______________________ I'm really sad about Amazon, because I think the store is great. I'd use it even if I had to pay retail price if that is what it took to make them profitable. I still cannot understand why the idea fails. It should be possible to run a web business cheaper than one with a physical front, but as we've seen again and again, while that might be true at first, it doesn't scale. That's odd, has anyone explained this? __________________ TMF Money Advisor
I don't believe that the idea fails, or will fail. As I see it, there are two primary, counterbalancing factors which distinguish e-tailing from traditional retailing, which we've discussed ad nauseaum. On the one hand, e-tailers are able to operate with lower infrastructure costs over an equivalent sales base, because labor needs and physical store needs are lesser, warehouses considered. In contrast, of course, is fulfillment & shipping. The many-to-many (individual wrap and ship) model is more expensive than the one-to-many model (group stack and sit). The question is how the magnitude of those items balance, and whether consumers will pay extra if there is a perceived deficit.
I don't think we have to look much further than the catalog retailers to know this model is economically tenable. It's not the cost of server space or web development versus sending out print catalogs that's troubling e-tailers. Buyers already accept paying more money (shipping) for an expense that they don't expressly calculate in their retail experience (driving, parking, waiting on line), and catalog retailers like LE actually have significant disadvantages to the online model. In fact, I'm sure there are many small, online retailers that are very profitable, and I know there are even a few large ones (Global Sports, 1-800-flowers).
So why has almost every e-tailer bit the big one, or is about one exit away from bitethebigoneville? Cheap capital. The massive capital inflow into the e-tail market encouraged the early movers (every e-tailer is still an early mover, the industry is only about 5 years old) to make extremely risky (stupid) economic decisions. When everyone suddenly decides that each e-tail category is a winner-take-all game (picture Circuit City and Best Buy two years after inception going on a massive binge to building thousands of stores) because they have the capital to do it, it automatically postpones the ability to see the long term economics of the business. If soda was invented today, and billions of dollars flooded the industry as everyone attempted to scale fixed costs and marketing budgets to attack hypothetical 100% annual growth rates, it would look like a failed business idea for a while when that growth didn't materialize quite as planned (though still enormously) and the capital suddenly dried up. The shareholders of early e-tailers in essence sacrificed their capital so that the e-tail market as a whole could grow quicker than it normally might have in a more risk averse environment, and also probably postponed overall industry profitability, because along with cheap capital comes competition gluts.
I think that in the end, as capacity continues to thin and capital markets remind entrepenuers that public markets generally do not accept 10-year plans when they are require continued external financing, it will be clear that e-tailing will be a viable business in almost every category except dog food (long live the sock puppet). Of course, it'll still probably be an awful business, but not for the reasons it has [been]. More because barriers to entry will be tiny, switching costs miniscule, and differentiation minor. It's always possible - as in any commodity industry - that individual firms will attain sustainable advantages through branding or scale or something else - but the industry as a whole seems destined to be lower ROIC. Low ROIC, but very viable, in my opinion.
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I'm really sad about Amazon, because I think the store is great. I'd use it even if I had to pay retail price if that is what it took to make them profitable. I still cannot understand why the idea fails. It should be possible to run a web business cheaper than one with a physical front, but as we've seen again and again, while that might be true at first, it doesn't scale. That's odd, has anyone explained this?
TMF Money Advisor