What if... Amazon.com has bumper sales this Christmas?

In his first 'What if...' column for silicon.com, new economy commentator Dale Vile answers the first in a series of hypothetical questions we'll be putting to him. Everyone assumes bumper sales at Christmas are a good thing. But maybe there's such a thing as too bumper for Amazon.com...

The financial community is getting very excited about the prospect of Amazon.com having a bumper Christmas. The latest forecast from Amazon's 'Delight-o-Meter' sent its stock price up significantly. Yet what would be the impact of a good Q4 on the company's real business?

The simple answer is that Amazon is likely to lose even more money on top of the mountain of cash it has already disposed of. We can form a view of how much by extrapolating from Amazon's figures for operational expenses (fulfilment, admin and so on) for the first nine months of the year.

These tell us that it currently costs Amazon about $10.50 to extract $10.00 from the average customer. If the company achieved the analysts' estimate of $1.03bn in sales for the fourth quarter it would therefore lose over $50m based on operational overheads alone. If it sells more, it loses more.

All of this speculation about Amazon's Christmas reminds me of sitting down in the pub a couple of years ago with two friends who (sadly) happened to be SAP logistics specialists. We spent some time playing with the numbers and it didn't take us long to disprove the myth that it is always cheaper for a retailer to sell goods over the internet rather than through a physical outlet. (Never invite an SAP consultant for a drink unless you are prepared for this kind of conversation.)

We agreed the e-tail model works well for expensive items that don't weigh much, such as personal stereos and leather whips but runs into problems as the value drops and/or the weight increases. There comes a point when the cost of delivering an individually wrapped package to the customer's door is higher than the total cost of getting it onto a shelf in the high street.

In many cases, these realities were ignored by both dot-coms and investors. Seemingly limitless cash reserves were used to subsidise prices artificially, acting as a substitute for the bulk buying power and optimised supply/distribution chains of traditional players. The new economy evangelists viewed such complex systems as legacy, bogging down the dinosaurs while the dot-coms ran rings around them.

Meanwhile, those of us working in the real world of logistics were thinking it would be much easier to put a web front end onto an existing robust business than construct a new supply chain and distribution system behind a dot-com store front. Logistics stuff is hard and expensive, whichever way you cut it.

This plays into the hands of the traditional retailers who have been steadily entering the e-tail space. These players view the web as just another channel and aim to serve the customer wherever, whenever and however the customer wants. Many have already killed or absorbed the pure dot-com competition. They have done this by exploiting their brands and operational economies of scale across all channels.

Retailers like GUS Plc in Europe - with brands such as Argos, Jungle.com and Kays - have played this game very well. Customers can deal with GUS via the high street, the web, mail order or the TV in their living room. GUS representatives even come knocking on their door from time to time.

The other big names are there too. In Europe, we have Dixons, Sainsbury, Tesco as well as the Americans entering either directly or via local acquisitions. (Walmart buying Asda, for example.)

Smaller e-tailers need to beware as these giants battle away on a global or national basis. Little guys will still be able to make good business from delivering niche or customised products, just like their traditional counterparts in the high street. The trick, however, is to avoid commodity retailing and, wherever possible, play on brand, customer service and lifestyle positioning rather than price. Unfortunately for Amazon, it is playing the commodity game in the premier league and only a few large, pure e-tailers will survive in this space as the multi-channel big guns move in.

Having said this, Amazon now has a brand and is big enough to take the knocks. Also, it has been edging its way slowly towards profitability for a while now. This time last year, for example, it was costing Amazon over $11 to extract $10 from a customer. In addition, the company has diversified and developed into a very sophisticated international enterprise, some parts of which are already in profit at an operational level.

After all this effort and patience on the part of investors, it would therefore be nice to see Amazon have a bumper Christmas and start turning the corner to sustainable profitability. The only thing that's certain, though, is that however good or bad a Christmas Amazon has, the market will only become tougher as the 'real' competition continues to gather momentum.

What do you think? If you want to respond to this article post a Reader Comment below, or email editorial@silicon.com to let us know what you'd like to see Dale cover in future 'What if...' columns.

**Dale Vile is service director at analyst house Quocirca. His c.v. boasts years at Nortel Networks, Bloor Research, SAP and Sybase, and his job now involves working with vendors and users wanting to tap the business benefits of technology. For more information see: http://www.quocirca.com