Fool.com: Amazon Angles for Home Improvement Market (News) November 9, 1999

Amazon Angles for Home Improvement Market

By Richard McCaffery (TMF Gibson)
November 9, 1999

Investors worried that online retail giant Amazon.com (Nasdaq: AMZN) can't compete with brick and mortar competitors can relax. The world's biggest Internet retailer is now selling bricks and mortar.

Seattle-based Amazon.com today announced four new additions to its product line as the online holiday season looms: home improvement, software, video games, and gift ideas. The stores open tomorrow.

In addition, Amazon has purchased Tool Crib of the North, a privately held catalog company that sells tools and equipment. Amazon did not buy Tool Crib's chain of retail and equipment stores in North Dakota and Minnesota, which will remain privately held.

After running up $13 1/16 yesterday to close at $78 on buzz of today's announcement, investors showed their disappointment this morning as the stock fell more than $4 in trading. Apparently, entry into the world of lawn rakes and mouse traps isn't what investors hoped for after Amazon's statement yesterday that the "new additions to its product lines will impact the competitive landscape of online shopping."

Still, it's worth noting Amazon's move into these new product lines, especially the hardware offering because it's such a difficult online category. Keep in mind that even home improvement king Home Depot (NYSE: HD) hasn't yet rolled out a service that allows customers to buy all their hardware products online.

After all, how can you make money shipping a ladder? Most companies couldn't, and Amazon has yet to prove it can. But its asset management, cash flow management, and customer service skills set the company apart from many of its peers and bode well for long-term investors willing to take risks.

In addition, Amazon's scale should provide the company with a strong advantage in the hardware industry. As of September 30 the company had 13.1 million customer accounts, up more than 190% from 4.5 million a year ago.

This is a powerful asset, one that gives the company bargaining power when it comes to negotiating shipping rates. If the hardware category is successful, of course, Amazon can negotiate volume discounts with suppliers.

Amazon will charge just $4.95 a shipment regardless of weight, and product returns include a no hassle policy as well as free pick up for larger items. The more Jeff Bezos, Amazon's chief executive, adds customer touches and backs them up with the proper execution, the more his strategy seems to make sense.

For example, at the new Gift Ideas store Amazon not only wraps gifts, but also lets customers pick the wrapping paper and attach a personalized note. Customers can even fill out wish lists for friends and family, which could one day prevent your grandmother from buying you that horrible pair of pants instead of a GameBoy.

No question the company has a lot to prove. In the hardware segment alone it will have to compete with rival websites such as hardware.com and TrueValue.com. But the company has created critical mass around its many products and services and keeps setting the bar for other online retailers. It remains the company to beat in this fast-growing market segment.

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