Editor's note: This story is part of
TSC's
three-day series on the e-tailing Internet wars.
We're not in Bentonville, Ark., anymore.
In four years,
Amazon.com
(AMZN) - Get Report
has been doing what it took Bentonville-based
Wal-Mart
(WMT) - Get Report
three decades to do: build a world-class brand that is synonymous with low prices and great service.
Just as Wal-Mart is the discount destination, Amazon is becoming its online counterpart. Amazon has entered the music and video business, as well as the online auction space. It's made minority investments in
pets.com
and
drugstore.com
. Just last week, Amazon added another feather to its cap with a 35% stake in
HomeGrocer.com
.
And Amazon has had the liberty of expanding with Wall Street's support. By comparison, most analysts and investors would run for the hills if, say,
Nike
(NKE) - Get Report
leaped into the pet food business.
All This Expansion Doesn't Come Cheap |
|
*Source: Company filings |
As Amazon rolls across product categories, economic and fundamental questions arise about the company's ability to operate effectively in a hodgepodge of categories without alienating its current customers.
In addition to snapping up minority stakes in a growing number of industries, Amazon is spending heavily to promote its existing business. The company laid down $60.7 million in the first quarter on sales and marketing. That's three times what
eBay
(EBAY) - Get Report
spent in all of 1998. And Amazon's aggressive spending has spooked some investors. Amazon's stock is down 39% since
outlining its expansion plans alongside its first-quarter results released April 28.
A Bend in the River |
|
Amazon "is taking some
real
risks in extending its brand," says David Aaker, author of
Building Strong Brands
and a partner at the management consulting firm
Prophet Brand Strategy
, which hasn't consulted for Amazon.
Amazon didn't return three phone calls for an interview.
While the bond between Amazon and its customers is strong, it's unclear whether the company's brand will be easily transferred to additional businesses without changing the feel of the shopping experience. Moving from books to CDs is a natural extension, but moving from CDs and videos to auctions is more of a stretch -- and carries different risks.
The current
Star Wars
furor illustrates the upsides and downsides of Amazon.com's diversification. After buying the
Star Wars
trilogy on video and
Star Wars: The Action Figure Archive
, customers can then go to Amazon.com Auctions and bid on a Yoda Furby (no joke).
But in this last step, Amazon gives up a certain amount of control. The famously customer-service-oriented retailer isn't at the end of the transaction; an individual seller is. If a user has a bad experience, some of that negative sentiment may rub off on Amazon, not the seller.
And some of the company's recent investments in drugstore.com and pets.com seem even more of a leap in logic, akin to shopping for toothpaste and catnip at
Musicland
(MLG)
.
"While Amazon is good at selling books, they may eventually lose some customers who want only books and are now getting pitched for auctions and other things," says Kate Delhagen, director of e-commerce research at
Forrester Research
. Forrester hasn't performed consulting services for Amazon. Forrester found that three out of four people who shopped online last year said they would be willing to switch to another retailer.
"Their loyalties are still forming," says Delhagen. "If someone in the Amazon database is a satisfied shopper, it would be hard to dislodge them, but it can be done."
As more real-world brands embrace the Internet, Amazon will have to hustle to grab some of the 24 million households expected to shop online in coming years, up from 10 million in 1998, according to Forrester. Customers like to work with businesses with which they are familiar, and trust translates as a company goes online.
While the risks of this strategy are plentiful, the rewards are also sizable, say analysts and money managers.
"It's a once-in-a-lifetime opportunity," says Christopher Lord, a general partner at
Pivotal Asset Management
, which holds Amazon shares. "They are building for the long term, and they shouldn't let Wall Street's short-sightedness" stop their quest for domination.
One thing Amazon is realizing is that some people will buy everything online, just as some consumers buy all kinds of products from mail-order catalogs. And it wants to maintain ownership of the customer at all points.
Jim Lattin, associate professor of marketing at the
Stanford Graduate School of Business
, says the relationship with the customer gets stronger, not weaker, because of expansion. Some people may feel alienated as the company expands, but more likely, customers will appreciate Amazon's recommendations for CDs and videos and the opportunity to jump to auctions without filling out another personal profile.
"If you don't stretch too far," says Lattin, "you don't know where the line is or where to draw it." He says the company has to get ahead of customers' wants, so that they don't look elsewhere.
What remains uncertain is whether shoppers who are looking for a CD by
Dogstar
and copies of
Dog Day Afternoon
and
How to Make Your Man Behave Using the Secrets of Professional Dog Trainers
are also in the market for dog food. Or, for that matter, mouthwash and aspirin.
