Amazon had become one of the most recognisable brands in the world and was headed towards becoming the first truly global company of the New Economy. Present - Though Amazon this year, will sell over $3 billion worth of books, music, electronics, lawn mowers, etc., (37 categories in all) to some 25 million customers in over 150 countries, over a dozen Wall Street analysts have downgraded their ratings for the stock, including one who said that the company would run out of cash by early 2001. Stock is down 83 per cent to under $18 with Market capitalisation down to $7 billion. Amazon's initial strategy was laser focused and uni-dimensional - Get Big Fast (GBF).

The theory was quite simple: Once Amazon became big enough (nobody was clear how BIG), the economies of scale and efficiencies of a virtual store would kick in, and Amazon would start making money. Amazon spent over $200 million building seven distribution centers across the USA and the idea was that if this 3 million square feet of warehouse space was run efficiently, Amazon would be able to sell to as many customers as Wal-Mart, at a fraction of the cost. Let's go back to the premise on which Amazon was conceptualised.

The foundation for e-commerce is technology, as opposed to the foundation for retail commerce, which is real estate. As real estate goes on becoming more expensive, technology gets cheaper. In the real world, every time Wal-Mart opens a new store, it has a new set of costs: rent, sales staff, electricity, etc. When Amazon opens a virtual store, it has none of these costs. Over the past few years Amazon has paid up-front to build its basic foundation: the Website, distribution centers, servers, customer service centers etc. That foundation is the e-tail mould, so Amazon can sell anything - music, electronics, kitchen appliances, etc., - without incurring a bundle of new costs. That's the fundamental edge e-commerce will always have over retail commerce. Sounds great, doesn't it? Reality Check! E-tailing is not a one size fits all business. In fact, every time Amazon has opened a new virtual store, it has taken a whole new set of costs.

Consider for example, Amazon's online electronic store, which itlaunched in June 1999 with a heavy promotional blitz, the business is second biggest, after books. Books are small, cheap to ship, have a long shelf life and come from a few limited groups of suppliers. Compare this with electronics.

Electronics come in oddly shaped packages (think TV's - 4" to 65" screens, flat screen, etc.,); their shelf life is short (who wants last year's model), they are expensive to ship (big screen ones need special delivery) and what's more, come from dozens of manufacturers. And several of these manufacturers don't want to alienate their existing vendors by doing business with Amazon so they don't sell to Amazon. Thanks to all that Amazon had to run big costs to launch its electronics store. It has to buy products (of manufacturers who don't want to alienate their existing vendors) from resellers at a mark-up; it has to redesign warehouses to handle such cumbersome packages (a home theater system or a large TV stand). To compete with local electronics stores it has to hire servicepeople to go to customers' homes to help set-up the DVD's and the home theater systems.

Moreover, just by putting up an electronics tab is on its Website is not enough to convert an Amazon book buyer to an electronics buyer - it has to advertise a lot. What's true for electronics is true for toys, kitchen appliances, hardware, etc. Each new business Amazon gets into has its own set of problems, problems that incur a new set of costs. And when Amazon ventures overseas, these problems are exacerbated. Last year Amazon launched sites in France and Japan. So it has to pay to build two new distribution centers, hire new staff on two new continents, puzzle through different sets of tax codes and so on. And all this is besides the cost of promoting and advertising the new stores - last year the company spent $225 million on marketing. In fact, just like real world retailers, Amazon's cost grow with sales e.g. in the first nine-month period of this year, Amazon's sales grew by 86 per cent, its fulfillment costs(its biggest expense) grew by 118 per cent. Not surprisingly, Amazon's margins end up getting squeezed just as any real world retailers'. As per Bezos' own projections, when Amazon turns profitable its gross margins will be 20 per cent.

Compare this to Wal-Mart's 22 per cent and Barnes & Noble's 28 per cent. At its most optimistic, Amazon's operating margins will be five per cent (same as Wal-Mart's). That's not bad at all, after all those numbers are what real world retailers in USA aim for. But, there's a huge disconnect between financial estimates and investor expectations. If Amazon turns out to be no better than the most successful retailer in the world like Wal-Mart - a Wal-Mart trades at 1.5 times sales and Amazon valued on a similar scale would be closer to $4.5 billion as against the present $7 billion. And if Amazon does no better than any ordinary real world retailer - a Kmart, a J.C. Penny, a Sears - a Kmart trades at 0.12 times sales Amazon's market cap would tumble from $7 billion to $360 million! This is a story priced to perfection plus because even at this 83 per cent diminished value of $7 billion it is still valued more than Barnes & Noble, Kmart and J.C. Penny combined! Buyers beware!

Mr Sangani is head of Credit Resources, aMumbai-based investment banking concern