Amazon layoffs: What's it all mean?
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After Amazon.com's Seattle customer-service employees collected their belongings Tuesday and gathered at the Westin Hotel to be summarily laid off, Chief Executive Jeff Bezos sent the department a midnight e-mail.
"We've just had our best financial quarter in our history, and yet we're laying off about 15 percent of our employees," he wrote. "Why, and what does that mean?"
Amazon.com, whose growth-over-profits strategy helped it become the bellwether of e-commerce and the poster child of Internet hype, is now pledging to atone for its free-spending ways.
The company last week said it would slice 1,300 employees from its payroll, close a distribution center and scale back another. And - perhaps most important to Wall Street - it declared it would turn an operating profit by year's end.
Still, the question lingers:
Why, and what does that mean?
The short, exotic history of Amazon is well-known, says Adam Hamilton, a research analyst with Seattle-based McAdams Wright Ragen. The key now is to build a long, practical future.
"It's just a matter of putting their heads down and plugging away, quarter by quarter - making the claim that they will make a profit credible," he said. "There are a lot of people out there who don't believe them."
When Amazon.com reported its fourth-quarter financial figures Tuesday, the accompanying restructuring wasn't the only surprise.
The company reported a substantial slowdown in its core business. U.S. book, music and video sales grew 11 percent from last year, compared with an 82 percent growth from fourth quarters of 1998 to 1999.
Some analysts expressed concern over the softening of the company's core, since roughly 65 percent of its customers have yet to buy items from other product categories, whether they be spatulas or drills.
Bezos said some of those sales have migrated to the international division since it launched Web sites in France, the United Kingdom, Germany and Japan. But he mostly blamed the ripple effect of a slowing economy and warned that sales this year could fall to $650 million lower than earlier projections.
The company said restructuring would save millions of dollars and move it closer to profitability, even amid an economic downturn. The plan includes the elimination of 850 jobs in Seattle, 450 in Georgia, and the closure of a year-old multimillion-dollar distribution site.
"There has always been an undercurrent of pressure to take a position (on profitability), but they were growing so fast that they were able to deflect those questions and point at top-line growth," said Stephen Zrike, a senior analyst with Forrester, a market research company. "Now that the rate of growth is slowing, they haven't been able to avert the focus from the bottom line."
Put up or shut up
Analysts say last week's profit announcement was critical because management essentially put a stake in the sand.
"That's a big thing with analysts and investors - the extent to which you can trust management," said analyst Hamilton. "They've never said anything to which we've been holding them."
In an interview last week with The Seattle Times, however, Bezos conceded profitability was a prediction, not a guarantee.
And the issue remains clouded by the company's definition of profit. In announcing its forecast, it said it expects to reach "pro forma operating profitability" in the fourth quarter of 2001. "Pro forma" results are not a bottom-line figure and, in Amazon.com's case, exclude stock-based compensation, investment losses, goodwill, one-time charges and other expenses.
Pro forma figures can differ widely from bottom-line "net" figures. In the fourth quarter of 2000, for instance, the company had a net loss of $545.1 million, while its pro forma net loss was $90.4 million. Its pro forma "loss from operations" was even smaller - $59.9 million - and that's the figure it's targeting to get into the black by year's end.
Bezos, in his interview with The Times, said the company announced an operating-profit date because it now has enough visibility to do so. He pointed to the company's last four quarters, which he described as a stream of significant improvements. Operating loss as a percentage of sales, for instance, fell to 6 percent, down from 26 percent a year ago.
"That's what gives us the ability to make that kind of prediction," he said.
Untested by hard times
Although Amazon.com has proved what it can do when times are good, observers want to see how the company performs when times are bad.
Amazon hung out its shingle during the longest economic expansion in U.S. history. It built an e-commerce powerhouse aided by a booming economy and Wall Street's once-voracious appetite for all things dot-com.
In stark contrast, the Federal Reserve last week lowered interest rates for the second time in less than a month to stave off recession. Wall Street now shuns the Internet commerce sector; many of Amazon's counterparts are dead or on life support.
Shawn Milne, a research analyst with Wit Sound View in San Francisco, said it's time for Amazon to behave like any other company.
"I find it interesting that there's so much media hype around laying off 1,300 people," Milne said. "This isn't fantasy. The company is growing slower than expected. They need to right-size"
Even so, critics say Amazon.com should not have cut its Seattle customer-service division if its mantra truly is customer obsession. Workers say the company's newer call centers, thousands of miles from headquarters, often transferred the most complex customer-service requests to Seattle's more-experienced staff.
Robert Spector, business journalist and author of the book "Amazon.com: Get Big Fast," said the decision goes against the company's founding principles. "The fact that they are going to be sending (customer service) out in the hinterlands is not a positive sign," he said.
'No cutback in service'
Bezos said the company is not reducing customer service, but consolidating operations. "There is absolutely no cutback in customer service," he said.
But JJWandler, a customer-service representative who was laid off, said Wall Street's demands have changed the culture of the company.
"Any analyst who doesn't think customer service is going to suffer because of this, I would encourage to place several orders and try to get some support from Amazon on those orders," he said. "I would recommend they do it after (we leave)."
Other key questions remain. Amazon helped grow its core business by offering customers incentives such as product discounts and cheap shipping. While the shopping experience on the site continues to improve, it's unclear how regular customers will react in its post-discount phase.
Then there is the question of competition. Last year marked the emergence of retooled and better organized online operations among the so-called brick-and-mortar powerhouses, including Wal-Mart, Target and Kmart.
Analysts say Amazon must continue to drive its book customers to other product categories such as cell phones and lawn and patio items. Still, it's unclear how those categories have fared so far.
The company doubled fourth-quarter sales in its international division and early-stage businesses group, which includes camera and photo, kitchen appliances, and tools and hardware.
But aside from electronics, which posted the second-highest sales behind books, the company has not broken out specific sales numbers for individual early-stage businesses. For its part, Amazon said it would focus on grabbing more wallet share from present customers, while driving sales abroad. Last week, Bezos also told employees the company would begin paring unprofitable items from its offerings.
He said the company can count on the things that separate it from other retailers: 30 million customers; the 48th most-recognized brand name worldwide; a sophisticated e-commerce system; $1 billion in cash.
Ken Goldberg, director of retail at the Miami-based answerthink, a high-tech consulting company, said driving loyal customers into other categories will be a challenge, especially for a Web site that was built selling books.
"It's the old story: think about Sears," he said. "It's hard to sell screwdrivers and dresses in the same building. You can attract and promote the softer side of Sears, but it's still the place where husbands, uncles and boyfriends buy lawn mowers."
Jeffrey Fieler, a Internet consumer analyst with Bear Stearns, said the question now is not whether the company will live, but how big it can grow.
"Yes, they'll live. Yes, they'll be profitable," Fieler said. "But they won't be as big as once dreamed."
Forrester's Zrike said Amazon.com is one of the last of the so-called "pure-play" e-commerce companies that can prove, or disprove, whether the business model of retailing exclusively on the Web is viable.
"I think that when all is said and done and we have some distance from this crazy launch era for e-commerce," Zrike said, "Amazon certainly will have been a bellwether company, a pioneer - but also an anomaly."
Monica Soto's phone message number is 206-515-5632. Her e-mail address is: msoto@seattletimes.com.