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Amazon Uses Faux Suggestions To Promote New Clothing Store
Customers Used to Amazon's Uncanny Accuracy
May Be Baffled by Humorous Recommendations By
NICK WINGFIELD and JOE PEREIRA Has Amazon pulled a fast one on customers who trust its recommendations? Amazon.com Inc. has long prided itself on its ability to pitch extra products to shoppers by objectively analyzing the buying patterns of other customers. Search for a book, and Amazon will recommend additional books and music favored by buyers of that book -- often with uncanny accuracy to a shopper's tastes. But at least one new Amazon effort to recommend add-on purchases is anything but scientific. Recently, customers perusing
book, music or video listings on the An Amazon spokeswoman now says such clothing recommendations are "faux" suggestions that are "not based on the purchasing history" of Amazon customers. The spokeswoman, Patty Smith, says the recommendations are designed to direct people to its new apparel store where they can buy the items. Ms. Smith says Amazon deliberately designed the recommendations with a humorous edge so customers would know they weren't real. Still, the fake clothing suggestions are positioned next to what Amazon says are legitimate recommendations for books, music and videos that Amazon says are determined using software that impartially analyzes the purchasing history of its customers. The use of made-up recommendations could call into question the methods Amazon, one of the most popular and widely admired Internet retailers, uses to promote new products to its customers. The Seattle-based company is under pressure to make its new apparel store perform well during the crucial holiday shopping season. While some customers may be able to figure out the clothing suggestions are bogus, says Carrie Johnson, a senior analyst at Forrester Research, a market research firm, "I think it's a little misleading that apparel recommendations are based on nothing." Amazon denies trying to mislead shoppers, but in recent days, it has tweaked the wording of its recommendations because it says some weren't getting the joke. As recently as Monday, some recommendation headings read "Customers who shopped for this item also wear," followed by a list of four items. By Tuesday, some recommendations had a more cheeky statement: "Customers who wear clothes also shop for ... " followed by a list of apparel items. Amazon also subtly changed the list of clothing it recommended on some of its product pages, moving from items such as cashmere sweaters from Land's End, Tommy Bahama Shirts from Nordstrom and Performance Fleece from Old Navy to a mix of more whimsical items such as lady bug rainboots and "clean underwear," which are more generic descriptions of clothing available from retailers on the Amazon site. Amazon previously ran the whimsical list on some product pages, but now it appears to be the only list it is currently running. Amazon made the changes "because customers were confused about" whether the recommendations had a real connection to the products customers were browsing, says Amazon's Ms. Smith. "We wanted to make it as obvious to them that these were humorous." She says the apparel suggestions won't hurt Amazon's credibility with customers. "We think the language is such that it's evident that" the recommendations are "not scientifically based." Amazon's retail partners say they aren't bothered by Amazon's phony product suggestions. "My perception is I think they're taking a tongue-in-cheek approach to promote this new category, and their customers get it," says Julie Bornstein, vice president of merchandising and marketing at Nordstrom Inc. in Seattle. "It's a fun way to lure people into this new area to see what's available." Ms. Bornstein said she isn't bothered that Amazon took some liberties with the name of the Nordstrom product -- ladybug rain boots -- that it's recommending. But some authors say they're not crazy about Amazon's pitching clothing alongside their books in any form. Huston Smith, author of "The World's Religions," which Amazon marketed alongside clean underwear and other items, called the cross-promotions "a perverse act of consumerism ... that pulls the rug out of one of the book's principal messages, which is that man does not live by bread alone." Mr. Smith, who has taught religion and philosophy at the Massachusetts Institute of Technology, Syracuse University and the University of California, Berkeley, added that "I don't like the thought of Amazon using books such as mine to promote what I deem to be overblown consumerism." Mr. Giuliani's publicist, after receiving a facsimile of Amazon's cross-promotions under "Leadership," didn't return calls for comment. The clothing recommendations show up only on Web pages for certain book, music and DVD products on Amazon and, on those pages, customers will see the recommendations only a limited number of times. Amazon won't say exactly how it decides where and when to show the clothing recommendations. Amazon has long used Web technologies to recommend purchases based on collective purchasing habits. For instance, customers who visit the Amazon page for the DVD of sci-fi thriller "Minority Report" see a list of recommended movies, including "Spider-Man," "Lord of the Rings" and other titles that were previously purchased by buyers of "Minority Report." Online retail executives disagree about how effective such recommendations are in prompting customer purchases. The practice of discerning someone's preferences through collective purchasing patterns, sometimes referred to in the industry as "collaborative filtering," hasn't yet reached a level of plausibility for it to be construed as grounds for any legal action, opines Jack Balkin, a Yale University constitutional law professor who specializes in Internet law and the First Amendment. "When you see something like 'if you bought David McCullough's 'John Adams,' then you'll like tank tops from Old Navy,' the consumer is likely to say 'this is just a silly old computer program trying to understand me,' " says Dr. Balkin. Amazon says it will eventually base its apparel suggestions on actual purchasing patterns by customers, but it needs to gather more transaction history in apparel so it can accurately correlate clothing purchases with the items customers buy in other categories. Write to Nick Wingfield at nick.wingfield@wsj.com5 and Joe Pereira at joe.pereira@wsj.com6
Updated December 4, 2002
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Copyright
2002 Dow Jones & Company, Inc. All Rights Reserved Printing, distribution, and use of this material is governed by your Subscription agreement and Copyright laws. For information about subscribing go to http://www.wsj.com |
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FROM THE ARCHIVES: November 22, 2002
Amazon Prospers on the Web By Following Wal-Mart's Lead
Internet Retailer Cuts Prices, Keeps Eye
On Costs in Bid for High Sales Volume By
NICK WINGFIELD For the past several years, Amazon.com Inc. entered the holiday season as if it were battling for survival. And each year, it looked as if the Internet retailer might lose. During the fourth quarter of 2000, Amazon had losses of more than a half-billion dollars and missed Wall Street sales forecasts. High costs forced the company shortly after to close two of its eight U.S. warehouses and lay off 15% of its employees. For most of last year, investors worried about Amazon's ability to pay suppliers while the company was saddled with $2.1 billion in debt. This year, things are different. For once, almost no one is questioning Amazon's ability to survive the holidays. The company has pulled off a sharp reversal in the past year, restoring brisk sales growth in its core book, music and video business. Although net income remains elusive, the company has sharply narrowed its losses. Early this year, Amazon reported a small profit for 2001's fourth quarter, its first ever. Amazon's surprising formula is exactly what helped ruin many other online businesses and once added to the gush of red ink at Amazon itself: aggressive discounting and free shipping. To pay for those goodies, Amazon is behaving like every other successful mass retailer and slashing its costs wherever it can. A smarter system of processing orders means fewer errors. It has cooked up imaginative ways to cut shipping fees by consolidating orders. And it has a lucrative new business selling new and used goods online on behalf of other merchants. Amazon collects commissions on those third-party sales without the risks and costs of owning the inventory. Discount retailers such as Wal-Mart Stores Inc. continually lower prices by squeezing inefficiencies from their operations, sacrificing fat profit margins on products in favor of selling in high volumes. By adopting this strategy, Amazon appears finally to be doing what industry officials have long said the Internet would allow retailers to do -- drive down prices aggressively for consumers.
Can Amazon become one of the few companies to emerge as a long-term success from the ashes of the dot-com crash two years ago? While many technology companies and retailers have seen their stocks battered, Amazon shares are up 116% for the year. The company has lost billions of dollars in value since the Internet boom days. Still, Amazon has a market value of $8.9 billion, more than five times that of Barnes & Noble Inc., the country's biggest book retailer. Two Choices Retailers face two choices, Amazon founder and Chief Executive Jeffrey Bezos said in a conference call earlier this year: Work hard to raise prices or to lower them. Amazon, he says, has "decided to relentlessly follow the second model." Mr. Bezos's biggest gamble is a return to offering customers free shipping of most Amazon products ordered on its Web site. Early this year, Amazon waived delivery charges on orders $99 and above. Later, the company dropped the minimum order size to $49, then to $25 -- about the price of two hardback books or CDs. Amazon says it will decide after the holidays whether to raise the $25 minimum but that it plans to continue offering free shipping in some form. Market research shows customers hate shipping charges. Online buyers cite shipping discounts as more likely than any other promotion to encourage them to purchase goods during the holidays, according to a recent consumer survey by Jupiter Research, a unit of Jupitermedia Corp. Growth Booster Amazon credits free shipping as a key factor in boosting its growth. Third-quarter revenue jumped 33% to $851 million from a year ago, and the company predicts revenue will rise between 19% and 28%, to between $1.33 billion and $1.43 billion, during the crucial holiday quarter. By comparison, overall U.S. retail sales are expected to rise 3.5% during the holidays from last year's levels, according to consulting firm Retail Forward Inc.
Amazon lost $35 million in the third quarter, compared with a $170 million loss a year ago. The company says a more important financial measure is its free cash flow, which it defines as cash from operations, after capital expenditures and interest payments, and excluding noncash accounting items such as asset depreciation. Amazon expects to generate positive free cash flow for the full year. The company achieved this in 1998, with free cash flow of $3 million. This year, Goldman Sachs analyst Anthony Noto expects Amazon to report free cash flow of $110 million. "It means the company will be self-sustaining," says Marie Menendez, senior credit officer at Moody's Investors Service Inc. Many retailers still consider free shipping as unsustainable, one of the growth-at-all-costs gimmicks that landed so many Internet retailers in the morgue two years ago. After all, a retailer can elect not to charge customers for shipping, but it still needs to pay carriers to deliver orders to customers' doorsteps. Amazon executives last year vigorously debated the risks of introducing a permanent free-shipping offer. Some company officials worried that customers might not settle for anything else once they got used to no shipping charges, according to people familiar with the discussions. "If you get them trained on free shipping, will you be able to stop it if you decide it isn't working?" one person says, describing those concerns. "Everyone understands that if you head down this path, it's a slippery slope." An Amazon spokesman declined to comment on internal discussions. Mr. Bezos declined to be interviewed for this story. Amazon competitors have resumed discounting, too. Closely held Buy.com Inc. offers free shipping on most products without a minimum order size and promises to undercut Amazon book prices by 10%. So far, competing offers don't seem to have drained significant amounts of sales from Amazon, most analysts say. To help offset the costs of free shipping, Jeffrey Wilke, Amazon's senior vice president of operations and customer service, has led an aggressive campaign to cut costs and squeeze more productivity out of workers at the company's warehouses, where orders are processed. The 35-year-old engineer employs a team of a half-dozen mathematicians who devise models for, say, the best way to spread book inventories throughout Amazon's six warehouses in the U.S. Mr. Wilke is a devotee of "six sigma," a method for using data analysis to reduce errors in manufacturing and service industries. He assigns "black belts" and "green belts" to workers, a six-sigma award system that honors the most creative problem-solvers at its warehouses.
His crusade is helping. Fulfillment costs -- charges incurred to process orders, but not to ship them -- are Amazon's single biggest operating expense. These costs fell to 12% of revenue last year from 15% in 2000. Fulfillment costs in the most recent quarter were $90.3 million, or 10.6% of revenue. Mr. Wilke also is working to wring more savings out of Amazon's delivery process. With its free-shipping program pushing up expenses, Amazon spent $10 million more on shipping than it received from customers in the third quarter, compared with $2 million a year earlier. One tactic: Amazon is consolidating more of its orders, taking advantage of the greater time it has to deliver products to customers who opt for free shipping. In exchange for free delivery, customers typically agree to wait several extra days to receive their goods. (Customers can choose to pay for faster shipping.) Consider the benefit when a hypothetical Amazon customer in New York orders a DVD player and a book. One item is warehoused at Amazon's Delaware warehouse, the other in Nevada. Previously, Amazon would have shipped the items in separate packages from its warehouses within 24 hours, effectively doubling shipping costs. But with the extra days it gains to prepare free-shipping orders, Amazon now can have one of its distributors send the book to its Delaware warehouse on a pallet with other books for a nominal fee. Amazon then bundles the customer's order in one box and ships it, saving several dollars in carrier charges in the process. Break on Rates The extra order volume spurred by free shipping also gets Amazon a break on shipping rates. The company is increasingly using a method called "postal injection," in which it uses its own trucks or independent carriers to drive truckloads of orders to local postal depots from Amazon warehouses. The procedure eliminates processing steps for the U.S. Postal Service. Amazon won't say exactly how much it saves this way, but one of the shipping companies Amazon works with, SmartMail LLC of Atlanta, says it saves customers between 5% and 17% off the normal price of first-class mail. Amazon says the cost-cutting has allowed it to resume aggressively discounting many of its products. Two years ago, as investors pressured the company to stanch its losses, Amazon reined in its discounts. In the summer of 2000, prices on many books went up. Discounts on bestsellers, for instance, went to 40% off from 50% off. The company jacked up prices again on many books in early summer 2001. The moves stalled sales growth in its largest retail category -- books, music and video -- where sales dipped slightly last year to $1.69 billion.
Amazon says it began reversing the price increases last year. More price cuts were made in April of this year, when the company lowered prices on all books over $15 to 30% off list price, expanding a discount it previously offered on books over $20. Third-quarter sales for its book, music and video business jumped 17% to $412 million from a year earlier. "We've chosen to offer great prices to customers because we can afford to," Mr. Wilke says. Amazon also is counting on new businesses to offset the costs of free shipping and product discounting. The company recently formed a slew of new relationships with other brand-name merchants to sell their goods to Amazon customers, for which Amazon earns commissions. This month it introduced an apparel store featuring clothing from Nordstrom Inc., Gap Inc. and others. Those retailers handle their own shipping. For other merchants, including Toys "R" Us Inc., Amazon warehouses their products and takes care of deliveries. An even faster-growing business is Amazon's Marketplace, which is similar to eBay Inc.'s Internet auction market. In the Amazon operation, individuals and independent merchants sell new and used goods on the same Web pages that the company sells its own products. Customers browsing for "The Sopranos Family Cookbook" on Amazon, for instance, can buy the item new from the Internet retailer for $17.97 or pick from nine used copies listed by individuals for as low as $12.50. Amazon says sales by third parties represented almost a quarter of all the items sold on Amazon in North America in the third quarter, up from 16% a year ago. Amazon won't disclose the value of those sales. A risk is that Amazon could effectively help individual merchants steal new product sales from its own site. Amazon executives say they don't care whether they sell one of the company's own products or someone else's, since the actual dollars that go to Amazon's bottom line are about the same. The Marketplace business has upset some high-profile groups. The Author's Guild, an advocacy group for writers, earlier this year blasted Amazon for its used-book business, saying the retailer was hurting the royalties that authors receive from new book sales. Write to Nick Wingfield at nick.wingfield@wsj.com4
Updated November 22, 2002 2:41 p.m. EST
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Copyright
2002 Dow Jones & Company, Inc. All Rights Reserved Printing, distribution, and use of this material is governed by your Subscription agreement and Copyright laws. For information about subscribing go to http://www.wsj.com |
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![[Jeff Bezos]](../images/Bezos_Jeff01242002223854.gif)
![[Jeffrey Wilke]](../images/Wilke_Jeffrey-FZ24711212002223247.gif)
![[Graph]](../images/amazon11222002004930.gif)