Last week Amazon.com announced that it had made an annual profit for the very first time. They racked up a profit of thirty-nine million dollars, compared to a loss of one hundred forty-nine million just a year ago. It's quite a milestone.
After all, it took Amazon almost eight years to have a single profitable quarter. Until last year, it had not even put two profitable quarters together back to back.
Jeff Bezos founded Amazon in 1994 as the perfect Internet business. He was selling hedge fund shares when the Net came along and figured it would be a great new tool for business. So he sat down to figure out what kind of business would profit most.
He considered several things before he settled on books. Books are a commodity. The titles that you buy from Barnes and Noble or from a local independent bookshop or from Amazon are all the same. Unlike food, books don't spoil. They're relatively easy to sort, stack, and ship. Lots of people buy books. It's a huge market.
Rigorous analysis is one of the keys to Bezos' and Amazon's success. Folks who know him will tell you that Bezos may appear to be a bit of a goof when you see him clowning around in interviews or bouncing on a trampoline for a Fortune Magazine picture. But when it's time to get down to business, he's one of the strongest data-driven CEOs on the planet, the kind that merits comparison with folks like Michael Dell, Jack Welch, and Sam Walton.
Originally, the idea was that Amazon would handle the basic purchase transaction and outsource everything else. It seemed like a good idea at the time. But, it wasn't long before Bezos figured out that if he really wanted to deliver a great customer experience, he would have to control more than just the Web site. That led to a decision to build some warehouses.
That decision to build warehouses tells us a lot about Jeff Bezos. It tells us that he obsesses about the customer experience at Amazon. It tells us that he's willing to abandon his original plan if that plan isn't working. It reminds us that underlying that goofy exterior is a data-driven heart. And it tells us that he's willing to bet the future on his decisions.
When he decided to build warehouses, he bet big. Amazon built six warehouses, just about the minimum needed to cover the United States effectively. It didn't just build simple boxes. Instead, the Amazon warehouses are state-of-the-art robotic-picking operations. Today they work great. In the beginning, they didn't.
In the beginning the warehouses looked like they might never work. And the investment press let Bezos have it. They said investing in all those warehouses was dumb. Bezos thought otherwise.
He'd looked at the numbers. He understood the difference between a flawed decision (outsourcing everything but the Web site) and flawed execution (warehouses you needed that didn't work like they should).
Over time, the warehouses have become more and more efficient. Today, they are part of the reason why Amazon can deliver a superb level of customer service as well as astoundingly high inventory turns. The average for most retailers stays well below fifteen times inventory per year, but Bezos' company is well above twenty.
That's not all. Today's Amazon warehouses can handle about three times the volume they could manage in 1999 while eating up a far smaller percentage of Amazon's revenues.
Right now it might be déjà vu all over again for Bezos. When Amazon announced its first profit last week, its stock price actually dropped. Several analysts said that Amazon was giving up too much in discounts and free shipping to acquire new customers and that the company should have even more profit.
Once again, Bezos is justifying Amazon's strategy by looking at the numbers. He likes to point out that after actually testing a number of customer acquisition strategies over a couple of years, the company went with discounts and free shipping as the best way to build a solid customer base for the long term. What other things did he consider?
Probably the biggest was Network television. It's been a while now since Amazon advertised on network television, and the reason is that the numbers simply didn't add up. Television costs too much without producing the kinds of customers that ultimately produce profit.
In the process of working to improve the customer experience, Amazon has developed some incredible technology. There has been one click ordering and the technology to make an affiliate program work and the technology to make the warehouses run better and more efficiently.
Amazon developed that technology to sell its own stuff more effectively and to gain competitive advantage. But, there were more profits to be had out of this. "Why," you can imagine Bezos thinking, "don't we use our software to let other folks sell lots of their stuff on the Amazon site?"
Thus was born the new incarnation of the retail mall. In the physical world, the mall is a physical location anchored by one or more large, destination, stores, but including lots of other, smaller, stores.
In the early days of the Net, a lot of companies tried the mall concept. One company called IMall organized their mall by type of merchandise. If you wanted bookstores, you could check out several. If you wanted hardware stores, there were a bunch of those, too.
The smaller merchants didn't really have a lot to sell most of the time. The shopping software wasn't very good. There were lots of worries about security and using credit cards online. And so the concept went away until Amazon resurrected it.
The Amazon mall is different from Imall and its kin. In the Amazon version of the mall, what unites all the stores is simply the Web site on which they exist and the back end software that helps them sell their stuff.
For the last couple of years, we've bought toys for my grandsons from the Toys R Us connection on Amazon.com. Amazon runs the store under an agreement with Toys R Us, who maintains the brand. Guess what? While lots of other parts of Toys R Us went south during the last holiday season, there were big profits made on the Amazon site.
Amazon started by selling its own stuff on its site. Then Amazon leveraged its technology investment by allowing other merchants to do business on the Amazon site. The logical next step is to make the technology available to businesses and developers who have no connection with the Amazon site.
That's the big bet that Amazon is making right now. It's conceivable that within the next decade the major source for profits at Amazon will not be the sales of the books and CDs, etc. that Amazon sells for itself. Instead, it will be the share in the goods it sells for others and the money it makes by making its technology available so that others can sell their own stuff in other places.
There are several analysts who are worried about what the immediate future holds for Amazon, but I'm not real worried. First of all, the times are with the company.
While the total of all retail sales in the United States is building at a rate of about four percent a year, online retail has been increasing by better than twenty percent; and Amazon itself has been almost doubling that. Expect that to continue.
You can also expect the investment in backend software to pay off as other online merchants use it to improve their customer experience and profitability. But you can expect more, too.
Jeff Bezos and his crew are likely to work on improving the things they already do well, and may be finding some new things we - and they - haven't even thought of it yet. Of course, they'll analyze their ideas to find the most profitable ones. Jeff Bezos has shown us that he really knows how to get profit by the numbers.
