Mixed signals
For its part, Amazon is sending out mixed signals about its outsourcing plans.
Although it did a deal with Toys "R" Us, essentially outsourcing inventory management, Amazon's partnership with Borders shows the e-tailer also will handle fulfillment. The Borders and Toys "R" Us deals are based on the notion that Amazon is the king of online sales and knows better than anyone how to handle fulfillment and customer service for online operations. So why does the company need to look to outside help?
"We're always looking to make the best possible blend of which types we do ourselves and which types we outsource," said Amazon spokeswoman Patty Smith. "The guideline is, can the outsourcer perform as well as we can, and are there economic benefits?"
Analysts said Amazon could outsource everything outside of its core books, music and video business. With each store Amazon has added, fulfillment costs have risen. Costs rose from 11 percent of sales in 1998 to 15 percent of sales in 2000.
Amazon has made efforts to trim those costs, announcing in January that it would close one fulfillment centre in Georgia and operate its Seattle centre on a seasonal basis. It also announced plans to consolidate its European customer service centres in an effort to slash fulfillment costs.
Because Amazon's distribution centres are only 40 percent filled, "it would make sense for it to either fill the excess capacity by partnering with traditional retailers or take capacity out by closing down more distribution centres," D'Eathe said.
Potential partners?
Analysts declined to speculate on what companies would be likely outsourcing partners for Amazon, but computer distributor Ingram Micro is a potential candidate.
Although Amazon credited strong electronics sales for better-than-expected sales in the first quarter, analysts note that the online retailer lacks direct relationships with manufacturers. Simply put, Amazon's margins would improve dramatically if it could buy from suppliers at cost.
Ingram Micro, which helps Best Buy with its fulfillment, could dramatically cut Amazon's costs for its electronics store because of its close ties to numerous manufacturers.
"Let the experts do what they're best at," said Wit SoundView's Milne, adding that companies such as Ingram Micro "are used to shoving boxes around."
Amazon also could outsource its customer service operations. "I think customer service outsourcing is something that all companies do to one extent or the other. I haven't heard (that it's) anything beyond (that)," said Tim Albright, analyst at Salomon Smith Barney.
