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Amazon More Friend Than Foe for Small E-Tailers

By Mark W. Vigoroso E-Commerce Times ECT News Network
Jan 30, 2002 5:25 PM PT

Accusations of anticompetitive land-grabbing often befall category leaders like Microsoft (Nasdaq: MSFT) and Wal-Mart. But e-tail juggernaut (Nasdaq: AMZN) is no bully, according to analysts.

Amazon More Friend Than Foe for Small E-Tailers

In fact, Amazon has earned a reputation as a strong collaborator rather than an opportunistic adversary.

"Amazon has been more of a partner than a competitor," Giga Information Group analyst Andrew Bartels told the E-Commerce Times. "Other retailers are nestling under the jaw of Amazon, and Amazon is picking up [product categories] that it couldn't [otherwise] go after."

While Amazon may make competitive e-tailers sweat, it does not deserve the everything-for-everybody discount thug reputation that Wal-Mart has garnered, analysts said.

You've Got a Friend

By forging affiliate relationships with other retailers, Amazon has entered into mutually beneficial deals that boost other players rather than bullying them out of contention.

"Amazon can bring its huge customer base and efficient online operations to strategic partnerships," Yankee Group analyst Paul Ritter told the E-Commerce Times. "It leverages its core competencies to offset deficiencies in its partners."

For instance, Ritter said, Circuit City uses its partnership with Amazon to offer a highly visible online sales channel while preserving its indispensable in-store fulfillment model.

Amazon's partnerships with Toys"R"Us and Borders offer similar symbiotic upsides, he added.

Price Not Right

In addition, while Amazon's prices are competitive, they are not consistently the lowest available. Unlike Wal-Mart, Amazon cannot always use high-volume wholesale purchasing power to offer bargain-basement prices to consumers, Bartels suggested.

Instead, the e-tail giant aims to create added value -- through content, personalization and reliable fulfillment -- for which customers will be willing to pay.

"Amazon may charge 1 to 3 percent more, but [with real value] they don't have to be the lowest priced online store," Bartels added.

Periodic Pressure

That said, the e-tailer's latest bid to cut prices by offering free shipping on orders of more than US$99 may make it hard for smaller e-tailers to compete.

"The bigger you are, the more you can spend on promotions," Gartner research director Geri Spieler told the E-Commerce Times.

It is unclear how long Amazon's free shipping offer will last. But competitors in key product categories like music and books surely are keeping a close eye on the e-tail giant's moves.

Even before the free shipping offer, Bartels said Amazon's clout had an adverse impact on sales at CDNow and (Nasdaq: BNBN).

Marginal Failures

Despite its influence, Amazon cannot be blamed for the droves of recent e-tail failures, analysts said.

Internal miscues, such as faulty product strategies and misspent marketing dollars, did more to bring about dot-com downfalls than did disproportionate competitive pressures, Ritter suggested in a recent report.

Indeed, product strategies centered on negative or slim profit margins undercut many e-tailers' hopes for endurance.

For example, met its end in 2000 in part because of minus 3 percent gross margins, Ritter said.

Mindful Marketing

The bottom line is that retailers that overspend on marketing and advertising without significant customer conversion rates will struggle, according to Ritter's report.

"Most online retailers that spend in excess of $20 to $40 for each paying customer, or that spend 50 percent or more of revenues on sales and marketing expenses, are likely to have a difficult time sustaining their business," the report said.

By those metrics, Amazon/Toys"R"Us competitor -- with per-customer acquisition costs of $111 -- may face an uncertain future, Ritter said.

Limited Goods

Despite Amazon's hefty chunk of customer mindshare, there is ample room for other online retailers to prosper, especially if those retailers utilize multiple sales channels, analysts noted.

"The pure e-tail model has limited customer appeal," Bartels said. "People buy certain categories of goods online, but there's a much wider list of goods that people may research online and buy through other channels."

In fact, Amazon will never be Wal-Mart's online counterpart because many products, ranging from dog food to toilet paper, do not provide enough value per pound to be sold online and shipped economically, he added.

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