Jungle Fever On the Web

By Chris O''Malley

Its primary business is selling a decidedly low-tech commodity: books. Daily, it must stare down a Goliath competitor that has more stores than it has employees. Last quarter it lost nearly $25 million. Now it's rolling the dice and expanding. Would you invest in this company?

If the company is Amazon.com--arguably the hottest ticket on the runaway train of electronic commerce--you surely might. Presuming, of course, you're not already late to the station. Amazon's stock, which rose more than 37 points in a single day last week, is flirting with doubling its value in the month of November alone. Analysts attribute that rise mainly to the seemingly boundless potential of e-commerce, or retailing on the Internet--a subject fresh on the minds of shoppers and investors this holiday season. Internet consumers will buy $3.5 billion worth of goods in the last three months of this year, and $7.8 billion for the year, according to Forrester Research of Cambridge, Mass. That's a thin slice of the overall retailing pie, but it's growing fast--projected to reach $32 billion in five years.

Investors eager to ride this trend often turn to Amazon after starting out as satisfied online buyers of its books--and now of its music CDs, videos and gifts. The company has spent heavily to establish a brand name and reputation from scratch, with no brick-and-mortar stores to springboard its efforts. "Brand name is critically important to retailing, and Amazon paid dearly for it," notes Marie LaTour Kadison, senior analyst at Forrester. "They knew it was imperative [to establish a brand identity] before companies like Barnes & Noble and Borders came online."

Amazon has managed to hold that early lead, amassing a base of 4.5 million customers that is the envy of the "e-tailing" world. Service has been its secret weapon. Its website deftly mixes simplicity with depth, offering book reviews and personalized recommendations. Orders automatically generate a thank-you e-mail. And Amazon will hunt down any title you can't find, even out-of-print books, with the friendly zealousness of a small-town Midwesterner giving you directions to the doughnut shop. "Word of mouth is incredibly powerful online," explains Jeffrey Bezos, 34, Amazon's founder and CEO. "A dissatisfied customer can tell 1,000 people in a few minutes." Scott Ehrens, a managing director at Bear Stearns, says Amazon "understands how to treat customers better than anyone else on the Web."

While the selection at Amazon is far greater than even at the megabookstores, and the shopping is PC-potato easy, it's seldom cheaper and certainly not faster. Amazon chops an impressive 30% or 40% off the list prices of most hardcovers, but standard shipping adds back about $4 and takes three to seven business days. Next-day shipping runs $11, eating nearly every penny of the $11.58 you'd save on Tom Wolfe's A Man in Full, for instance, compared with the full list price.

A week before Thanksgiving, Amazon announced it would try its hand at stuffing stockings with videos and an assortment of holiday gifts, including toys and electronic games. There's reason to believe the crossover can work. Amazon began selling music in June and quickly grabbed the lead in online CD retailing.

The more Amazon sells, though, the more money it loses. Last quarter's net loss of $24.7 million was more than double the loss in the same period last year, even as sales tripled to about $38 million and the ranks of its notoriously loyal customers nearly quadrupled. And those losses are expected to continue at least through 1999. Bezos insists that focusing on profits during this growth phase would be a "strategic mistake." Amazon's proponents believe market share is what matters, and the company will reap its earnings rewards when online buying heats up and its marketing blitz cools down. Says Henry Blodget, an analyst with CIBC Oppenheimer: "They are investing money, not 'losing' money."

This vision is embraced by the individual investors (many of them trading online) who have driven Amazon's stock beyond any established benchmark of price-to-revenues. But many analysts and institutional investors view the stock as overpriced and believe the company faces a tangle of challenges. Its principal foe, Barnes & Noble, recently purchased the Ingram Book Group, the largest U.S. wholesaler to book retailers, including Amazon. This follows Barnes & Noble's sale of 50% of its website operations to giant publisher Bertelsmann AG, creating a potent synergy. Meanwhile, nine other major Web retailers, including CDnow and eToys, recently banded together in an online mall called ShopperConnection to better compete with Amazon. Well-funded upstarts like Buy.com keep coming. And the first "electronic books"--or flat displays that let you read a book on a screen--are just hitting the market.

Bezos says he isn't fazed. "I tell my employees they shouldn't be afraid of our competitors--they're not the ones who give us money," he says. "They should be afraid of our customers." So go fear and retailing in cyberspace.