Amazon's JVC Sales Renew Margin Worries

While Wall Street puzzles over whether suppliers will stand by e-commerce giant Amazon.com (AMZN) as cash grows tight, a major electronics manufacturer whose products are sold on the Amazon site finds itself with oddly little to say on the matter.

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Officials at JVC, a Japanese maker of televisions, stereos and other gadgets, have become increasingly dismayed to see its products for sale on Amazon at cut-rate prices, even though JVC doesn't sell to Amazon. The pricing has prompted some JVC retail customers to complain to JVC, which in turn has been talking with Amazon management. Amazon officials weren't immediately available for comment. Amazon has 43 JVC items listed for sale.

By buying JVC products from someone other than the manufacturer, Amazon sidesteps restrictions on how it displays and sells the gear, restrictions that brick-and-mortar retailers such as Circuit City (CC) and Best Buy (BBY) accept. But it also misses out on lucrative discounts, raising the question of whether Amazon is actually profiting on each sale. With the company racing to become profitable by the end of this year, the capital markets looking uninviting and the economic slowdown crunching sales forecasts, Amazon can ill afford sales that put it in the red, analysts agree. Amazon shares were up 31 cents Thursday at $10.50.

Pennies From Heaven

JVC says brick-and-mortar retailers that it supplies directly have complained about the prices of JVC goods for sale on Amazon. But beyond saying that JVC itself isn't selling to Amazon, spokeswoman Nancy Bird can offer little insight into the retailer's practices.

"We don't know where they are getting it from," says Bird, who speculates that Amazon buys the goods from distributors at prices above what JVC offers directly. "That's just not the best business practice as far as we are concerned."

Bird adds that at the prices she has seen, Amazon isn't probably profiting from the sales. "I've seen prices [on Amazon.com] that are ridiculously low," Bird says. "That's the biggest problem. Other retailers see those prices and say, 'We can't afford to sell them at that.' "

Bird says JVC officials have raised their concerns with Amazon management, but she won't offer details of those conversations. "We are monitoring what they are doing," she says.

The JVC dispute apparently isn't unique at Amazon. Sony (SNE), for instance, has 25 authorized online dealers, but Amazon isn't among them. According to a person who wishes to remain anonymous, Sony and JVC share similar concerns about Amazon, and Sony's relationship with Amazon is "very acrimonious."

The Profit Motive

Of course, there's nothing wrong with undercutting the competition on price. But the JVC situation strikes at the heart of perhaps the top concern among Amazon analysts and investors: setting prices too low to make a profit.

"Are they selling products at a level that makes them money? There is still some concern about that," Holly Gustafson, an analyst at Legg Mason, told a group of investors and analysts at a Wednesday discussion of Amazon's finances hosted by the New York Society of Security Analysts. (Gustafson has a buy rating on the stock, and her firm has no underwriting relationship with Amazon.)

One frequent complaint voiced by analysts is that the company does not break out sales for its electronics business. The company reports revenues in two segments: its core media business, which includes books and videos, then everything else, including electronics, toys, kitchen and hardware, falling under the rubric of emerging businesses.

At the height of dot-com mania, investors rewarded Internet retailers for sales growth, profits be damned. But as stock prices swooned and the funding picture tightened, investors' focus shifted to profitability. As a result, shareholders have lost patience with efforts to gain market share at the expense of the bottom line by doing things like selling radios for a loss.

According to published reports, Amazon CEO Jeff Bezos circulated an email within the company in early February that detailed plans to stop selling many unprofitable items.

Wednesday's analyst forum came at a time when Wall Street has become increasingly concerned about Amazon's financial health. While the company has stated it can become profitable on a limited basis by the fourth quarter of 2001 without tapping the capital markets for extra cash, some contend the company could face a cash crunch in the coming months. Now the fate of the company, most observers agree, is in the hands of credit managers at companies that supply Amazon with goods.

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