Amazon Finds Profits in Outsourcing

Since its founding in 1995, Amazon.com has taken a lot of titles. Internet bookseller. Warehouse builder. Personalization expert. Shipping discounter.

Now add outsourcer to the list. The big Web store is quietly building an e-commerce outsourcing business with customers like America Online, Target and Virgin MegaStores. Visit Target.com, and you see the Target bull’s-eye logo. Amazon.com, however, is making it work behind the scenes.

Those are three of the five significant e-commerce deals Amazon has announced since its August 2000 deal with Toys “R” Us. Overall, the company has more than 30 partnerships (though many of these partnerships are pure marketing deals, ˆ la Drugstore.com, which shows up when you surf for “health & beauty” on Amazon.com).

As the e-tail sector prepares for the peak holiday shopping season, it’s interesting to note that when it comes to selling goods or selling online know-how and services, it’s the services that brings better profit margins, according to Amazon.

In general, services generated $225 million in sales for Amazon.com in 2001; that’s about 7 percent of the company’s $3.1 billion in total revenue for the year. Sales of books, music and DVD movies, Amazon’s biggest business, earned 29 percent gross margins last year. Services, its smallest unit, had 68 percent gross margins in 2001, and it has generated nearly $100 million in sales for the first half of 2002.

So far, it’s been a select group of partners that contributes to this services business. Besides Virgin and Toys “R” Us, Amazon.com runs sites for Borders, has built a new version of Target.com and licenses some features, such as its search tool, to AOL’s shopping area.

Owen Van Natta, Amazon’s vice president of business development, says the company has a meaningful commitment to generating more such deals but wants to remain selective. Name-brand companies “that are really committed to the customer experience, those are also the partners that tend to really appreciate” what Amazon has built, Van Natta says.

Neither Amazon nor its clients say much about how the deals are structured. But so far, Amazon seems to have made customers like Borders.com happy. In April, its parent company, Borders Inc., extended its deal with Amazon, allowing customers to pick up Web purchases in Borders stores. Borders also said Amazon.com would take over the site for its Walden Books subsidiary.

Bob Edington, who is Border’s director of retail convergence services, calls Amazon “best in class” because it’s best able to convert site visitors into buyers. Edington says Borders decided to outsource its site because it wanted to focus its technology staff on in-store efforts, like kiosks, but still have a site that would draw customers.

Both Amazon and its partners gain sales and traffic?Amazon’s traffic grew 34 percent last year, compared with 7 percent for overall U.S. Internet traffic, according to Nielsen NetRatings. The bigger picture for Amazon: more products. Successful e-commerce sites “need to be one-stop shopping destinations. These deals give Amazon a leg up” on rivals like Yahoo and eBay, says Dawn Brozek, a NetRatings analyst.

So, if you’re a retail sector CIO, don’t be too surprised if Amazon.com knocks on your door.