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Commentary: An e-tailing milestone

Earnings of a penny a share would not normally be cause for celebration. But for Amazon.com, that figure--its first quarterly net profit--shows it's possible to profit from online retailing.

By Charles Abrams, Gartner Analyst

Earnings of a penny a share would not normally be cause for celebration. But for Amazon.com, that figure, recorded in last year's final quarter, was its first quarterly net profit since the company started up in 1995.

That's right on schedule in our book.

See news story:
Amazon posts its first net profit
In October 2000, Gartner forecast that Amazon would reach this goal in the fourth quarter of 2001.

Amazon has long been seen as the key player in selling goods to consumers over the Internet. That's partly because the company was very good at it. And there was a general feeling that if Amazon failed, the whole idea of selling over the Internet would fail.

Now that Amazon has announced its first quarterly profit, memories of the Peapod and Webvan failures will fade as businesses register this milestone.

Amazon's profit in the fourth quarter of 2001 was $5.1 million, compared with a loss of $545.1 million in the year-earlier period. For the full year, Amazon still showed a net loss of $567.3 million. But that was less than half the previous year's loss of $1.4 billion.

The quarter's profit was less than 1 percent of sales, and there would have been a loss but for a $16.3 million gain on foreign exchange. Amazon has been taking painful steps to reduce costs, such as a major restructuring effort that closed four main support centers and cost 1,300 jobs. Restructuring does not always deliver benefits, but in Amazon's case, fulfillment expenses are down 17 percent in the quarter, and cuts elsewhere meant total operating expenses fell 53 percent.

More impressive, however, was Amazon's sales performance. In a generally weak economy, it pushed sales up 15 percent to $1.1 billion for the quarter. Amazon was probably helped by some U.S. consumers being reluctant to visit stores for holiday shopping. But the company has been effective at discovering customers' interests and persuading those customers to spend more on each visit.

CEO Jeff Bezos said Amazon will continue to be a retailer that works hard to lower prices. That strategy is different from the deep discounting that Amazon used to offer. Consumers value convenience more than price from online retailers. Amazon can certainly deliver convenience, and it has shown that online retailing is becoming accepted. It is possible to make a profit from e-tailing.

(For related commentary on the maturity of consumer e-commerce, see Gartner.com.)

Entire contents, Copyright © 2002 Gartner, Inc. All rights reserved. The information contained herein represents Gartner's initial commentary and analysis and has been obtained from sources believed to be reliable. Positions taken are subject to change as more information becomes available and further analysis is undertaken. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of the information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.