COMMENTARY--Maybe it was obvious all along, but it wasn't spelled out until yesterday: A profitable online retail business is just a front door.
Amazon.com (Nasdaq: AMZN) reported quarterly results yesterday. There weren't many surprises: Losses came in a bit narrower than First Call's consensus estimate; sales growth of books and other media grew at a relatively sluggish 2 percent; working capital declined; the company still expects to hit operating profitability by the fourth quarter.
It was an unremarkable quarter with an equally unremarkable analyst teleconference last night. "Frankly it was a boring call," Dain Rauscher Wessels analyst George Sutton writes in a research note released this morning.
And Amazon.com has turned out to be a boring company.
Sutton believes boring is good. He might be right, but that doesn't necessarily make Amazon.com appealing. If good is all you want, there are other companies out there.
Executives insist that their earnings targets are based on improved efficiency in all segments, but Amazon.com's own numbers indicate that its best profits have little to do with Amazon.com's ability to run the nuts-and-bolts of a retail operation. Services--which includes, among other things, the company's partnerships with companies like Toys "R" Us (NYSE: TOY)--generated a gross margin of 67 percent and operating margin of 10 percent, both well-above Amazon.com's other business categories.
In other words, the most profitable segment of Amazon.com wasn't retail at all, but rather auctions, zShops and operating Web sites for other retailers.
Amazon.com has always run excellent Web sites, with terrific search capabilities, compilations of user comments and easy formats that draw a user deeper into the network. I was sucked in myself this morning; I went to Amazon.com to look up figures on the company's investor relations Web site, and next thing I knew, I was going through customer comments on Crouching Tiger, Hidden Dragon. Sticky design at its best.
But being a great, let alone revolutionary, retailer takes more than just a notable Web site. It takes a lot of work with order fulfillment, warehousing, inventory management--everything involved with back-end functions and operating efficiency. And Amazon.com is far from the best in that category.
The company says it's getting better. It's largest revenue-generator, the media business, already shows a profit on the books.
Unfortunately, as any Amazon.com observer can tell you, that profit seems to have come at the expense of growth. Even for a large retailer--and Amazon.com's revenue doesn't seem large compared to giants such as K-Mart (NYSE: KM) or Wal-Mart (NYSE: WMT)--a 2 percent increase in revenue is a poor performance.
So it would seem that more of these Toys "R" Us-style deals would be a key element of Amazon.com's future profitability, although company executives last night publicly dismissed the notion. "We don't expect to rely on new partnerships to reach our profit goal," CEO Jeff Bezos said.
Of course he'll say that. What's he going to do, admit that Amazon.com's organic retail isn't working? That's a lot to ask the Man of Last Year to swallow.
More telling is the fact that Amazon.com keeps trying to hook up with brick-and-mortar counterparts. It's an arrangement that plays to everyone strengths: Amazon.com's mastery of online attractions, and traditional companies' experience with the real work of retail.
Amazon.com expects to announce at least one more major partnership this year. The company says its financial goals for 2001 don't require a deal, but Amazon.com wouldn't be cozying up to the companies it once aimed to bury unless it was an important long-term strategy.
First-quarter results would seem to indicate that Amazon.com's best chance for fat profits lies with others. Bezos will build a nifty online entryway, but his brick-and-mortar companions can provide the body that does all the hard work.
What Amazon.com does best is greeting people at the entrance, showing them around and operating the cash register. In essence, the company's best profits revolve around being an effective e-tailing consulting and services firm--not a terribly interesting specialty these days.
The respectable and more difficult task of keeping the store supplied and organized lies behind Amazon.com's doors, on the shelves and in the warehouses of real stores. 22GO >