Gary Bacon II had bargain-hunting on the brain when he visited his local Barnes & Noble (BKS) in Jacksonville, Fla., on Dec. 7. But he didn't make any purchases. Instead, the Web designer whipped out his smartphone, snapped a few photos, and headed for the exit.
Bacon was using a new feature, released by Amazon.com (AMZN) on Dec. 3, that lets users take mobile photos of items they want to buy, store them in an online shopping cart, and purchase them whenever they want—typically at a discount—via the online retailer. The application, designed for Apple's (AAPL) iPhone, gives bargain hunters on the go a quick reference for prices and customer reviews of all the items sold by Amazon, as well as one-click purchasing.
Tools such as the iPhone application are among the reasons Bacon and millions of other consumers will flock to Amazon this holiday season, even in a bleak period for retailers. In November, online shops saw their first-ever drop in sales from the previous year, a sign that e-commerce sites won't be immune to the consumer-spending slump.
Some analysts have raised their outlook on Amazon, the leading U.S. online retail site, saying the company will be in good shape when consumer spending rebounds. "When we come out of this and there is less competition, their business is going to grow at an accelerated rate," says Scott Devitt, an analyst with Stifel Nicolaus.
Devitt cites Amazon's scale, strong reputation, and broad product offerings as the reason. But like other analysts, Devitt is also enamored of Amazon's large stake in research and development, which has led to new, technology-driven customer services like the iPhone application. Since its launch as an online bookstore in 1995, Amazon has widened its selection to span electronics, apparel, digital media, and numerous other retail categories. Along the way, it has also implemented technology to make online shopping easier. "Amazon has spent almost $4 billion on R&D over the past 10 years, which is vastly greater than the investment by its online competitors," says Cowen & Co. analyst Jim Friedland. This investment has been "a key factor in gaining share of consumers' wallets," he says. By comparison, Friedland says, online auction site eBay (EBAY) has spent some $2.7 billion on research and development.
"We like to do a lot of experiments," says Amazon spokesman Craig Berman. "Sometimes they work, and sometimes they don't work."
Lately they've been working. In recent months, Amazon has unveiled several new ways to shop, all powered by high-tech design. Its Universal Wish List feature includes a browser "widget," a button users can click when they see a product they want anywhere on the Web, creating a list they can retrieve via Amazon. The Gold Box highlights special deals by the day, hour, or availability. And a new feature for the holiday season, "Windowshop View," lets visitors browse products in a sleek Adobe Flash-based viewer that uses a 3D-simulated environment to capture the look of walking down an aisle at a toy store.
"Amazon has done a good job of adding innovative elements to the site," says Ken Cassar, vice-president of industry insights at Nielsen Online. But according to Cassar, few of the innovations Amazon has released in the past have the promise of the iPhone application. "The ability to be able to take a snapshot of a product with a phone and see a full database of prices completely changes the game—particularly when a consumer is in a brick-and-mortar store, where the consumer still makes over 95% of purchases."
Virtual Sales Rep
That's because, in several categories where Amazon competes, such as electronics and apparel, consumers want to touch and try out the items they're considering. You can't do that on the Web site. With the iPhone application, Amazon customers can enter brick-and-mortar stores armed with a virtual sales representative and checkout counter from Amazon. "Amazon has now put a kiosk in [brick-and-mortar] stores through mobile devices," says Bill Mirabito, a consultant with e-commerce researcher B2C Partners.
In a first, the iPhone application uses outsourced workers to match photos of products in the real world to Amazon's offerings. So when Gary Bacon snapped a photo of Jim Collins' book Good to Great in Barnes & Noble, a contractor who had signed up to perform the task on Amazon's "Mechanical Turk" program (a crowd-sourcing service open to anyone) received 10¢ to match the cover to the book's product page on Amazon.com. "Within a few moments, the Amazon app updated [with the price], and I added it to my 'Wish List,'" Bacon says. Amazon's Berman says this service is still considered experimental and that it was introduced "to gauge the interest in and typical usage of such a service and to gather feedback from users on what they like and do not like about the service."
Mobile shopping is in its early days, and analysts don't expect the iPhone application to make a big impact on the company's bottom line soon. "In the short term, at least in the U.S., people aren't going to be buying a lot of big-screen televisions on their cell phones," says Stephen Baker of NPD Group. Still, the iPhone app is one way for Amazon to up the ante on brick-and-mortar stores that are fast becoming its toughest competition. In a November survey, JPMorgan Chase (JPM) asked consumers what specific sites they plan to use for holiday shopping, compared with last year. While Amazon was the top response for the second year in a row, with about 50% of consumers planning to shop there, the sites of traditional brick-and-mortar retailers, including Sears (SHLD), Target (TGT), and Wal-Mart (WMT), had their biggest gains.
Some investors are warming to Amazon, too. On Dec. 8, Amazon's shares closed at 51.41, up 38% since Nov. 20 and outpacing Wal-Mart, eBay, Barnes & Noble, Overstock.com (OSTK), and Best Buy (BBY) in the same period. Stifel Nicolaus' Devitt rates Amazon's stock a "buy" with a target price of 63. Michael Souers, an analyst at Standard & Poor's who also rates the stock a buy, expects earnings of $1.30 a share in 2008 and $1.63 in 2009, compared with $1.21 in 2007. S&P, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP).
Wal-Mart: A Strong Rival
How long can Amazon outpace the likes of Walmart.com? "I'm hard-pressed to see anything on the immediate horizon that's going to chip away at Amazon's leadership, but the company that is most likely to challenge that over the medium to long term is going to be Wal-Mart," says Cassar. In recent years the big-box retailer has expanded its online operations, garnering nearly as much traffic as Amazon and eBay. It also uses strong ties to suppliers to offer products no one else has. On Dec. 8, for example, the chain announced it would begin selling tens of thousands of Nintendo (7974.T) Wiis—a highly coveted product for the holidays that's sold out at Amazon.com—exclusively at Walmart.com.
And should Amazon survive the recession with its place in online retail strengthened, the landscape is likely to look different by then: Many online-only competitors may not survive, while offline retailers shutting brick-and-mortar stores are likely to follow Wal-Mart's example and strengthen their position on the Net. Many of these companies will find themselves repeating some of Amazon's experiments.
Still, they'll have a lot of catching up to do. "History has not been kind to the followers in the Internet sector, and we believe Amazon's investment has provided the company with a sustainable competitive advantage," says Cowen & Co.'s Friedland.
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