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.

I don't rely on Amazon just because it's cheap and convenient. For a store that aims to give you a bargain, it also excels at customer service. Here's something that happens often: I'll buy an item on Monday afternoon and be told to expect it to arrive Wednesday. Then, sometime Tuesday, the UPS guy rings my door—amazingly, Amazon has moved the product from its shipping center in Nevada to my apartment in San Francisco in less than a day, for no extra charge. The store even excels when something goes wrong. The Web abounds with stories of Amazon going above and beyond to make sure its customers are happy. Last year Joe Nocera of the New York Times wrote about how Amazon replaced his son's Christmas present for free after someone had filched the package from his building—which, of course, wasn't Amazon's fault.

I've got a story like that, too. Before Thanksgiving last year, I ordered a roasting pan for my parents, who live in Southern California—but I accidentally had the item delivered to my house, hundreds of miles away. What to do? I looked into shipping the roasting pan to my parents, but the cost was prohibitive. Then I thought about ordering them a new pan and returning the one that had come to me—but the sale on the item had expired, meaning that the pan was now $10 more expensive.

So I did what any frustrated customer would do: I threw myself on the mercy of customer service. I called Amazon's secret call center and explained my problem to a friendly gentleman in a foreign country. (Speaking of which, there is one way Amazon can improve its service—publicize their call center's number!) The Amazon rep fixed everything. Because I was a loyal customer, he said, he would sell me a new pan—shipped to my parents' house—at the now-expired sale price. He also offered to take back the pan that I'd had delivered to me for no charge at all—not even shipping.

Amazon can provide such great service because it's a retail behemoth. There's a feedback loop working here—as it gets more customers, it makes more money and can better afford to placate the small number who feel wronged, which of course helps it win even more customers. This also explains why Amazon is not only beating offline stores but is also stealing market share away from its online rivals. EBay had a terrible holiday quarter—its profits declined by one-third, and, for the first time in its history, its revenues were lower than the comparable period the previous year. The company is also warning that its numbers for the current quarter will fall below expectations.

This seems counterintuitive—as times get tough, you'd expect that people would turn to eBay both to sell their stuff and to buy other people's used items. But while you can occasionally get some amazing deals on eBay, shopping on an auction site requires a lot of work. Shipping costs vary widely depending on the merchant, which means you've always got to be on the lookout to avoid getting ripped off. Shipping times are inconsistent, too—buy something at Amazon and you can be sure you'll get it within the week, but a delinquent merchant on eBay could dither forever. And what if something goes wrong—if your package is stolen from your apartment's common area, or your kitchen sponges aren't as absorbent as you expected, or you accidentally got your product shipped to the wrong address? Some sellers on eBay might go the extra mile, but many won't—and you'll end up stuck.

In the past, all this was worth it—you could be sure that if you put in the work, you'd get a fantastic deal on eBay. But as Amazon has reduced its prices and expanded its selection, fiddling with eBay no longer seems necessary. At Amazon, you click once, and the item's on its way. No wonder people can't stop shopping.

Farhad Manjoo is a technology columnist for the New York Times and the author of True Enough.