TCS Daily

By Aiming At Profits, Amazon Misses Opportunity

By James K. Glassman - February 5, 2001 12:00 AM

After the bell sounded Tuesday afternoon,, Inc., reported that it would cut 1,300 employees, or 15 percent of its workforce. In itself, this reduction is not unusual. Chrysler, bought out by the German automaker Daimler-Benz at a peak price, just laid off 26,000. The economy is slowing (from a 5 percent clip only six months ago to just 1.4 percent in the fourth quarter of 2000), and it's not unusual for Internet firms, which had expected faster growth, to start pulling in their horns.

But the cutbacks at Amazon are especially worrisome since they indicate a change in strategy: Amazon now wants to make a profit. Quickly. "While the strength of consumer spending remains uncertain, and there are no guarantees, we expect as a whole to reach operating profitability in the fourth quarter of this year," said Warren Jenson, Amazon's chief financial officer.

What's wrong with making a profit? After all, to critics like Alan Abelson of Barron's, Amazon has been the poster child for the wild excesses of the Internet. From less than $2 a share in 1998, Amazon soared to $106 by December 1999, only to hit a low of $14 about a year later. All the while, Amazon has been bleeding red ink. Losses have gone from $28 million in 1997 to $125 million in 1998 to $720 million in 1999 to an incredible $1.4 billion in 2000. After eliminating one-time items, the loss for the fourth quarter actually fell by half compared to a year earlier - to $90 million. Still, investors and analysts have been losing patience throughout the year.

Only six months ago, an analyst at Lehman Brothers named Ravi Suria blasted the company, saying that it showed "financial characteristics that have driven innumerable retailers to disaster throughout history." As a result, the stock fell by one-fifth in one day - to $33 a share. On Wednesday, it closed at roughly half that price. Its market capitalization is now just $7 billion, down from more than $30 billion.

So, again, why not cut jobs and try to make a profit?

It seems to me a better approach - though one that would require a great deal of courage - would be to postpone profits further in search of market share. Amazon is already the largest Internet retailer, and, as the economy slows, other e-retailers are dropping like flies. They have run out of cash and gone into bankruptcy. It is a time like this - a time of golden opportunity -- that a market leader grabs an even larger proportion of revenues. That appears to be what Michael Dell of Dell Computer is doing - putting more and more pressure on his competitors.

To do that costs money. It requires more promotion, more price-cutting, better service. Amazon called its staff cuts a "restructuring" and that reductions were concentrated on "corporate staffing and a consolidation of ... distribution and customer service networks."

Perhaps Amazon can continue to produce high revenues without these 1,300 employees, but I tend to doubt it. This move sounds to me like a retreat - perhaps one that was meant to be tactical but could prove strategic.

Of course, it may be that Amazon has no choice. The company could be running out of money. The Dec. 31, 2000, balance sheet shows $822 million in cash and $278 million in marketable securities. That may not sound like a lot for a company that lost over $1 billion last year, but operations did produce a positive cash flow of $248 million in the fourth quarter (admittedly the best period). We really don't have enough information to predict whether Amazon will get into a cash squeeze. My guess is that it will not, but investors need to make their own judgments.

I can say that Amazon is a marvel. Revenues have risen from $16 million in 1996 to $2.8 billion in 2000. They rose 68 percent last year alone, with purchases by more than 20 million registered users. From selling only online books, Amazon has successfully branched out. More than one-third of its U.S. customers purchased items from the site's electronics, kitchen (excellent, by the way), hardware and toys sections. Inventory is staggering, prices are low and service is remarkable. In the fourth quarter alone, Amazon sold nearly $1 billion worth of goods - two-thirds of the total in the books, videos and music category. International sales doubled.

Amazon's only problem is that it has not made a profit, but these are still early days. In 1625, Francis Bacon wrote about investing in forestry plantations: "You must make account to lose about 20 years' profit and expect your recompense at the end. For the principal thing that hath been the destruction of most plantations hath been the base and hasty drawing of profit in the first years."

Jeff Bezos, Amazon's CEO, says that the company turns a profit on book sales. But, clearly, it cannot thrive on books alone. It now has a spectacular chance to branch out, to push aside weak competitors, eventually to emerge as the most powerful retailer of any sort in America. That's not a fantasy. It could happen - but not if Amazon pulls back.

The time to advance is now. The iron is red-hot.

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