Case study. Amazon vs. Barnes & Noble

Case study:Amazon vs Barnes & Noble

Álvaro Gómez Vieites

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.

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.

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.

Turnover

Gross margin

Marketing logistics

% of Turnover

Tics & website content.

Other operating expenses

Total operating expenses

BAII

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

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.

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.

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.

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%.

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.

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.



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.

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.

• 
  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 ?