. The first one is a concept that we learned about a couple of weeks ago, Sense and Response. In such a dynamic market place, competition is so fierce that if your web site isn't providing a service that is user friendly and has floors in it, someone else is going to sweep the carpet from under your feet. As I understand sense and response is all about learning what the market want and providing it for them in the best possible way. This might sound really basic however this process involves many steps and marketing tools to successfully carry out.

Firstly, to understand the "sense" side or what the market wants, you need to gain information from your customers. Based on that information then the company is able to create a response. The sensing issues for an e-tailer could range from the distribution being to slow to the range of products isn't very good. Maybe a company might sense that their business e-tailing model isn't working and the consumers would like to trade in a different medium. Therefor, sensing in this new environment is critical.

Then there is the "response" side. As mentioned before if your company isn't responding to the cries of the public within days of knowing what the problem is, you'll loose all your customers. For every leading site such as Amazon, there are thousands of smaller ones sitting back waiting for them to make a mistake and then jump them.

E-Tailing and Its Future #2: Building Brand Recognition
In addition to my Sense and Response concept, I also think that the old economic strategy of building brand recognition is just as important in today's new emerging economy.

Take FTD.com, an American e-tailer that makes money. They are the e-tail arms of the famous national florists network just came off its second profitable quarter and is on track to stay in the black. So what's the secret says CEO Michael Soenen? It's brand: The name FTD has been synonymous with flowers for 90 years. "Our reputation is our strength," says Soenen. "We can deliver a great product, and customers know this." (Neuborne 2001)

Brand is a tremendous driver of online behaviour. That wasn't as clear in the early days of the Internet, when many online merchants were pure plays. But now, as the rest of the retail community has caught on to the new technology, consumers are voting, and brand matters. "It has a much stronger pull on the Internet than anyone expected," says Soenen. And that's not going to ease up anytime soon. (Neuborne, 2001)

If building brand recognition is a key factor to the success of e-tailing as the example suggests, the future might depend on just how long it takes for people to become loyal customers and trust the brand name. Such issues could also then depend on the company's ability to set up a system that can sense and respond to growing trends and problems.


CONCLUSIONS:

To tie this into the future of Amazon, I think that if Amazon can't do it then no-one else can. So far they have proved to be the market leaders in all areas of the e-tailing market. Their site is user friendly their one to one marketing strategies are the best and they have continued to steer the path for e-tailing over the past few years.

Statistics show that their loss margins a getting smaller and their revenue margins are increasing, however I still think that by predicting the future based on economic numbers is a little dangerous It's a good measure, yet how many people predicted the infamous market correction in 2000?

So on paper it looks like they will pull through, but I think that Amazon will survive also because their ability to sense and respond to customer needs and demands are second to none. Another key element in the survival of e-tailers has been their cash flow or more importantly their cash burn rates. Setting up an e-tailing site is very expensive and most companies have failed not because their site wasn't good enough but they burned to much cash and eventually investors pulled out.

I recently read that by the end of the March quarter this year Amazon had $600 million in cash reserves, while their overheads are being reduced further and further. Therefore I think that Amazon will make it"¦"¦.JUST! They have also managed to generate a great deal of brand recognition in such a short amount of time.

Therefor, I think that because Amazon is likely to survive the e-tailing renaissance due to the above factors, e-tailing is here to stay. The next argument is then, just how many of these e-tailing sites will survive the test of time. We'll leave that for another time shall we!



REFERENCES:

Kontzer, T 2001 Amazon Shrinks Staff
http://www.eoenabled.com/planetit/out.asp?i=Amazon&t=0&n=33662328&tid.html

Pastore, M 2001 Amazon Benefits From Q4 Spending Splurge
http://www.eoenabled.com/planetit/out.asp?i=Amazon&t=0&n =10&urlSpending+Surge

Stone, A 2001 Amazon: Starting On A Long Comeback Trail?
http://www.businessweek.com/technology/content/may2001/tc2001053_958.htm

Neuborne, Ellen 12/2/2001 E-Tailing's Future
http://www.businessweek.com/technology/content/feb2001/tc20010212_361.htm

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