Holidays to Put Amazon Strategy to the Test

Barely five years ago, Jeff Bezos hooked up a few computers in the garage of his suburban Seattle home and flipped the switch on his dream to launch “Earth’s biggest bookstore” by harnessing this newfangled e-commerce thing everyone was talking about.

An initial public offering later, Bezos was a 34-year-old billionaire, joining the pantheon of brilliant nerd heroes who are rewriting the rules on everything in business.

Now comes the hard part.

Bezos could have called his venture Bookshop.com or Buybooks.com, but it was no accident that he found inspiration in a river that is said to have an endless number of branches. Bezos believes that through an extraordinary advertising blitz he has made Amazon.com synonymous with e-commerce and that he can sell anything online, from microwave ovens to garden rakes.

As the important Christmas shopping season begins, the pursuit of that vision will test the limits of this relatively new commercial frontier.

It also will test the limits of the Amazon brand and provide clues to a multibillion-dollar question: Can Amazon.com--can any Internet site--overcome a long list of marketing and logistical hurdles and succeed in becoming the Wal-Mart of the Web?

“The short answer, I think, is no,” said Andy Bartels, vice president of e-commerce at Giga Information Group, a Cambridge, Mass., consulting firm.

Amazon’s hard-built franchise in online bookselling might not translate well to other categories, particularly products that shoppers like to touch before they buy, Bartels and some other analysts say. They question whether online shoppers who trust Amazon for books will have the same level of confidence when it comes to buying a belt sander or a gas grill.

“The whole valuation of Amazon has been based upon this open-ended vision that Bezos created, that it will become the Wal-Mart of the Internet,” Bartels said. “It has learned, painfully, that it can’t.”

Not everyone agrees with that gloomy assessment, and Amazon retains some strong allies in the financial world. Tom H. Wyman, a vice president at J.P. Morgan Securities in San Francisco, said Amazon is seeing rapid growth in most of its new categories and he thinks the company is on a steady path to profitability.

Wyman predicted that as online shopping continues to grow, even the best of the competition--such as Wal-Mart.com, Kmart’s BlueLight.com and Buy.com--will all come up short against Amazon.

“In the end,” Wyman said, “they dominate.”

That confidence pushed Amazon’s stock to $113 a share last December. But in a steady sell-off through most of the year, Amazon lost as much as 80% of that value--a result of investors’ growing doubts about Amazon’s mega-mall aspirations.

The wake-up on Wall Street began after a disappointing 1999 Christmas season that left Amazon with tens of millions of dollars in unsold inventory. Amazon’s picks didn’t match the demand, and a growing number of investors began to question the foundation of Bezos’ sell-everything philosophy.

Amazon offers 18 million items for sale. It is a statistic Bezos loves and one that petrifies some analysts, who wonder how any online company can select, stock and ship 18 million different items and maintain the lean infrastructure that is supposed to give virtual stores the edge.

This Christmas, Amazon is trying a new tack, teaming up with Toys R Us to share the strength of each other’s brands. Amazon will handle the ordering and the shipping, Toys R Us will take care of inventory.

The partnership has been widely hailed, although some analysts see Amazon’s growing use of retail partners as an acknowledgment by Bezos that he can’t conquer the e-tail world on his own.

Bezos doesn’t sweat the distinction. “We’re selling things ourselves directly, but we’re also selling things through partnerships,” he said.

Amazon pursued the Toys R Us deal because it was a win-win proposition, Bezos said, not because Amazon couldn’t have kept the toyshop open on its own. And he brushes off bricks-and-mortar comparisons, saying he isn’t interested in building an Internet version of Wal-Mart or Mall of America.

“We want to be the Amazon.com of the Internet,” he said.

Bezos, a Princeton-educated computer scientist, was a restless investment banker who ditched Wall Street on a hunch that there was big money to be made getting in on the ground floor of online shopping. He compiled a list of potential merchandise categories and crossed them off one by one until he settled on books.

It might have seemed an unlikely choice; bookstores, after all, were among the better retailers at delivering an inviting shopping experience.

But though mega-stores such as Barnes & Noble and Borders were enticing buyers with cappuccino and comfy couches, Bezos was offering a fast, no-nonsense way to order titles. Browsing and impulse buys would be a problem, but Bezos was betting that some books were a commodity purchase, that shoppers knew exactly what they wanted and would welcome an easy way to get it. What buyers lost in ambience, they would make up in convenience and, later, in price.

A few years later, even as the company was burning through investors’ money, Amazon expanded to offer CDs, videos and DVDs. Then, like a marathon runner breaking from the pack, Bezos began a rapid expansion, racking up hundreds of millions in losses as Amazon expanded into broad new categories of merchandise.

All the while, Bezos stayed cool.

“This is the Kitty Hawk era of e-commerce,” he told analysts at a meeting in September. “We believe very firmly that e-commerce is in its infancy and that it’s very important to continue to make a certain prescribed number of bold bets in order to be prepared for this future.”

Bezos has made bold bets in toys, cars, electronics, lawn and garden equipment, cameras, health and beauty aids, tools and kitchenware. He’s set up sites in England, France and Germany. The merchandise is moving. Revenue has skyrocketed.

And Amazon is still losing money.

In the latest quarter, Amazon’s sales jumped 79%, to $638 million, but the company lost nearly a quarter billion dollars. Amazon’s core book business is making money now, but the red ink continues to flow thanks to Bezos’ bets that he can eventually turn a profit--a big profit--in other categories.

But Bezos may be trying to stretch the Amazon brand name too far, said Faye Landes, an analyst with Sanford C. Bernstein & Co. in New York. Landes ran focus groups this year to see whether computer users really knew about all of Amazon’s product lines. The findings: Even heavy Amazon users were mostly unaware that the Web site sold more than books and videos.

“You can’t go into Wal-Mart five times and not know what they carry. But apparently you can go onto Amazon 20 times and not be aware of the breadth of the assortment,” Landes said. “People have a very fixed image in their minds of what Amazon is. Look, Levi’s can’t sell shirts. McDonald’s can’t sell pizza. And I think it’s going to be a similar, if not more difficult, leap for Amazon to sell other things.”

More difficult, in part, because branding a store is especially tough on the Web, retail experts say. A bricks-and-mortar store can reinforce--or reinvent--its image in countless subtle ways. Signs can trumpet new arrivals. Key merchandise can be pushed to the entrances.

On the Internet, every customer walks into the store through a portal, or computer screen, rarely bigger than 19 inches in diameter. It’s simply harder to wow on the Web, retail observers say. And that may mean Earth’s biggest bookstore will have a tough go of it as Earth’s biggest pharmacy or Earth’s biggest toy store.

That’s heresy to Bezos, who raises no white flag over his efforts to become the ultimate superstore. If customers haven’t discovered the merchandise beyond the bookstore, Bezos says, it only means that his growth potential is greater.

That growth potential is virtually unlimited, said J.P. Morgan’s Wyman. Consumer electronics already brings in more revenue than any other category except books, and Wyman thinks it won’t be long before Amazon is making money on electronics.

He sees the company successfully expanding beyond merchandise, using the strength of its brand to make money in partnerships with online service companies, starting perhaps with a brokerage or a travel agency.

Amazon will show a profit by the end of next year, Wyman predicts, and he forecasts a staggering $100 billion in sales by the end of the decade. That would put Amazon far ahead of every other retailer today except Wal-Mart.

“It’s only a matter of time,” Wyman wrote in his latest report to investors, “before [Amazon] turns the skeptics into believers.”

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Hartford Courant staff writer John Moran contributed to this report.