The Everything Store: Jeff Bezos and the Age of Amazon (18 page)

The rumbling stopped after forty-five seconds, and employees evacuated the building. In a commanding performance, Bezos donned an item from his collection of oddities, a hard hat shaped like a ten-gallon cowboy hat, scrambled onto the roof of a car in the parking lot, and organized pairs of employees to reenter the building and collect their valuables. The building owner later shut down
the tenth and twelfth floors for repairs, and for months plastic tarps covered patches of the façade where bricks had shaken loose.

When I visited Amazon for another
Newsweek
story that March, the stock was hovering around $10 and the city inspector had closed the main lobby. It was an unattractive sight and an unavoidable metaphor for the company’s rapid descent. Visitors were ushered into the basement through the back of the building, past a large placard warning of falling bricks.

In early 2001, Amazon’s position and future prospects remained dubious. The problem wasn’t only its diminishing market capitalization or its overlarded staffing and expansion efforts. Growth, particularly in the oldest category, books—still more than half its business at the time—appeared to be slowing after years of annual double-digit increases. Inside the company, executives were fearful that the slowdown augured an overall decrease in online shopping itself. “We were scared to death,” says Erich Ringewald, a vice president in charge of Marketplace. “Books were decelerating, and everyone thought that Walmart.com would start selling books at a loss to keep us from growing.”

Amazon then did something rare in its history. Warren Jenson, pushing to improve margins to meet the company’s self-imposed profitability deadline, convinced Bezos to quietly raise prices in the older media categories. Amazon reduced its discounts on bestselling books and started charging more to overseas customers who were buying from the domestic website. Bezos signed off on the increases, but another important meeting quickly made him change his mind.

On a Saturday morning that spring, at the Starbucks inside the Bellevue Barnes & Noble where he had conducted Amazon’s very first meetings, Bezos met Jim Sinegal, the founder of Costco. Sinegal was a casual, plain-speaking native of Pittsburgh, a Wilford Brimley look-alike with a bushy white mustache and an amiable countenance that concealed the steely determination of an entrepreneur. Well into retirement age, he showed no interest in slowing down. The two had
plenty in common. For years Sinegal, like Bezos, had battled Wall Street analysts who wanted him to raise Costco’s prices on clothing, appliances, and packaged foods. Like Bezos, Sinegal had rejected multiple acquisition offers over the years, including one from Sam Walton, and he liked to say he didn’t have an exit strategy—he was building a company for the long term.

Bezos had set up the meeting to ask Sinegal about using Costco as a wholesale supplier for products that manufacturers still wouldn’t sell to Amazon. That idea never went anywhere, but over the next hour, Bezos listened carefully and once again drew key lessons from a more experienced retail veteran.

Sinegal explained the Costco model to Bezos: it was all about customer loyalty. There are some four thousand products in the average Costco warehouse, including limited-quantity seasonal or trendy products called treasure-hunt items that are spread out around the building. Though the selection of products in individual categories is limited, there are copious quantities of everything there—and it is all dirt cheap. Costco buys in bulk and marks up everything at a standard, across-the-board 14 percent, even when it could charge more. It doesn’t advertise at all, and earns most of its gross profit from the annual membership fees.

“The membership fee is a onetime pain, but it’s reinforced every time customers walk in and see forty-seven-inch televisions that are two hundred dollars less than anyplace else,” Sinegal said. “It reinforces the value of the concept. Customers know they will find really cheap stuff at Costco.”
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Costco’s low prices generated heavy sales volume, and the company then used its significant size to demand the best possible deals from suppliers and raise its per-unit gross profit dollars. Its vendors hadn’t been happy about being squeezed but they eventually came around. “You can fill Safeco Field with the people that don’t want to sell to us,” Sinegal said. “But over a period of time, we generate enough business and prove we are a good customer and pay our bills and keep our promises. Then they say, ‘Why the hell am I not doing
business with these guys. I gotta be stupid. They are a great form of distribution.’

“My approach has always been that value trumps everything,” Sinegal continued. “The reason people are prepared to come to our strange places to shop is that we have value. We deliver on that value constantly. There are no annuities in this business.”

A decade later and finally preparing to retire, Sinegal remembers that conversation well. “I think Jeff looked at it and thought that was something that would apply to his business as well,” he says. Sinegal doesn’t regret educating an entrepreneur who would evolve into a ferocious competitor. “I’ve always had the opinion that we have shamelessly stolen any good ideas,” he says.

In 2008, Sinegal bought a Kindle e-reader that turned out to be defective and wrote Bezos a laudatory e-mail after Amazon’s customer service replaced his device for free. Bezos wrote back, “I want you to consider me your personal customer service agent on the Kindle.”

Perhaps Amazon’s founder realized he owed Sinegal a debt of gratitude, because he took the lessons he learned during that coffee in 2001 and applied them with a vengeance.

The Monday after the meeting with Sinegal, Bezos opened an S Team meeting by saying he was determined to make a change. The company’s pricing strategy, he said, according to several executives who were there, was incoherent. Amazon preached low prices but in some cases its prices were higher than competitors’. Like Walmart and Costco, Bezos said, Amazon should have “everyday low prices.” The company should look at other large retailers and match their lowest prices, all the time. If Amazon could stay competitive on price, it could win the day on unlimited selection and on the convenience afforded to customers who didn’t have to get in the car to go to a store and wait in line.

That July, as a result of the Sinegal meeting, Amazon announced it was cutting prices of books, music, and videos by 20 to 30 percent. “There are two kinds of retailers: there are those folks who work to
figure how to charge more, and there are companies that work to figure how to charge less, and we are going to be the second, full-stop,” he said in that month’s quarterly conference call with analysts, coining a new Jeffism to be repeated over and over ad nauseam for years.

Bezos had seemingly made up his mind that he was no longer going to indulge in financial maneuvering as a way to escape the rather large hole Amazon had dug for itself, and it wasn’t just through borrowing Sinegal’s business plan. At a two-day management and board offsite later that year, Amazon invited business thinker Jim Collins to present the findings from his soon-to-be-published book
Good to Great.
Collins had studied the company and led a series of intense discussions at the offsite. “You’ve got to decide what you’re great at,” he told the Amazon executives.

Drawing on Collins’s concept of a flywheel, or self-reinforcing loop, Bezos and his lieutenants sketched their own virtuous cycle, which they believed powered their business. It went something like this: Lower prices led to more customer visits. More customers increased the volume of sales and attracted more commission-paying third-party sellers to the site. That allowed Amazon to get more out of fixed costs like the fulfillment centers and the servers needed to run the website. This greater efficiency then enabled it to lower prices further. Feed any part of this flywheel, they reasoned, and it should accelerate the loop. Amazon executives were elated; according to several members of the S Team at the time, they felt that, after five years, they finally understood their own business. But when Warren Jenson asked Bezos if he should put the flywheel in his presentations to analysts, Bezos asked him not to. For now, he considered it the secret sauce.

In September 2001, Bezos, Mark Britto, Harrison Miller, and two Amazon publicists flew to Minneapolis to announce a long-planned deal with Target. On the day of the announcement, they arrived just before 8:00 a.m. at the retailer’s downtown headquarters and took an elevator to a television studio on the thirty-second floor of Target Plaza South, the tallest building in the city. As they were in the
elevator, Amazon PR chief Bill Curry got a call from a colleague in Seattle. A plane had hit the World Trade Center. When they got upstairs, they asked their Target counterparts to turn on the television.

Together the Amazon and Target executives watched in horror as the second plane hit the World Trade Center. No one had any idea what was going on. Curry, a former publicist for Boeing, observed that the plane looked like a 767. Plans to publicize the partnership with a series of satellite-television interviews were scrubbed. The tragic morning then unfolded before them, as it did for everyone else around the world. The Target building was evacuated and then reopened, and the Amazon and Target executives stood together for much of the day watching a single television.

In the afternoon, Bezos, still on his photography kick, walked around the Target office taking pictures with his Elph digital camera to record the awful, historic day. Someone complained to Dale Nitschke, the Target manager in charge of the Amazon partnership, and he quietly asked Bezos to stop.

The skies were closed to commercial flights for the next seventy-two hours, so the Amazon group couldn’t fly back to Seattle. On the morning of September 12, they bought additional clothes and an automobile cell phone charger from a Marshall Field’s department store, rented a white Mazda minivan from Hertz at an exorbitant daily rate, and headed west on I-90, a highway that ended in Seattle.
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Britto drove, Miller sat in the front seat, and they all stewed, shell-shocked, listening to music and their own thoughts. “Driving through the farmland and thinking about what was next was surreal and cathartic,” Miller says.

While Britto drove, Bezos used his phone and helped to organize a donation drive on the Amazon home page, which in two weeks would raise seven million dollars for the Red Cross. They stopped to stretch their legs in the Badlands and spent the night at a Mount Rushmore hotel that Bezos remembered visiting with his family as a child. Flags were at half-mast at the Mount Rushmore memorial, and the tourists were somber. Some tourists recognized Bezos—not as the Amazon.com founder, but as the CEO who had just
appeared in a goofy ad for Taco Bell to raise money for the Special Olympics. Afterward, the executives bought matching navy blue Mount Rushmore windbreakers and ate at the park cafeteria.

The group kept driving west. Later that day, the skies briefly reopened for private flights, and Bezos’s plane met them on a small airstrip. Bowing to the gravity of the moment, Bezos did not make his usual announcement that the company was not paying for the flight; they flew to Seattle, and their solemn cross-country odyssey ended.

Bezos may have been famous to some because of his notorious Taco Bell ad, but in fact Amazon had some of the most memorable TV ads of the dot-com era. In the Sweatermen series, created by the San Francisco office of an agency called FCB Worldwide, a campy chorus of men dressed like Mr. Rogers extolled the virtues of unlimited selection on Amazon. The playful, retro shtick reflected the goofy sensibility of Amazon’s CEO. But a year into the bust, Bezos was desperately trying to figure out how he could stop advertising altogether.

As usual, Bezos battled his marketing executives. They argued that Amazon had to be on the airwaves to reach new customers. As Amazon’s losses mounted, Bezos’s opposition hardened. He had the marketing department organize tests, running commercials in only the Minneapolis and Portland media markets and measuring whether they generated an uptick in local purchases. They did—but, Bezos concluded, not enough to justify the investment.
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“It was pretty clear afterward that TV advertising wasn’t really having an impact,” says Mark Stabingas, a finance vice president who joined the company from Pepsi.

The result was not only the cancellation of all of Amazon’s television advertising but another dramatic purge of the marketing department. Alan Brown, a chief marketing officer who came from MasterCard, left after only a year on the job. Centralized marketing at Amazon was shut down and its tasks spread out among the e-mail marketing and worldwide discovery groups led by Andy
Jassy and Jeff Holden. Amazon wouldn’t advertise on television again for another seven years, not until the introduction of the Kindle. “There can be only one head of marketing at Amazon, and his name is Jeff,” says Diane Lye, a British senior manager who led Amazon’s data-mining department and helped run the advertising tests.

Bezos felt that word of mouth could deliver customers to Amazon. He wanted to funnel the saved marketing dollars into improving the customer experience and accelerating the flywheel. And as it happened, at the time, Amazon was conducting an experiment that was actually working this way—free shipping.

During the 2000 and 2001 holidays, Amazon offered free shipping to customers who placed orders of a hundred dollars or more. The promotion was expensive but clearly boosted sales. Customer surveys showed that shipping costs were one of the biggest hurdles to ordering online. Amazon hadn’t yet found a good way to convince customers to shop in multiple categories—to buy books, kitchen appliances, and software, for example, all at the same time. The hundred-dollar threshold motivated buyers to fill their baskets with a variety of items.

In early 2002 late on a Monday night, Bezos called a meeting in Warren Jenson’s conference room to talk about how to turn the holiday-season free shipping into a permanent offer. This was one way he could redeploy his marketing budget. Jenson in particular was opposed to this. The CFO worried that free shipping would be expensive and wasteful, since Amazon would be giving discounts to all comers, including those customers who were inclined to place large orders anyway.