How Amazon.com is thriving in a horrendous retail climate.

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Feb. 5 2009 5:11 PM

Shop Till Everyone Else Drops

How Amazon.com is thriving in a horrendous retail climate.

Illustration by Robert Neubecker. Click image to expand.

On a conference call with financial analysts last week, someone asked Amazon.com CEO Jeff Bezos whether other companies' failures were the secret of his company's success. All around Bezos, commerce is plummeting. Many rival retailers have reported their worst revenues in years; they're cutting workers or shutting down entirely. Yet Amazon is thriving: It just had its best holiday season in company history, with profits up 9 percent over last year. Bezos offered a diplomatic answer: "In the long term, fortunately the markets that we operate in are very large markets, and there is room for lots of winners." Perhaps he's right about the long run—but for now, he's being modest. In a retail desert—as customers turn to frugality and big-box stores turn to liquidation—Amazon remains an oasis: It's the one place that'll sell you stuff for a bargain without making you feel like you're slumming.

Bezos has been dabbling in so many markets lately that it's easy to forget how well he runs his main business. Amazon offers the Web's leading "cloud-computing" warehouse—it sells cheap online storage and processor cycles to Internet startups looking to save on overhead costs. The Kindle, its year-old e-book reader, has become an Oprah-certified phenomenon; Amazon is reputed to have sold 500,000 of them, with demand far outstripping supply. (The company has scheduled a press conference for Monday at which everyone expects it will release an updated version of the device.)

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But it's Amazon's retail business that's the heart of its success. Over the last couple of years, the company's retail arm has pursued a relentless expansion: It has launched a digital music store; added to its selection of Latin music, indie movies, and out-of-print books and CDs; and started selling new products ranging from fabric to motorcycles and ATVs. Just this week, Amazon launched a new PC video game store, selling hundreds of downloadable titles for less than $10 each. As other retailers pare down their operations, Amazon keeps hiring more people and building new distribution centers.

All the while, it has kept prices low. Analysts say it can do so for one big reason: It owns and operates zero stores. While other retailers had to order their holiday inventory weeks in advance—and, therefore, guess at consumer demand, risking getting stuck with a lot of extra stock—Amazon could wait until late in the season to buy from producers. "Amazon was able to restock when nobody else was restocking," John Aiken, an analyst at Majestic Research, told the Wall Street Journal (subscription required). "As demand was falling off a cliff, they could get better rates."

As a result, Amazon offered some of the deepest discounts of the season, selling TVs that normally went for $1,000 for just $700. Of course, so did a lot of other stores. Indeed, Amazon isn't always the cheapest place to shop—real bargain hunters can almost always find better deals at Wal-Mart (which may explain why that company is the other bright spot in retail this season). Amazon isn't always the nicest place to shop, either—hey, who wouldn't prefer getting a Valentine's gift in a blue box from Tiffany's over a brown one with a smiley face? But a recession concentrates the mind: Customers want cheap stuff, but they also want convenience, quality, and a friendly, hassle-free atmosphere. Amazon isn't Tiffany's, but it's not a chaotic, out-of-the-way discount zoo, either. Instead it occupies a sweet middle spot—it's the nicest place to buy cheap stuff. These days, that combination goes a long way.

I've been shopping at Amazon since shortly after it opened its doors in 1995, but I became a loyal customer just three years ago, when I signed up to its $79-per-year Prime plan. I'd guess that between one-quarter and one-third of my retail purchases now come from Amazon. (I'm pretty friendly with my UPS guy.) Prime members get free shipping on most items in the store or overnight shipping for $3.99; because you can share the plan with up to three other people, it's a steal for frequent shoppers. (Amazon requires everyone sharing the plan live in the same household, but in my experience it doesn't enforce that restriction very firmly.) If you and your housemates buy more than two items a month from Amazon, you should consider subscribing. Be warned, though, that Prime membership will alter how you think about shopping. These days, whenever I become cognizant of some need that would ordinarily require an unplanned trip to the store—when I want a bathroom hook, a shelving system for my closet, a new wireless router, or a discount pack of kitchen sponges—I check Amazon first. It's usually faster to order the item there and get it shipped for free than to add the thing to my shopping list. With Prime, you don't really need a shopping list.