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Tuesday, 24 July, 2001, 10:14 GMT 11:14 UK
Amazon's quest for profit
Amazon's UK distribution centre
Sales at Amazon aren't growing as strongly as expected
It may be one of the last big internet retailers left standing - but it has never made any money.

As the ranks of online retailers have thinned, Amazon has stayed the course even as its critics foresaw its demise.

Its established brand name and market presence left it better equipped than most to survive last year's dot.com fallout.

Late on Monday, the group said that it remains on track to post a pro-forma operating profit in the fourth quarter.

But it is still unclear when it will make a net profit.

When is a profit not a profit?

It can seem that there are as many different ways to define profit as there are to make profit.

Pro-forma operating profit can be defined as profit minus some potential losses such as investments or employee stock options. It is not as stringent a definition as that demanded by standard accountancy practices.

By this definition, Amazon will be in "profit" by the end of the year.


We don't have a crystal ball on the economy

Warren Jenson, Amazon chief financial officer
At face value, Monday's results appear strong.

The company did post a loss for the 17th quarter in a row, but its pro-forma operating loss narrowed. In the US it has already posted a pro-forma operating profit and it is set to hit break-even by the end of the year in the UK and Germany. "It is a notable achievement in any kind of retailing, to say that a US-based company in the three years after launch can start two new standalone businesses in Europe," Amazon's UK country manager Steve Frazier told BBC News Online.

But crucially, sales aren't growing as fast as expected.

What this means is that Amazon.com is being helped on its way to profit by the aggressive cost cutting it has put in place.

It has closed distribution centres, shelved plans for a new corporate headquarters and laid off 15% of its staff.

"We took some fairly dramatic restructuring moves to reduce costs...and we don't have anything like that in mind [in the near future]," Amazon's Steve Frazier said.

Slow sales

But sales are still continuing to disappoint.

In theory, the failure of many internet retailers should have freed up as much as $1bn in online consumer spending that could go to Amazon.

But working against Amazon is the slowing US economy.

Some analysts say the retailer is shifting the same amount of stock, but tighter economic conditions mean that it is selling cheaper items instead.

"There can never be any guarantees. We don't have a crystal ball on the economy," Amazon chief financial officer Warren Jenson admitted.

This difficulty in growing sales has engendered some analyst scepticism.

"Can they make money? Yes. Can they grow the top line? If anything, we're more doubtful about that, " said Safa Rashtchy, an analyst with US Bancorp Piper Jaffray.

"It's hard to say we are not disappointed."

Amazon's Steve Frazier said:"Our sales are still growing...there is some impact of the slowdown in the consumer economy in the US already [factored] into those numbers. Given the state of the economy, we have made choices to drive for profitability rather than pure growth."

Serving retailers

One of the more interesting parts of the Amazon.com earnings release was the performance of its services division.

This division - the company's smallest - grew 41% to $38.6m, enjoying gross margins of 68%.

This could mean that Amazon.com could make a hefty amount as a retail services business.

Already, Toys 'R' Us pays Amazon.com a fee to run its online shop. Some suspect similar deals could follow.

The deal it recently announced with AOL provides some evidence that this is the direction in which Amazon could be heading.

Under the deal, AOL will use Amazon technology to build an e-commerce offering for AOL customers.

AOL chief executive Barry Schuler said: "We are going to partner as much as we can to get the best products and services."

Money to spare?

While Amazon is not expected to see any revenue from this for more than a year, the $100m cash injection from AOL should provide the internet retailer with some useful extra cash.

During the dot.com crash, some industry analysts had predicted that Amazon could run out of money before turning a profit.

The firm denied it then and continues to deny it.

It expects to have cash and securities worth $600m at the end of September and worth $900m at the end of the year.

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See also:

24 Jul 01 | Business
Amazon 'on track' for profitability
01 May 01 | Business
Amazon loses top spot
22 May 01 | Business
Amazon UK expands into electronics
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