Transcript NBA 600: Session 8 E-Commerce Amazon.com 13 February 2003 Daniel Huttenlocher

NBA 600: Session 8
E-Commerce Amazon.com
13 February 2003
Daniel Huttenlocher
Today’s Class
 Retail electronic commerce
– Look at Amazon.com
• Where they are today
• How they got there
• What future holds – shopping platform
– Amazon’s 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
– World’s 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 don’t
 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 Amazon’s 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 Amazon’s 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 Amazon’s revenue
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Building Expensive Infrastructure
 Amazon’s 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% Q1‘99, 14% Q1‘01, 12% Q1‘02, 10.6% Q4‘02
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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
– Amazon’s 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 won’t 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. Amazon’s focus
– Contrast with kinds of offline brands that are
mainly about experience
 No overall design to IBM site in late ’90’s
– 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 you’ve 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 didn’t make it
 Some didn’t 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
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