Amazon still wants to be queen of the jungle

Online giant Amazon.com is still growing, and still making huge losses. Its new global advertising strategy continues the search for profit. By Gary Thurtle

Amazon.com, the e-commerce pioneer which once basked in the warm glow of the Internet boom, is now shivering in the chill wind blowing across the bombed-out new media economy.

Amazon.com’s decision to shift its &£35m global advertising account into Wieden & Kennedy is part of the e-commerce giant’s desire to grow into an international company.

Amazon has revealed its strategy of building outside its core markets in the US, UK, Germany and France and has dropped HHCL & Partners because of its lack of a global network. Wieden’s task will be to bolster Amazon as it tries to expand, following a dismal series of financial results.

After hitting on the novel idea of selling books on the Web in the mid-Nineties, the US giant went from strength to strength. But Amazon couldn’t escape last year’s implosion of technology stocks, which sent its shares plummeting. Now Amazon is hoping for a resurgent year to rescue its falling share price.

The company’s British arm, Amazon.co.uk, last month bolstered its retail presence by introducing electronic goods. Unlike its US parent, the UK division has stuck to selling core products – books, videos and CDs – since its launch in 1998. It was the most visited UK retail website in April this year, according to data analyst Jupiter MMXI, with 1.7 million users. Its nearest rival in the UK is Amazon.com, its parent, with 1.1 million users.

There is general support from City experts for Amazon.co.uk’s move into electronic goods, which have been sold on the US website since 1998. They point to high margins on new products, such as digital cameras and flat-screen TVs. But Amazon is in a challenging position. New media experts describe the company as “walking a tightrope” between diversifying to make money and potentially over-stretching and undermining its core brands.

As Amazon.co.uk makes its foray into the electronic goods arena, analysts believe any new ads should push the strength of the brand and the quality of service, rather than putting individual products in the spotlight.

Gartner Europe e-business research director at Mark Raskino says the diversification will work because the company has developed a “gold standard” reputation for customer service.

“Amazon has built up trust by selling cheap, low-risk products. As consumers’ confidence in the company and the Web increases, they feel more comfortable buying more expensive products online. It’s a sensible model,” says Raskino.

Amazon.co.uk is already being quite canny in its marketing. It is offering three books for &£10, drawing on its established strengths in book-selling to lure people onto the site to view other products.

“Amazon’s always been good at tactical marketing,” says Jupiter MMXI senior analyst Nick Jones. “I think it has a battle ahead of it to raise awareness of the electrical range, especially as companies like Comet and Dixons are online.

“Amazon’s new offline work needs to be focused. The last campaign stood out because it homed in on speedy service and delivery.”

The e-commerce giant’s latest financial results suggest it’s starting to deliver on its promise. For the first quarter of 2001 it reported worldwide sales of $700m (&£507m), compared to $574m (&£415m) in the same period last year. Overall, Amazon made an operating loss of $49m (&£35m) in the first quarter of last year, compared to $99m (&£72m) this year. Spend per customer in 2000 was $134 (&£97), up 19 per cent. Amazon had 20 million customers worldwide last year, compared with 14 million in 1999.

The company expects to break even operationally by the beginning of next year. But, it will still have to pay off debts of $2bn (&£1.4bn) over the next seven years. Judging by the pattern of sales growth since 1994, that is going to be difficult.

Electrical goods may be the first of many new product ranges rolled out on Amazon.co.uk. The US site has already dabbled with diverse lines, including kitchen utensils and DIY equipment. It also sells dual-branded toys and baby products, on behalf of Toys R Us and Babies R Us, and has agreed a similar deal with bookshop chain Borders.

Borders and Toys R Us buy the merchandise and Amazon.com provides the Web administration. All three companies have linking sites.

There is speculation that similar services will appear on Amazon.co.uk. But the company has already been stung by its disastrous investments in US home style site Living.com and pet-food specialist Pets.com, both of which ceased trading last year.

Amazon’s founder and chief executive Jeff Bezos admitted in his annual report last year that the e-commerce “land rush” is over. He wrote: “We overestimated how much time would be available to enter categories.”

Raskino says there could be scope for Amazon.co.uk to sell DIY equipment in the UK, and highlights clothing as a possible line. He believes that, outside the US, Amazon would probably partner only pan-European companies in order to make any deal profitable. Amazon currently operates in the UK, Germany and France.

Daniel O’Boyle Kelly, senior analyst at IDC, adds: “Internet companies, including Amazon, are now taking a more considered approach. They’re concentrating more on the kind of returns they are going to get.”

With the dot-com eruption fading, Amazon is taking a measured approach to new ventures, aligning its online talents with the merchandising skills of traditional retailers.

If, as predicted, the economic climate gets frostier, Amazon will have to manage carefully its moves into new areas, show it has learnt from its mistakes, assuage City sceptics and successfully tackle its debts.

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