Amazon: the Brink of Bankruptcy

Since its incorporation in 1994, Amazon’s business model had expanded from offering a simple internet marketplace for books to providing web services to online retailers, storage solutions and a dramatically expanded product line. Nevertheless, despite massive sales the company failed to produce a profit for shareholders and Amazon was on the brink of bankruptcy at the beginning of 2001. If I were a shareholder who received the company’s 2000 annual report, I would have strongly agreed with CEO Jeff Bezos that the company must achieve profitability by year-end 2001.

I would recommend that the company accomplish this by cutting costs related to fulfillment and inventory and by increasing revenue by capitalizing on the previous year’s investments in infrastructure. While many expenditures in 2000 were related to Amazon’s efforts to implement its strategy for growth, operating costs had also increased. Amazon’s fulfillment costs were 11 percent of sales in 1997 and 1998, ballooned to 14 percent in 1999, and further increased to 15 percent in 2000.

Because e-Commerce was still new and just beginning to establish customer trust, it’s critical that these costs be reduced without negatively impacting quality, speed of delivery or customer service. Because of Amazon’s large scale and repeatable processes, I would recommend a continuous improvement strategy such as lean Six Sigma. Another area of operational cash drain is inventory. After adding multiple new product lines and distribution centers in 2000, inventory management became a challenge for Amazon. In 1999, inventory turnover was 20% that of competitor Barnes and Noble and contributed to negative cash flow in 2000.

Amazon would be well advised to use IT technology such as an advanced ERP to better estimate the inventory needed to meet demand without overstocking. In addition to cutting costs, Amazon must increase revenue. While it may be tempting to suggest the company completely abandon some of its less profitable products and international endeavors, I think this would be poor advice. Many of these areas have just been developed and hold potential for future profits in the wake of the past year’s investment. Instead, I propose Amazon focus on their efforts to leverage existing infrastructure.

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For less profitable verticals such as consumer electronics and home and garden, the company should reproduce the Toys r Us model and partner with established, brick and mortar organizations that can benefit by exploiting Amazon’s ability to handle high volumes while reducing their risks of taking operations online. In return, these companies offer Amazon a stability that other online retailers of the dot-com era lack. It would be critical that Amazon implement these recommendations immediately in order to become profitable in 2001. Amazon. om must prove to Wall Street and investors that it is capable of generating a profit.

Through 2000, much of Amazon’s growth was funded by investors and the debt market. The environment generated by the dot-com crash and Amazon’s plummeting credit rating will significantly limit access to new capital. Since the company will almost certainly have to dip into existing cash reserves in the first quarter of 2001 to pay suppliers for 2000 Q4 inventory among other obligations, Amazon must begin replenishing cash reserves through its operations in the next four quarters.

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