My Yahoo!Amazon's Hard Time Going High End
Living.com is dead less than three months after its premiere on Amazon.com, signaling far more than the failure of online furniture sales. In February, Living.com agreed to pay Amazon $145 million over five years for prominent placement. Today, the Austin, Tex.-based furniture site said it will file for bankruptcy.
This is just more evidence that Amazon.com amzn (nasdaq: amzn - news - people) will have a hard time extending its brand beyond the books, CDs and movies its 23 million shoppers associate with the site. Amazon has been rapidly expanding into larger product categories through partnerships like the one with Living.com and launches of departments like Lawn and Patio and Toolcrib. But analysts say there is little evidence these products are selling well.
The trouble is that it was the sales from these high-priced, high-margin products that were supposed to help support Amazons media businesses, which have notoriously thin margins. Amazon began adding new product categories when the company, and most other e-tailers, realized that there is little that is virtual about selling online. What was thought to be an overhead-free industry became capital intensive, requiring things like warehouses and trucks. The sale of books and CDs wasn't going to foot that kind of bill.
But consumers arent going to Amazon when they need to buy anything expensive.
"In my mind, they are the first destination for people who want to buy small items at a discount," says Jupiter Communications analyst Ken Cassar. "Thats some of the reason Amazon had trouble dominating the toy space, because theyre more expensive items." Last week Amazon and Toys 'R' Us toy (nyse: toy - news - people) announced plans to create a co-branded toy site to replace Amazons toy store.
The difficulty Amazon has selling high-end items creates another problem: that of pulling in the huge marketing deals like the one inked with Living.com. Ashford.com asfd (nasdaq: asfd - news - people), another upscale e-tailer that cut a marketing deal with Amazon, is finding that its link on Amazon has resulted in similarly disappointing sales, industry sources say.
"You would expect that Amazon would deliver so many customers to Living.com or anyone else that they would be a success," says Deutsche Bank Alex. Brown analyst Jeetil Patel. But it doesnt, and that threatens Amazons marketing revenue. In the second quarter, marketing sales made up 3.5% of revenue but a whopping 12% of gross profit, according to Patel, because sponsorship sales have 80% margins.
"The sales that enhance Amazons margins seem to be at risk," says Patel. And that in turn could ultimately put its entire business at risk.
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