Case study:Amazon vs Barnes & Noble
Álvaro Gómez Vieites
Case study. Amazon vs. Barnes & Noble.
This case study is about Amazon, one of the most successful stories about internet business;
the most important retail business for books on internet. B2C.
Amazon started selling books on Internet in 1995, and within 10 years become the biggest B2C
in the world, selling all types of products ( a range of more than 30 products ) with more than
100 million of clients in 250 countries all around the world, making profits with sustainable
growth. Its success has openned the market to other companies that were traditionally
operating in the book retail sector, like Barnes & Noble, the biggest retail shop in USA, funded
in 1876 with more than 800 shops in the country, which was concerned about the success of
its new competitor operating in Internet.
How was Amazon funded.
Year 1994 Jeff Bezos, a CEO of D.E: Shaw
corporate, located in New York, decide to start
up Amazon.com in order to take advantage of
the increasing use of the world wide web.
By that time Jeff Bezos was 32 years old
decided to quick his job, moved to Seattle on
the west coast of USA and asked for a loan to
his parents ( 300.000,00 Dollars ) in order to
start up his company.
In 1999 Jeff Bezos was named man of the year
by the Time.
Case study:Amazon vs Barnes & Noble
Álvaro Gómez Vieites
Jeff Bezos thought about a list of 20 products that he thought could be successfully sold on
Internet, finally he decided to focus on books, he did so, because there are millions of different
titles of books all around the world, so books were the products with plenty of categorizes.
Music was second with millions of cds on the word. At that moment Jeff Bezos thought of
giving the chance to clients to have a shop with a big range of books, getting advantage of TICs
in order to organize and facilitate how to locate different books among the vast range of
products categorized among the databases.
That is how on July 16th 1995 he opened his first on line book shop, being different to its
competitors, because of having the largest range of different books. The shop slogan was " if
the book is printed it is in our catalog". Its quality service, a very easy buying procedure, and
attractive prices, with discounts up to 50% on best sellers comparing to the prices on
traditional shop books.
At the beginning, Jeff Bezos, got the book orders at his own computer and do the packaging of
the book by himself at his house garage. The company finish its first year of activity with 11
employees and 511.000 $ turnover.
After 2 years growing, Amazon got into the stock market on may 15th 1997 with 3 million
stocks at 18 dollars per stock, that way the company got 54 million capital, reaching a market
value of 438 million dollars.
In 1997, had already 2.500.000 book titles at its catalog, and a database of 1,5 million clients,
with a turnover of 150 million dollars.
Meanwhile its main competitor Barnes& Noble has a turnover of 2.900 million dollars a profit
of 65 million dollars, being the first book seller in USA, with a market share above the 25%.
That same year Barnes & Noble decided to went into the Internet business creating its own on
line shop, that is why some experts thought this could make Amazon disappear from the
market. ( At some point some media forecast talked about amazon.toast )
But Amazon growth keep on going, in year 1999 the company had 14 million clients, reaching
up to 20 million clients by year 2000. Year 1999 more than 4.700.000 books could be found on
its catalog, with an average of 375.000 dollars turnover per employee, at that time traditional
book sellers have an average of 27.000 dollars turnover per employee.
Case study:Amazon vs Barnes & Noble
Álvaro Gómez Vieites
Year 2000 Amazon had a turnover of 2.700 million dollars, whereas Barnes & Noble have a
turnover of 320 million dollars.
E commerce had a rapid growth within those years, were books on line buying reached 6% of
book selling market share on year 2000, while in 1998 it was online 1,9 %.
Business growth.
On year 1998, Amazon decided to start selling other products apart from books, Amazon
started selling music ( CDS) and videos ( DVDs ), focusing its core business in BMV ( Books,
Music and Videos ).The music shop was funded in 1998, with an initial catalog of 100.000 Cds,
as for the videos, it was also founded in 1998, at Christmas time in order to get advantage of
Christmas presents buying. Jeff Bezos, explains why they decided to offer also music and
videos. " we used to get emails from clients asking us if we were not thinking of selling music,
and DVDs, as they were willing to buy those kind of products on our web site". By year 2000
the new BMW, was a profitable business, but Amazon decided a new strategy for growing , a
risky strategy based on the internalization of the company, and the diversification of products,
becoming a real megastore rather than a book store. In order to do so, Amazon started buying
some shops and dot.com companies, financing this operations by selling its own stock market
shares, and with the cash flow of the company, with an investing cost of millions of dollars, so
that short term profit was being invested for the long term business.
Case study:Amazon vs Barnes & Noble
Álvaro Gómez Vieites
Turnover
Direct cost
Gross margin
Marketing logistics
% of Turnover
Tics & website content.
Other
expenses
operating
Total operating expenses
BAII
Financial result
Net profit.
Jeff Bezos idea was to go for the long term profitability, placing the following strategy. " the
winners takes it all" when considering competitors on Internet business.
From 1999 on, Amazon on line shop already offered toys, electronically products, videogames,
tools, etc. In year 1999 Amazon started the toys and electronics shop, in April 2000 the shop
for gardening was started. October 2000 a shop for photography was launch in collaboration
Case study:Amazon vs Barnes & Noble
Álvaro Gómez Vieites
with the Australian company ofoto , September 2001 Amazon started selling computers, new
and second hand, as well as computer accessories, working in collaboration with ingram micro,
a company in charge of the distribution of computer products, and in collaboration with the
company called circuit city, where Amazon clients could pick up the products they have bought
on line. A shop for magazines and newspapers was launched in November 2002, with an initial
offer of more than 50.000 titles. October 2003, Amazon launched a delicatessen with
chocolates, caviar, cheese, and other delicatessen products.
On 1997 Amazon slogan was the biggest book shop on the world, on 1998 their slogan was the
biggest book and music shop of the world, in 1999 their slogan was the biggest mega store on
the world.
This strategy created a problem among the company, the supply chain was more complex,
especially when products were to be sent back to Amazon in case of clients non conformity.
Among the most important acquisitions made by Amazon between year 1998 and 2000, we
can quote drugstore.com ( on line store specialized in health), Pets.com ( on line shop
specialized in products for pets ) , junglee ( service for comparing products ) , livebid.com
( online auctions ) accept.com ( software for ecommerce) , planetall ( specialized in online
services for agendas.) alexa specialized in control and measuring how many visits does a web
site received.
Case study:Amazon vs Barnes & Noble
Álvaro Gómez Vieites
Exchange.com, specialized in looking for old books. Kozmo, specialized in sending products to
consumers home. eziba, handcraft products all around the world. living.com, home furniture.
back to basic toys, specialized in selling classic toys. internet movies database, the biggest
database of films and cinema on internet.
At the end of 1999, Amazon announced they were buying exchange.com and accept.com and
alexa for a price more than 645 million dollars.
At the same time an internalization process was being started , creating branches out the USA,
were most of its clients were registered. In 1998 Amazon created a branch company in
Germany, and UK, in 2000 a branch was created in France and Japan . In order to better attend
European market demands.
Amazon bought companies like the German telebook , and the British book pages.
This way Amazon was able to be in the international market in a very short time. In year 2000
22% of its sales came from outside USA, being Europe its second market with 14% of the sales.
Selling in new markets was difficult for Amazon as there were new challenges to be overcome,
such as logistics, clients special likes and dislikes, and market regulations. For example in
Germany it was forbidden to sell books related with Nazism, and to offer special discounts on
this type of products.
On 1999 Amazon started its business of "on line auction", and second hand products. Also,
decided to open its on line shop to other sellers, using zshop service, a virtual mall, in which
any shop can establish its own shop on Amazon, paying a monthly rent of 39,99 dollars, and a
commission on its item sold, between 1.25% and 5% percent of the price of the product sold.
In order to facilitate payments among these shops, Amazon also offer Amazon payments
service.
Virtual shopping center in Amazon. Zshops.
Case study:Amazon vs Barnes & Noble
Álvaro Gómez Vieites
Some experts, start doubting about Amazon strategy as it was far too risky and said probably
Amazon would not be able to overcome the investment effort, as the company was already
losing 2.91 dollars on average per order.
It must be taken into account that since internet business started, competition on the net has
been very severe. During 1999 and 2000 books and cds sold on the net were up to 9% or 16%
cheaper than those sold off line, therefore margins were quite low. The financial crisis on tics,
on 2000 affected also Amazon, so it stocks on the market also got through difficult times.
Amazon stock market prices.
When famous on line businesses were closed like etoys on 2001, and webvan closed in 2001
after having been valued 1.200 million dollars on the stock market, new doubts about Amazon
future were placed on the table.
Amazon had to close some of its previous investments like pets.com, also some studies in year
2000, like Ravi suria de Lehman brothers, were not being positive about Amazon, what created
a decrease in Amazon stocks, of a 80%.
Case study:Amazon vs Barnes & Noble
Álvaro Gómez Vieites
For this reason Amazon decided to take measures in order to decrease costs, and stop its
expansion, in order to increase its financial liquidity and start giving investors a profitable
dividend. So Amazon, closed some distribution centers, fired 15% of the employees, 1.300
employees, and start looking at its orders in order to eliminate those that were not profitable.
In year 2000 Amazon has started running a software for studding the margin on its sale, taking
into account logistics expenses, non conformities, and other factors. That way Amazon
discovered more than 10% of electronically devices, cooking cluttering, and tools in USA that
were not being profitable, the same as 5% of the books, cds and videos sold.
Logistics expenses were creating also some trouble, that's why Amazon decided to close
certain logistic centers in some countries out USA, like Germany and UK, in order to cut down
on costs.
Year 2002 Amazon had a turnover of 3.930 million dollars and lost 149,13 million dollars,
Amazon reached a market share of 35,2% in selling books , music and videos on line.
Meanwhile its main competitor, Barnes & noble, the same year had a turnover of 5.270 million
dollar and had a profitable business model following classic business approach.
But Amazon strategy finally started working out, and in year 2003 started having positive
financial results, 35,28 million dollars, after having lost more than 3.000 million dollars since its
foundation. With a turnover of 5.270 million dollars, 35% of its sales already came from
outside USA orders, Amazon had already 8.500 employees, and various logistic centers and a
well known websites, while Barnes 6 Noble, had 1 million shops and more than 50.000
employees.
Finally stocks markets decided to support Amazon business model, so that on September 2003,
Amazon reached 18.300 million dollar value at the stock market, much higher than its
competitor Barnes & Noble.
June 2003, when Harry and Potter was launched , Amazon reached an amazing historical
record of online sales, getting 1.30 million orders in one single day.
Case study:Amazon vs Barnes & Noble
Álvaro Gómez Vieites
Amazon stocks evolution.
In year 2004, Amazon turnover was 6.920 million dollars with a profit of 347 million dollars,
over passing for the first time its competitor Barnes& Noble, which turnover was 6.165 million
dollars.
At the end of 2004, Amazon had branches on Canada, UK, Germany, France, China and Japan,
and was selling products to 217 different countries with a database of more than 100 million
clients.
Christmas 2004, electronic devices orders overpassed those of books and music, reaching up
to 2.8 million orders in one day. Amazon business success was a fact.
An on line book store that made an strategy to become a mega on line store, with different
products, like electronic devices, videos, DVDs, toys, products for babies, delicatessen, wine,
clothes, shoes, photography, furniture's, car accessories, sport articles, health and beauty,
watches, jewelry, gardening, office materials, and so on.
Case study:Amazon vs Barnes & Noble
Álvaro Gómez Vieites
Range of products offered at Amazon.
Amazon, became this way the biggest B2C on the world, while its competitor, Barnes& Noble,
was still losing money on its online shop.
Do not leave your company to get amazoned.
Nowadays, a traditional well known company, with financial stability, high market share, and a
distribution model supported by several retail shops and physical logistics infrastructure can be
easily over passed by a new company following an online strategy, focusing on clients needs.
Amazon and Barnes& Noble, is a case study that tends to confirm this. Nowadays Barnes &
Noble is still not known outside USA, a company that had plenty of retail shops, with a long
history on the market was over passed by a new company with an on line strategy.
The expression, "to get amazoned" is used to refer to this situation. We could cite other
examples, that have taken places in other sectors and markets in the last few years.
Case study:Amazon vs Barnes & Noble
Álvaro Gómez Vieites
Thinking about Amazon case.
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Think about other sectors in which a situation like Amazon case could happened again,
or has already happened. Could you think about any other cases in which following an
internet business model a revolution on a sector of activity has taken placed
internationally ?
Name Amazon principal assets and why is this company so valued on the stock market.
What is what Amazon best do?. What is its mayor strength?
What could other competitors from the different sectors like toys, books, office
materials, photography, delicatessen, etc. do, in order to compete with the biggest on
like B2C of the world ?