Thursday, February 24, 2005
The challenges ahead for Amazon
Amazon, one of my favorite online brands, faces some significant challenges ahead as analyzed in this Knowledge Wharton article:
On Nov. 18, Bank of America securities analyst Aram Rubinson did Rashtchy one better. He started coverage of Amazon with a "sell" rating and a price target of $26 at a time when Amazon shares were trading at $39.90. Calling Amazon a "mass market player in a niche market," Rubinson says Amazon is a mere retailer, and not an Internet stock that deserves a loftier valuation. To make matters worse, Amazon's product lineup is too broad, meaning it can't get economies of scale for any one category, states Rubinson, adding that if Amazon were more focused, say on just books and music, it would generate better returns.
According to William Cody, managing director of Wharton's Jay H. Baker Retailing Initiative, Amazon's department store approach could backfire, although he suggests that it's too early to determine how the Amazon saga will play out. "One-stop shopping works well in a department store. But online, another department store is just a click away."
...One of the reasons experts like Wind and Fader suggest Amazon may be better off refocusing its efforts instead of expanding is its average order size. According to Rubinson, Amazon has an average order value of $54. Direct and catalog retailers focusing on just a few product categories average $150. The bottom line: Amazon is selling some products even though they aren't profitable. The tradeoff is growth for profits.