Amazon starts to flow out of undergrowth

The world's biggest internet retailer is creating order - and long promised profits - from apparent chaos, says THOMAS SUTCLIFFE.

It would be a cruel thing to do, but I would like to take a professional librarian round one of Amazon's distribution centres - warehouses where the world's biggest internet retailer turns virtual promise into consumer fulfilment.

It would be one of those schoolboy exercises in reckless combination - the blending of two incompatible substances in the hope of a spectacular reaction.

From a distance, the picking towers - the section where Amazon stores its inventory - offer a geometrical promise of comprehensible order, four floors of metal shelving receding into the distance.

It's only when you get close that you see there is no order - or none apparent to any human mind.

Three copies of Jonathan Franzen's The Corrections (No 30 on Amazon's sales ranking) sit alongside a larger stack of Tired of Being Tired (a self-help health book which is No 1912). On the other side of the aisle the eye leaps from a book of cartoons, to The Hobbit, to a Dean Koontz thriller. Compact discs are mixed with books and computer software.

By any traditional understanding this is a library from hell - an exercise in structured chaos.

Which is fitting really, as for the past five years Amazon.com has put counter-intuition at the heart of its business plan.

Jeff Bezos, the firm's founder, may be the only CEO in history to have apologised to his shareholders for making a profit - a blasphemous oversight in just one division some years back which ran counter to the almost religious dedication with which income was then converted into capital expenditure.

Bezos' vision was simple and it had a mantra, "Get Big Fast", a gold-rush determination to stake out as much ground as possible on the wild frontier of the internet.

His gamble was not a small one. Since it was founded in 1995, the company has sold books and other items to more than 35 million customers, but it has lost $US2.8 billion ($NZ6.7 billion).

Last month, for the first time, Amazon.com announced a modest quarterly profit for the company as a whole. Accountants can make the most gifted conjurors look ham-fisted but this was the real thing.

And this time, Bezos wasn't saying sorry. Amazon may not be out of the woods yet, but its long-term investors can see something other than trees.

The engine rooms that Bezos hopes will end up pumping even more cash back into the company than has flowed out over the last few years are its distribution centres.

And one of the first things you notice about them is how much empty space there is left.

The next branch of Amazon isn't going to be out there in the world, requiring planning permission and builder's fees. It's already sitting on your desk, and you obligingly paid to put it there.

The moment you decide to use it they have to be able to respond. Some of this empty space even has a geographical designation.

"This is Mass Land," says the UK managing director, Robin Terrell, as we cross a broad expanse of scuffed grey concrete which divides the picking towers from the sorting and dispatch lines.

On the floor the yellowed traces of gaffer tape mark out the locations for the pallets of Harry Potter books and Bridget Jones videos that sat there last December, fuelling a pre-Christmas boom for the company.

"Over Christmas we had 17 straight days on which we shipped over 100,000 units," Terrell explains. On their best day, December 13, they dispatched 150,000 items from here.

He says: "Take a good-sized bookshop. Imagine that you have to sell every single book in it before closing time, and then add to that the task of wrapping them all for postal delivery, and you have some idea of what that figure means in practice."

And even then, says Terrell, they weren't running close to capacity.

Right now Mass Land is a desert, just a space from which you can appreciate the scale of the picking towers - a high-rise storage system constantly replenished by those on "putaway", who take fresh deliveries and restock the shelves.

Somewhere in there are four bits of my property. Just before I set off, I obey the cheeky admonition of the Amazon screen ("Your shopping basket lives to serve. Give it a purpose - fill it up!") and put in an order.

By the time I arrive, it has entered the steady process that will have it out of the door within 24 hours.

If I were to check its progress on the website, as all customers can, I would see it described as "Dispatching soon", but the in-house software gives a more telling detail.

Right now, it declares, it is "Paid, not picked" - a clue to one source of Amazon's edge over its high-street rivals.

Strictly speaking, almost everything you can see in this vast inventory of software, CDs, electrical goods and books belongs to either the customer or the manufacturer.

On a rough average Amazon will pay for an item 15 to 20 days after it has been paid, earning interest in the meantime.

What's more, it can turn its stock over with an efficiency that would make a conventional bookseller weep - adjusting purchasing orders with its own in-house predictive software, so that stock matches public desire with figure-hugging tightness.

If there's a spike in demand, they can react quickly - with their major suppliers, an order placed at nine one night will usually be in the warehouse by the next morning.

The second thing you notice about the distribution centre is that it appears to be hopelessly understaffed.

The shrink-wrapping machines thump steadily away and the orange "totes" - the plastic crates in which orders are assembled - shuffle along the overhead conveyor belts queuing up to await sorting.

But there aren't many people, except at those points where automation has to give way to the vestigial human decision still left in the system.

This depopulation is another clue to Amazon's route-plan for long-term profitability. Terrell has the statistic ready: a recent year-on-year comparison showed they were shipping 15 per cent more goods with 4000 fewer staff.

Last year the company discovered the hard way that name recognition and internet presence could not be easily traded for increased revenue. A decision to cut discounting in America resulted in a drop in orders, until price cuts were reinstated. Efficiency was the only way to increase the margins.

Asked once whether his customers were loyal, Bezos replied, "Absolutely, right up to the second that somebody else offers them a better service."

This is responsible CEO talk - consistent with what he has called an "anal-retentive" focus on customer service.

But Amazon customers are loyal - they have a relationship with the firm built on its alternative approach to the commercial imperative.

Amazon customers can buy and sell their used books online through the company's popular marketplace service. In the US, where this has been operating for some time, such transactions account for 15 per cent of all orders - and Amazon gets a small cut from every one.

It's a good example of their ingenuity in creating a site that locks internet surfers in, and it isn't an isolated one.

Amazon's inclusion of reader reviews on its site is open to abuse - "Emily Bronte" once reviewed one of her own books and whinged about the fact that Jane Austen got "two mini-series and a full-length motion picture in one year". But it also reinforces the sense of a different way of doing business. Look up Get Big Fast, the standard history of Amazon's creation, and you'll find a reader complaining that its positive tone "grates".

But he concedes that the last few pages of the book are more critical and "best of all, it questions whether Amazon's business model will work (after all, Amazon has yet to make a sustained profit)".

It looks as if that sceptic - just one of thousands - may ultimately be proved wrong.

But if so, Amazon somehow has to manage to grow beyond its kid-brother charm - all upstart energy and eager zeal - without turning into just another corporate Big Brother.

- INDEPENDENT

Amazon at a glance

* Amazon is the world's biggest internet retailer or "e-tailer".

* Best known for selling books, the company also claims the biggest range of products from CDs to kitchenware.

* Amazon's results have come to be seen as a commercial test case for the viability of selling goods on the internet. Despite gaining 35 million customers in 220 countries since its launch in July 1995, the company has also lost $US2.8 billion ($6.7 billion) in the same period.

* Last year it lost $US567 million ($1.36 billion), an improvement on its $US1.4 billion loss in 2000.

* Last month Amazon finally made its first quarterly profit of $US5.1 million ($12.2 million) - on sales of $US1.1 billion.

* Amazon does not have an operations base in New Zealand, although it has considered the idea.

Amazon's top-selling books this week

1. The Wisdom of Menopause: Creating Physical and Emotional Health and Healing During the Change by Christiane Northrup M.D.

2. The Summons by John Grisham

3. The Ultimate Safe Money Guide: How Everyone 50 and Over Can Protect, Save and Grow Their Money by Martin Weiss

4. Self Matters: Creating Your Life from the Inside Out by Phillip C. McGraw

5. Fall on Your Knees by Ann-Marie MacDonald

6. The Bureau and the Mole: The Unmasking of Robert Philip Hanssen, the Most Dangerous Double Agent in FBI History by David A. Vise

7. Bias: A CBS Insider Exposes How the Media Distort the News by Bernard Goldberg

8. Stupid White Men ... and Other Sorry Excuses for the State of the Nation! by Michael Moore

9. Don't Let's Go to the Dogs Tonight: An African Childhood by Alexandra Fuller

10. The Diary of Ellen Rimbauer: My Life at Rose Red edited by Joyce Reardon