NBA 600: Session 8 ECommerce Amazon.com 13 February 2003

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NBA 600 Session 8E-Commerce Amazon.com13
February 2003

• Daniel Huttenlocher

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Todays Class

• Retail electronic commerce
• Look at Amazon.com
• Where they are today
• How they got there
• What future holds shopping platform
• Amazons focus on user experience (UE)
• Leave eBay to communities, not a retailer
• Some electronic commerce statistics
• Multi channel shoppers
• Revisiting some failed businesses
• FreshDirect

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E-Commerce Amazon.com

• Launched in July 1995 with two goals
• Worlds largest selection of books
• High value given large number of titles
• Convenience that delights the customer
• Now a broad-based online retailer
• Core business BMV (books-music-video)
• Sales of 3.9B in 2002 Q4 up 33 y-o-y
• 17 ROIC, low-teens cost of capital (Lehman)
• Company predicts 15 sales growth in 2003
• 25-30M unique visitors per month (Nielsen)
• Estimates of about 50M active customers

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What Amazon.com Provides

• Online storefront user experience
• For own stores as well as partners and
  Marketplace merchants
• Marketplace is mall of independent merchants
• 23 of sales in Q1 2002 (Jupiter Media Metrix)
• Extensive focus on delightful user experience
• Driven many innovations, adopted others
• Payment processing
• Fulfillment
• Via own warehouses and partnerships with
  distributors
• Close ties with shippers (UPS, Fedex)

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AMZN Dominates Online Retail

• In addition to own site, operates sites for
• Toys-R-Us, Borders, CDNow, Virgin Megastore,
  Target, Drugstore.com
• These retailers have completely outsourced their
  online presence
• May handle own fulfillment though most dont
• Sales partnerships with about 50 other merchants,
  including
• Gap, Office Depot, Eddie Bauer, Circuit City,
  Nordstrom
• Maintain own separate online presence in addition
  to one on Amazons site

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How AMZN Got There

• Relentless focus on its two main goals
• Selection and convenience
• Required a certain scale of business to provide
  selection profitably
• In early years pursued growth necessary to
  achieve that scale
• Did not scale business at expense of convenience
  (delighting the customer)
• Grew quickly
• 1.64B sales in 1999
• 2.76B sales in 2000

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What Others Missed

• Many saw Amazons focus on growth as the goal
• It was not selection and convenience were
• Many pursued growth at any cost
• Buy.com focus on lowest prices on earth
• At cost of horrible customer service
• Hard to recover from bad reputation
• Focus on price without operational means to
  deliver it profitably
• Pets.com sales at below cost of goods
• Low value goods with high shipping costs
• Amazon did invest in it though

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AMZN Did Lose Billions

• Scaling while providing a delightful user
  experience was expensive
• But losses due to acquisitions, capital
  investments and operational inefficiencies
• Rather than cost of goods
• All could, in principle, be controlled over time
• Amazon did not engage in destructive focus on
  price
• Price leader relative to other channels, not
  other Internet sites
• Strategy seems to have paid off, Buy.com has
  (est.) 10 of Amazons revenue

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Building Expensive Infrastructure

• Amazons initial model was to outsource
  fulfillment
• Largely to Ingram a large book distributor
• Found hard to delight customers
• Shipping delays were not under their control
• Flexibility to ship in pieces, etc.
• Potential logistical advantages of operating high
  volume business
• In 1999 opened own distribution centers
• Rapidly drove down fulfillment costs ( sales)
• 17 Q199, 14 Q101, 12 Q102, 10.6 Q402

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Capital Markets Forced a Change

• Profitability rather than growth as best strategy
  to achieve goals
• Q4 2000 Bezos March to profitability
• Lehman report questioned whether cash necessary
  to survive the year, Q1 2001
• Potential problem for supplier credit relations
• Critical for operational costs
• March became a dash
• More open about what was profitable and by what
  measures
• Pursued strategies market allowed

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AMZN Marketplace

• Also in late 2000 started showing goods from
  independent vendors along side own merchandise
• Amazons merchandise description and pricing with
  links to other, generally used, versions
• Now also support sales of items not sold by
  Amazon itself
• Brings Amazon and eBay closer in terms of
  independent merchants and merchandise
• Different models auction versus fixed pricing
• eBay experimenting with fixed price
• Different consumer populations?

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A Page from WalMart Playbook

• In late 2001 Amazon started focusing more on
  price has driven growth
• Free shipping on orders over certain size
• Many studies show shipping costs are biggest
  impediment to shopping online
• Discounts on certain product categories
• E.g., books over 30
• Had achieved scale and operational efficiencies
  to enable price leadership
• Did not make price primary strategy until able
• Quickly dropping fulfillment costs gross sales

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Affording Free Shipping

• Amazon estimates free shipping will cost it 100M
  in 2003
• Currently available on orders over 25
• Longer shipping times for free delivery
• Flexibility to lower cost
• Consolidate into one shipment, get vendor to
  drop-ship, etc.
• Dropping TV advertising, relying on print,
  Internet, word of mouth
• Savings of 50M
• Resulting sales increase

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Not Damaging Reputation

• Peoples expectations for quality of interactions
  with Amazon are high
• Ease of use, selection, rapid delivery
• Does slower free shipping disappoint
• Expectation of same service even though told it
  wont be
• Ease of switching shipping options
• Focus on cost makes it important to better
  control inventory, avoid over stocking
• Amazon seems to be working bugs out of new
  approach, WSJ 1/9/03 anecdotal evidence

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Commonalities AMZN, FDX, DELL

• Exploit three ways that the Internet can deliver
  more value to customers
• Better information, service and selection
• Focus on information as value-added component of
  product or service
• Use as differentiator from other channels
• As grow, use as differentiator within channel
• Avoid competing on price until scale or
  efficiency allow it
• Start with premium product and move down
• May need price against established channels

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Where Online Commerce is Going

• Q4 02 growth estimated at about 24
• About 13B for the quarter
• Figures exclude travel sales
• Small portion of overall retail sales
• About 1.3 last year
• Growing considerably faster than offline
• 15-20 per year versus 2-5 per year
• At these rates, still only few percent in 5 years
• Changing demographics
• More closely mirrors overall retail spending
• Skewed to coastal cities, NY, LA, SF, DC, Seattle

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Doubleclick Study

• Compared Internet, catalog, retail store
• 33 only in stores (down from 36 in 01)
• 10 only online (up from 6 in 01)
• Price decreasing driver of Internet sales
• Still primary reason, but lower than 01
• Better selection increased as factor for online
  purchases over 01
• Return policies and price increased as factors
  for offline purchases over 01
• Convenience and trying the product decreased but
  remained most cited reasons

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User Experience is Everything

• Online the brand is the experience
• Major part of the offering, e.g. Amazons focus
• Contrast with kinds of offline brands that are
  mainly about experience
• No overall design to IBM site in late 90s
• Hard to use, most common requests were help
  button and search box
• Re-designed over 10 weeks, over 100 people
• Common layout, low download time, graphic design,
  navigability
• First week saw 84 drop in help button, 400
  increase in sales (NYT 8/30/99)

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AMZN Focus on Customer

• Company attracts people with customer focus not
  just in customer facing roles
• Including software developers
• Continuous testing in their usability lab
• Entire experience, not just Web interaction
• Tradeoff of new features versus clutter
• Metrics to evaluate each change
• Careful evaluation of how changes drive sales
• Leading the customer carefully
• E.g., with one-click addressing fears by making
  clear it was easy to cancel

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Customer Experience at AMZN

• Discovery
• Searching, browsing, recommendations,
  relatedness, what youve done on site
• Community
• Reviewers, merchants, spending time making site
  richer experience
• Shopping
• The bread and butter, has to be easy and fun
• Order monitoring
• Sale not over until customer happy with item(s)
• At least if want repeat business

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Revisiting E-Commerce Failures

• Some were just too early
• Level of comfort with online shopping
• E.g., much furniture bought offline not seen
• But Living.com didnt make it
• Some didnt fit online model well
• E.g., pet supplies
• Low value and high shipping cost items
• Some built un-sustainable costs/debt
• E.g., Webvan provided value beyond pricing
• FreshDirect giving online grocery a try in NYC

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FreshDirect Online Grocer

• Focus is on the food
• Modeled on Dell provide great choice and use
  Internet to deliver it
• With new manufacturing process
• Better quality and selection of fresh foods
• Prices 10-30 lower than Manhattan stores
• Fixed 3.95 delivery fee, minimum 40 order
• Deliver only at night and on weekends
• Direct from warehouse to customer
• Many items prepared in the warehouse
• Raised 120M goal 225M/yr sales by 04

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Summary

• Importance of user experience on brand
• Requires commitment across the company
• Requires common site design, navigation
• But content needs to be accurate, so best under
  control of individual business group/team
• Selection and convenience are big drivers of
  online commerce
• Price secondary focus for successful firms
• Perhaps getting less important for consumers
• Online community plays role too