Amazon’s profit and margins have always been slender; it earned only US$645 million last year, up 36 percent from the year before, compared to Wal-Mart’s US$13.4 billion, up 5 percent. But Wall Street is more enamored by the promise of the online retailer, valuing Amazon at around 60 times earnings and Wal-Mart at 15 times earnings.
“They don’t have to incur huge inventory carrying costs and can add product categories almost ad infinitum,” said Jeffrey Lindsay, an analyst at Sanford C. Bernstein. “Amazon has an almost magical business model in terms of inventory management.”
Amazon’s incursion into general retail has rivals scurrying to regroup and stop its advance.
Last month, Target, which allowed Amazon to run its Web site for the last decade, announced it would end the affiliation when its contract was up in 2011, following other one-time Amazon partners like Borders and Toys “R” Us. This month, Wal-Mart said it would allow other retailers to sell their products on Walmart.com, mimicking Amazon’s third-party marketplace and trying to match its vast selection. Analysts believe Sears, which owns Kmart, is preparing to allow outside sellers on its sites as well.
But the Amazon effect may be most deeply felt by small independent stores, which cannot hope to compete with Amazon’s selection and prices and recall in fear how the company hastened the fate of both independent booksellers and prominent electronics chains like Circuit City.
Like many small business owners, Ken Lombardi, the CEO of his family’s 60-year-old Lombardi Sports in San Francisco, views Amazon as a source of some of his business troubles. Though his store has been hit hard by the recession and the expansion of a sporting goods chain, REI, in the Bay Area, Lombardi says that it is Amazon that has helped depress profit margins and snagged sales for basics like silicone swim caps, undershirts and running shoes — which, he adds, Amazon can offer without California’s 8.25 percent sales tax.
“People used to come in to buy a pair of running shoes and we would sell them a shirt or a workout outfit. We’re losing that,” said Lombardi, who was recently forced to lay off a quarter of his 75-member staff.
In response to the gathering storm, Lombardi has overhauled his store, shrinking space for lagging items like Crocs clogs — which are offered cheaply on Amazon. He has added space for newer, hotter-selling items like Sanuk sandals, which are for sale on Amazon at about the same price. He also recently commissioned a new Web site to replace the static old one, which had not changed much over the years
“All we can do is tell a story physically and let people touch and smell and feel the product, which they can’t do online,” Lombardi said, lamenting his store’s future. “I think we are doing everything we can.”
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