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Wet Quarter Postpones Amazon's Desiccation While Kmart Drowns

Written By: Predrag Jakovljevic
Published On: February 7 2002

Event Summary

The market is confused again. Just when the notion that anything associated with online, dot-com', or prefixed with e' or i' meant a pass, non-viable business model, the logic was reversed by the recent financial reports of prominent representatives of both clicks' and bricks' camps.

On January 22, Amazon.com (NASDAQ: AMZN), one of the first online retailers (e-tailers) and the company used perennially as an example of a failed and money burning business model, released its fourth quarter and full year 2001 results — at long last, it has reported a profit. Moreover, the expectation for the future is that the improvement already seen during 2001 will continue and Amazon should be experiencing positive cash flow within next 12 months. The results themselves are even more impressive given that the company's demise had long been predicted and expected by Internet doomsayers.

The company reached its first billion quarter, and the revenues of $1.12 billion represent a 15% growth compared with $972 million in the same quarter last year. The revenue surge has largely been attributed to a massive order levels over the Christmas holiday, as well as to close to 30% of revenues coming from its international subsidiaries.

Ironically, on the same day, Kmart Corporation (NYSE: KM), the third largest and one of the oldest discount retailers in the US, announced it filed for Chapter 11 bankruptcy protection of its $17 billion assets. The Kmart's conundrum has long been its inability to position itself clearly within the retail market. It was caught in a twilight zone between an extremely efficient low-cost retailer, Wal-Mart, and a fashion-oriented brand-name discounter, Target. At the same time, the company was seemingly oblivious to customers' voices of dissatisfaction: from its poor customer service to indolent merchandising and outdated product lines.

Market Impact

Although Amazon has achieved what many have thought to be impossible, its results alone do not necessarily demonstrate the online business superiority over the "brick-and-mortar" one, and/or a very high level of consumer confidence throughout the economic slowdown. Conversely, Kmart's bankruptcy does not mean discount retailing is in trouble. Both cases, however, have symbolic, psychological, and financial meaning.

Amazon's performance is nevertheless an important milestone in the evolution of the dot-com phenomenon, as it may prove viability of online merchandizing (although not across the board). Amazon has always been brought to mind either as an example of what potential e-commerce offers, or as an example of how painful the road to achieving profitability this way can be. The fact that the company is now close to achieving positive cash flow might provide an encouragement to the industry.

The need for online purchasing, account management, e-billing etc. is indeed not only here to stay, but will likely grow in the future, as users pass the phase of disillusion ("How do I reverse the wrongly clicked transaction?" or "Where on earth are my goods?"), and enter the phase of clarification how beneficial and cool' the technology can be once it has been put well in place. Many have also turned to the convenience of the online Xmas shopping in the wake of the events of September 11, and due to occasional terrorist threats to shopping malls and other places of mass gathering.

In addition to business-to-consumer (B2C) e-commerce that Amazon represents, the buyer benefits of web-based business-to-business (B2B) e-sourcing continue to be documented in many industries as well. As the number of dot-coms dwindles, we still see some examples of highly focused exchanges with growth and a path towards profitability. EcFood.com and Logistics.com are examples of such exchanges in the food and transportation service industries, respectively (see ecFood Approaches Profitability - An Internet Trading Exchange Bright Spot, and Logistics.com Might Prove An Internet Success Story After All).

This does not mean that we unconditionally endorse Amazon's CEO's philosophy "if we build they will come", as that has often been modified as the process progresses. The company is not on easy street yet either, but many have stopped expecting its demise any time soon . Much of its recent success has come from its ability to tremendously improve customer service (order tracking and fulfillment) since the all but unacceptably poor delivery record two seasons ago, with improving efficiency (partly through the consolidation/reduction of warehouses and staff members), and while also offering reasonably priced quality products across a number of segments (a wide selection).

In the Usfor example, Amazon is providing mobile telephones, palmtops, household equipment and other goods in addition to the usual books, CDs, DVDs, computer games and other software. All the above reasons of success have been the traditional tenets of business, and nothing pertinent only to the new, Internet economy'. The company has also announced further savings for customers by adding a free delivery option for qualifying orders over $99. That should alleviate much of customers' resentment towards hidden costs (shipping and sales tax) that often equal the price of one book or CD, as well as raising the bar for its competitors.

On the other hand, Kmart seems to have fallen into complacency and to not sticking to the above traditional business tenets impressive customer service, constant innovation that keeps customers' attention, and cost savings. Kmart did attempt to harness technology at least to address supply chain efficiency, though. By deploying a number of supply chain management products including i2 Technologies and EXE Technologies, the company launched an ambitious renovation attempt to improve supply chain systems, with the aim to reduce store-level out-of-stocks and to increase inventory turns.

Unfortunately, Kmart had seemingly fallen prey to the misperception that packaged applications can run a complex organization of its size in a plain vanilla mode, without significant modification, and the project has all but stalled. One can imagine that a great part of Amazon's huge liability can be attributed exactly to a significant applications software investment (both in license and in its subsequent tweaking). Without that effort, one could hardly imagine Amazon's current ability to let you know exactly when, for example., UPS is going to deliver your order, or those, sometimes annoying personalized promotional offers or agents that inform' you that "The most of folks that have bought The Bridget Jones' Diary' book have also bought that and that".

User Recommendations

There is no need for much recommendation to existing and potential Amazon users, given that the risk of a loss in case of a company bankruptcy is negligible. As we are not financial analysts, we will not speculate whether the Amazon's stock price is too high or too low. It is all the matter of individual preference whether to engage in Internet shopping, and it is, however, certain that Amazon will attract new business on condition it continues with good service, wide selection, and reasonable price incentives.

On a personal note, I, for one, am not a regular Amazon user, partly because I prefer to flip the pages of the books in the local bookstore while sipping my coffee, and partly for being a petty soul and opting for used books or CDs at a shop in my neighborhood instead. I also hate to pay for the shipping costs, which can also occur if I choose to return the goods. The several times that I have used Amazon's services though, either as I needed some item in a rush or as I had to use a gift certificate, have caused me evolve from being initially unimpressed by the level of service to now being delighted by the selection of the catalogue, the ease of payment, the accuracy of the order status, and the speed of delivery.

On a more general note though, Web-based sourcing is a new tool that extends the efforts of many businesses' existing procurement efforts as well. Companies should therefore evaluate web-based sourcing to lower their cost and improve the quality of their purchasing operations. Mid-sized companies should be especially attracted to these approaches, as their large counterparts can also afford to invest in private exchanges. Web-based sourcing has proven to provide mid-sized companies with these same benefits at a fraction of the cost. To that end, there may still be many Internet startups or established companies whose products can provide a true value proposition, and both users and investors should not necessarily be repelled by the company's dot-com connotation, although the risk of their product acquisition cannot be denied or neglected.

On their part, the likes of Amazon, Logistics.com, and ecFood should continue their focused approach to their respective customers and its focus on profitability. They should further increase their market awareness efforts to become a better-known name within their target market, particularly the latter two, as Amazon has long past behind that problem.

 
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