Will Amazon become the Wal-Mart of the Web? Hasn’t it already?
Sometime later this year, if current trends continue, worldwide sales of media products — the books, movies and music that Amazon started with — will be surpassed for the first time by sales of other merchandise on the site. (That transition already occurred this year in its North American business.)
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Over the last year, shoppers have bought fewer books, CDs and DVDs, in many cases opting for cheaper digital downloads. In the quarter ending in June, for example, Amazon’s worldwide media sales grew only 1 percent, to $2.4 billion, highlighted by a slowdown in video games.But during the same quarter, sales of other products, which the company lumps together on its balance sheet in a grouping dubbed “electronics and general merchandise,” grew by 35 percent, to $2.07 billion.
One of Amazon’s key strengths is its supply chain management:
Instead of storing similar items next to each other — televisions with other electronics, shampoo with other personal care items — randomness abounds. In the warehouse where Terry Jones loudly roams the aisles, which the company somewhat randomly dubs Phoenix 3, “Star Wars” action figures are stocked next to sleeping bags; bagel chips sit next to the “Beatles: Rock Band” video game.In one high-risk valuables area, monitored by overhead video cameras, a single Impulse Jack Rabbit sex toy is wedged between a Rosetta Stone Spanish CD and an iPod Nano.
In nearby Goodyear, Ariz., at an even larger distribution center known as Phoenix 5, Amazon stores and ships more unwieldy items. Samsung 54-inch plasma HDTVs are stacked three high on the floor, next to crates of Pampers. Across the aisle, a kayak ($879) sits alone on the floor, wrapped tightly in cardboard and plastic.
Amazon says it stores dissimilar products next to each other on purpose, to minimize the possibility that employees select the wrong item. That seems unlikely: every product, shelving unit, forklift, roller cart and employee badge in these shipping centers has a bar code. Each physical move is orchestrated by software that calculates the most efficient path from shelf to the shipping area, telling employees on their wireless bar code readers which aisle and palette to go to next.
“Imagine how many customers we serve and if they were all here now,” said Bert Wegner, Amazon’s director of North American fulfillment, gesturing over the open space in Phoenix 5. “We are doing the heavy lifting for all of them in a hyper-efficient manner.”
Amazon also benefits greatly from its advanced inventory management methods and ability to negotiate beneficial payment terms with vendors. The company sells such a large volume of merchandise, and can predict customer demand so accurately, that it generally sells products within 65 days, before it has to pay suppliers for them.
That arrangement, which analysts call “negative working capital,” is unusual outside of grocery stores and allows Amazon to avoid the huge capital charges associated with buying and storing such a broad line of inventory. It also boosts the company’s cash flow, which it has used to pay down its debt to $109 million at the end of June from a hefty $2 billion in 2000, and to add more product lines to its Web site.
Amazon’s profit and margins have always been slender; it earned only $645 million in 2008, up 36 percent from the year before, compared to Wal-Mart’s $13.4 billion, up 5 percent. But Wall Street is more enamored by the promise of the online retailer, valuing Amazon at around 60 times earnings and Wal-Mart at 15 times earnings.
“They don’t have to incur huge inventory carrying costs and can add product categories almost ad infinitum,” said Jeffrey Lindsay, an analyst at Sanford C. Bernstein. “Amazon has an almost magical business model in terms of inventory management.”