Online retail

I originally wrote this article, “Online retail“ in April 2003.  The effectiveness of the marketing and operations management of Amazon.com are discussed and changes are suggested to improve the management of these functions.

Introduction

Amazon.com is an international business with operations in Asia, Europe and the US.  Using the latest internet technology, the company trades in goods online and provides services to other companies. Amazon.com owns several patents based upon internet technology.  'Amazon.com Reports Second Profit Ever' (2003) describes how the company's revenue for 2002 was $1.43 billion, up 28% from 2001's figures and annual sales for 2003 are expected to increase by 15 percent upon sales for 2002. Net income for the company in the last quarter of 2002 was $2.7 million, down 48 per cent from the same period in 2001. A $40.6 million exchange rate loss in the euro contributed to this fall as Amazon's $2.15 million borrowings are in this currency.  However, euro fluctuations in 2001 gained the company $16.3 million.

International sites in Japan, Germany, France, UK and Canada provided the company with the largest growth during 2002.  The annual revenue for each international site increased by more than 60% in 2002. This created a 76 per cent annual increase for the international business, outside the US, to $461.4 million.

The company was founded in 1995 by Jeff Bezos and Schepp (2002) describes how Jeff attributes continuous improvements in computer and internet technology as being key to the success of his operations. According to Moore's Law, a doubling of speed in computing technology takes place every year. Lower prices, faster delivery and new web-site features have been achieved by Amazon as a result of this.

International marketing business strategies

Amazon's SEC report ‘Annual Report Persuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31,2002' (2003) includes their mission statement, “We seek to offer Earth's Biggest Selection and to be Earth's most customer-centric company, where customers can find and discover anything they might want to buy online. We have designed our Web sites to allow millions of new, used and collectible products to be sold by us and by other businesses and individuals worldwide. A product on our Web sites may be listed for sale simultaneously byseveral different sellers. For instance, a product may be offered by us, by a participant in our Merchants@ program and by a business or individual selling a new, used or collectible version of the product through Amazon Marketplace, zShops or Auctions. We also offer certain e-commerce services to other businesses through our Merchant.com and Syndicated Stores programs." The expansion of Amazon's product and service range appears to be getting to a stage where either the company should consolidate its position within the market or split up the company. There is a danger that customers and management will find it hard to focus and identify with the aims of a company with such a diverse product I services mix.

Cost leadership is the international business strategy adopted by Amazon.  Additionally, the company also adopts a strategy which attempts to differentiate its products and services from that of its competitors. The product range is greater than that of high street book sellers. Promotion of Amazon's products is online rather than in-store and distribution is centralized via courier, rather than personal pick up of the product from the retailer. However, with such a variety of products, its competitors are not now just the booksellers. It is any company that sells any of its products either offline or online.

To attain synergy and competitive advantage, Amazon has strategic alliance partner networks with other retailers. Jeff Bezos' goal is to provide customers with a single source of supply. "Our vision is to become a one-stop shopping place for anyone to buy anything. It will be done not exclusively by us alone but in conjunction with what will ultimately be thousands of partners. The benefit of which is lower prices and better selection for Amazon customers“. I would recommend that the book sales business be separated from the 'one-stop shopping place'. Amazon have good experience with book sales but could jeopardize the success of this portion of Amazon by diluted efforts.

Last year, Amazon opened its fifth international business operation and expanded into the Canadian market. Amazon saw it as a natural choice as Canada was served by only one major online retailer, Heather Reisman's Chapters - Indigo. I consider that the choice of Canada for the latest international site was a mistake. Canadian law prohibits direct management of the operations and the company is in danger of losing control of its operations which are entirely subcontracted to third parties.  Additionally, the total population and population density of Canada isn't amenable to providing a wide variety of products with a quick delivery service.

Think global, act local

Amazon's marketers had to decide between an ethnocentric, polycentric or geocentric approach to their international operations.  They chose geocentric marketing and operations management. To the international consumer, it appears to be a polycentric company. Each website, for countries whose first language is not English, is available in that country's language and English.  However, Amazon achieves this "think global, act locally" approach through the clever use of software.  They have developed a single piece of global software which can handle any language. This reduces their entry costs into further international markets.

Foreign pricing laws

Amazon's international pricing policy is influenced by the laws and regulations of host countries. For example, there is no law against price fixing in Japan. Publishers in Japan do not allow retailers to discount prices on their books. This means that Amazon's strategy is modified for the Japanese market.  Only books in non -Japanese language and other products are discounted.  List price is used for Japanese books. I recommend that Amazon focus on the product, promotion and place in countries where laws dictate list price. A larger product collection, online promotion and same day delivery would differentiate Amazon from its competitors in densely populated cities of certain countries.

Cultural differences

Soto (2002) describes how mobile phones are heavily used by the Japanese for online purchases. They spent $19.2 million for online purchase of books and music, via mobile phone in early 2002. Amazon lags behind its Japanese competitors, such as Kinokuniya, in the use of mobile technology for online purchases.  However, Amazon state that they expect only a small proportion of their sales income growth through mobile devices, compared with internet access through computers.

American culture and products are popular in Japan. Amazon bought 9% of the shares of a US company that specializes in assisting companies to expand into international markets using multi-lingual software.

Japanese preferences for payment methods has also affected another of Amazon's strategiesin this country. The payment method to Amazon for goods, used internationally, is by credit card. However, the Japanese don't normally use credit cards for payment of goods. Amazon has changed its payment policy in Japan and offers cash on delivery, to suit the local market.

Branding

Amazon expects growth in its international markets to exceed growth in its domestic market. High international brand recognition is assisting this growth. For example, the market in Japan was developed prior to the company starting operations there.  Tens of thousands of Japanese customers were already patronising Amazon's other international sites, based upon the high brand recognition.  After commencing operations in that country, the Japanese web site now has revenues in excess of $100 million.

Yamada (2000) reports that three years ago, complaints started to be made about Amazon's alleged practice of dumping liquidated, discontinued, damaged, returned or overstocked products on its auction sites. Questions were asked as to whether this strategy conflicted with Amazon's quality branding image. In response to this criticism however, the company gave 'money back' guarantees for purchased items to a value of $2,500. I'd recommend that Amazon separate these business activities from its core business an operate them under a different company name to preserve their brand image in online book sales.

Pricing

Amazon's sales volumes increase yearly. The sales are driven by lower prices and Jeff Bezos claims that Amazon is lower in price because it can afford to be. 'Chewing the Sashami with Jeff Bezos' (2002) reports that although one of Amazon's long standing goals had been to reduce prices, it was only in 2002 that they were able to do so. A re-arranged cost structure from years 2000 to 2002 allowed the company to achieve this goal. Price reductions were achieved in three stages. Firstly, a 30 percent discount was offered on all books over $20. This was followed by free or discounted shipping. Most recently, the 30 percent discount was extended to books over $15.

Retail prices are discounted by 20 per cent to 80 per cent for liquidated products sold online by Amazon. This compares to 40 per cent to 80 per cent discounts offered by traditional liquidators. Amazon receives 5% sales commission for these products and the company's aim is to provide a better return than traditional liquidators can achieve. I'd recommend that liquidated products be sold by the company under a name other than 'Amazon' to preserve brand image.

Market pricing

Amazon's Canadian operations, which began last year, has adopted market pricing.  It discounts its top 40 bestsellers in Canada by 40%. Amazon's Canadian competitor, Indigo, was forced to adopt the same strategy. This form of geographic market pricing is necessary to compete in local markets.

Product prices can be adjusted to match changing geographic, demographic or economic market conditions using web-based systems. In 2001, Amazon tested market pricing but had to abandon the test after five days because of customer resentment.  I'd recommend that the company only use market pricing geographically.

Advertising

Amazon's expenditure to retain existing customers and to acquire new customers is very large. Advertising costs in 2003 will exceed $100 million.

The company has developed software that analyses the purchasing patterns of individual customers. It then recommends complimentary products based upon that particular buyer's previous buying history. According to Jeff Bezos, “The goal here is not rampant consumerism. The idea is to use technology to capture information about customers and their interests and match individuals with other products they might like, including products they don't know even exist."  I'd recommend that Amazon spend more effort in re-assuring the customer of how this information is exactly used to prevent mistrust.

Sales promotions

Soto (2003) reports that Amazon's free shipping promotion will cost the company $100 million in 2003.  Free shipping commenced at the end of 2002 and the campaign has proved to be so successful that the promotion will continue throughout 2003 for orders above $25 in the US and £39 in the UK.  Amazon attributes a 28 percent sales increase as being a result of the free shipping promotion. Free shipping is also offered at its international sites in Japan and Europe throughout 2003.  Sales volumes in the UK rose 32 percent for the end of 2002 as the British operations shipped 6.2 million products. The free shipping promotion contributed to a sales growth of 76 percent for its international operations at the end of 2002.  I'd recommend that Amazon use quantitative analytic techniques on a regular basis to match sales promotion expenditure with increase insales revenue and make sure that it is a profitable activity.

‘Jeffrey P. Bezos' (2002) describes how Amazon offers a 15 percent commission to other companies whose web sites link a customer to Amazon, resulting in a sale. The web sites can recommend Amazon books and tens of thousands of these affiliate sites are linked to international Amazon sites.  I'd recommend that Amazon be selective in the frequency of payments to affiliates. Only a few hundred affiliates with large commissions due should be reimbursed monthly, the remainder being paid yearly.

International operations management

The international operations management is now organised on a geocentric basis.  The company merged the management of its US home country business with its international business operations in November 2001.

Supply chain management

Jeff Bezos states that the distribution philosophy at Amazon is different from traditional retailers. Amazon uses a centralized distribution system. The inventory is much reduced when compared to that of high street retailers. Jeff Bezos expects that this business decision will ultimately lead to a very high return upon the capital investment.

International couriers, international and national postal services are used by the company for distribution of its products to customers. Urban property identification is very different in Japan, when compared to Europe and the US. Many streets don't have names and there is often no sequence to property numbers. Amazon aligned with Nippon Express for customer deliveries to benefit from their 'in country' knowledge.

Amazon was taught a lesson from its distribution centre mistakes in the US and applied its learned experience in Europe. The company had previously constructed too much warehouse capacity in the US and was forced to close one warehouse. They built five automated warehouses but only actually required four.  After this, international depots were designed more efficiently.

International business accounts for one-quarter of Amazon's sales. However, much of this business doesn't involve products crossing borders.  For example, the business operation in Germany deals mainly in books produced in the German language. These books are published and distributed within the same country.

Supply problems have created difficulties for Amazon in Canada. The relatively small population leads to smaller stocks of fewer titles being held by the publishers.  It’s not economically viable to maintain huge stocks in Canada and this has lead to customer complaints of late deliveries. The business in Canada was created to alleviate the problems experienced by Canadians when they orders goods from the US.  High shipping costs and adverse exchange rates are avoided.  However, low warehouse stocks levels in Canada create the situation whereby it’s still quicker and cheaper for Canadians to order from Amazon's US operations. "It’s hard to come out of the gate perfect," acknowledges Amazon spokesperson Kristin Schaefer. "It’s difficult to know how to accurately manage and stock inventory until you know what customers are buying."

International logistics

Amazon ships products to 220 countries. Products are shipped to customers entirely domestically within international operations or via international inter-company transfers. Shipping times have been reduced by two-thirds and growth has been achieved in both international internal markets and export markets.

International distribution is offered to customers in three tiers. Customs clearance charges and import duties are the responsibility of the customer. Firstly, using DHL Worldwide Priority Express, products can be shipped in one to four business days.  Secondly, using DHL World Mail, products may be shipped in 7 to 21 days. The slowest shipping method is by surface mail and the shipping times are; 3 weeks to Canada, 6 weeks to the UK, 8 weeks to Australasia and 12 weeks to Brazil. Tracking of shipments from Amazon is available over the internet. I'd recommend that Amazon consider undertaking delivery to densely populated cities within the world through their own organisation, without subcontracting to third parties. This would provide a complete service to millions of customers and customs clearance would be facilitated.

International service operations

Amazon has international service operations where it derives income from partnerships.  Retailers use the international Amazon web sites as portals for purchase of their products. Borders, CDNow and Toys"R"Us are some of Amazon's partners. This exploits the benefits that Amazon receives from internet traffic.

The role of government

As well as crossing national borders, Amazon's business also crosses national laws.  Two interesting cases have arisendue to differences in US law and UK law.  Courts in the UK issued an injunction against the distribution of a book defaming the founder of a religious sect. The book was removed from all of Amazon's international websites. A huge protest ensued by the global public who criticized Amazon for globally applying UK law. The book was returned to Amazon's selection, except for the UK web site. Courts in the UK also issued another injunction against the distribution of a book defaming a political activist in the Northern Ireland dispute. The book was withdrawn from the UK website and sales from the US website are not allowed to residents of the UK. I'd recommend that Amazon pay more attention to the consequences of their actions with regard to the differences between the laws of different countries.

Europe is a large market for online shoppers but it is a collection of many individual countries, each having their own laws. There are common EU directives on e-commerce but irregular execution of these laws in member countries may splinter Europe into several different markets. Asbo (2003) reports Amazon as noticing that the value of transactions within the EU is growing alongside the increase in online trade. The company would like to see legislation keep pace with the technological advances being made. I'd recommend that Amazon continue to be involved, along with other e-commerce companies, in the harmonization of national laws.

Wolverton (2002) states that two of Amazon's technology patents were published by the US Patent and Trademark office last year. They were related to their particular system for online payment. Previous patents from Amazon were for its purchasing process, affiliates programme and recommendation service.  The company has lodged these patents for a particular reason. The techniques described within the patents are not particular technological breakthroughs. However, the processes are critical to the business of the company. Having the patents in the name of Amazon prevents any other company from suing Amazon or from threatening the core operations of the business.  Indeed, many other companies utilize the same techniques patented by the company. Amazon choose not to litigate against these other companies as evidence of their intention to use the patents purely in a defensive manner. This was a good tactic by Amazon to counter any potential legal threat to the operation of its core business.

Canadian lawrequires book retailing companies in Canada to have a minority of foreign ownership. Amazon expanded into the Canadian market, with books in the English and French languages, last year but had to adjust the operation to comply with Canadian law. It has accomplished this by using Canadian registered companies to provide supply and distribution services. However, a similar previous arrangement tried by Borders was disallowed by the Canadian Booksellers Association. Borders challenged the legality of Amazon's operations in the Canadian courts but lost.  As Amazon doesn't have an office in Canada, it works through partner companies and the Canadian government ruled that the Investment Canada Act did not apply.

References

'Amazon. corn Reports Second Profit Ever', Associated Press, January 24,2003. Retrieved: April 3, 2003 from http://www.tallahassee.com/mld/tallahassee/news/

'Annual Report Persuant to Section 13 or 15( d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31,2002' United States Securities and Exchange Commission, February 19,2003. Retrieved: April 3, 2003 from http://phx.corporate-ir.net

Asbo. P. 2003, 'Amazon exec warns that legal uncertainties hinders Eurpoean e-ommerce', europemedia.net, February 20, 2003. Retrieved: April 3, 2003 from http://www.europemedia.net

'Chewing the Sashimi with Jeft Bezos', BusinessWeek online, July 15, 2002. Retrieved: April 3, 2003 from http://www.businessweek.com

'Jeffrey P. Bezos', METU Industrial Engineering Department, Ankara, Turkey, 2002

Schepp, D. 2002, 'Amazon's Bezos pushes growth', BBC News, June 3,2002. Retrieved: April 3, 2003 from http://news.bbc.co.uk/1/hi/business/

Soto, M. 2002, 'Amazon faces big test in international markets', The 8eaftle Times, April 22, 2002. Retrieved: April 3, 2003 from http://seattletimes.nwsource.com /htmllbusinesstechnology/

Soto, M. 2003, 'Earnings: Amazon posts second net profit', The 8eaftle Times,
January 24,2003. Retrieved: April 3, 2003 from http://seattletimes.nwsource.com
. /html/businesstechnology/

Wolverton, T. 2002, 'Amazon seeks patent for payment system', CNET Networks, Inc., September 23, 2002. Retrieved April 3, 2003 from http://news.com.com

Yamada, K. 2000, 'Shop Talk: Amazon.com's junkyard strategy', RHC Media, Inc., June 2, 2000. Retrieved: April 3, 2003 from http://www.redherring.com/insider/