Amazon Accelerates Its Expansion Beyond Books
Hammering home its ambitious plans to build itself into the dominant Internet retailer, Amazon.com Inc. today will start selling home improvement products, software, video games and gifts to grab more sales during the frenzied holiday shopping season.
To lure do-it-yourselfers into buying its circular saws and socket wrenches over the Internet, Amazon will subsidize shipping fees so that even a 500-pound table saw will cost only $4.95 for home delivery.
The $145-billion home improvement business has been relatively untouched by online sales, with Home Depot Inc. and Lowe’s Cos. still at least six months away from selling hardware, tools and other goods online, leaving a digital vacuum that Amazon is trying to fill.
To jump-start its entry into hardware sales, Amazon acquired Tool Crib of the North, a North Dakota catalog company. While the acquisition did not include Tool Crib’s five retail stores, Amazon acquired its mail-order operations, which will become Amazon’s first non-Internet retail business. Terms of the deal were not disclosed.
Stock analysts immediately cast doubt on the notion that Amazon poses a significant threat to the home improvement giants.
“Amazon’s core customer base likes reading books five days a week, not hammering nails five days a week,” wrote Merrill Lynch Vice President Peter Caruso. “Amazon will only target a small portion of the overall home improvement market.”
In anticipation of the company’s announcement, Amazon’s shares had jumped $13.06 on Monday to close at $78.
But on Tuesday, Amazon’s stock fell $7.19, or 9%, to $70.81 in heavy Nasdaq trading.
Amazon launched its business in 1995 by selling books online. But since last year it has been adding new products and now sells everything from toys to compact discs.
Its latest expansion, which adds online stores for computer software, video games and gifts, comes as Amazon and its rival online retailers spend heavily on marketing in hopes of capturing long-term customers.
In many cases, however, the outlays are expanding those companies’ quarterly losses. In the first nine months of this year, Amazon has lost $397 million on $964 million in revenue.
Jeff Bezos, founder and chief executive of the Seattle-based firm, said Tuesday that “to not invest at this time would be incredibly shortsighted. It is a critical category-formation time.”
Amazon’s moves into software and video games are predictable extensions of its current product line, but with home improvement, Amazon’s message seems to be that it is willing to enter any category.
The hurdles Amazon faces in establishing itself in online hardware are similar to those it is likely to encounter trying to expand into every other category.
Competitors Lowe’s and Home Depot have substantial assets to exploit when they do start selling online next year, including strong brand names, distribution relationships, advertising strategies and offline stores.
And although computers may seem like a natural area for Amazon, selling them brings more headaches than selling books.
“No one calls for technical support to read ‘War and Peace,’ ” said Jeff Bussgang, vice president of marketing for Open Market Inc., which develops e-commerce technology.
Even though Amazon began selling items other than books more than 18 months ago, analysts say the majority of Amazon’s revenue still comes from that core business.
But as difficult as it may be to extend its brand into pet supplies and pharmaceuticals--two other areas in which Amazon has invested--”they still have dominant [brand awareness] when it comes to e-commerce,” said Malcolm Maclachlan, an analyst with IDC Research.
