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Amazon takes aim at furniture retailers, profits be damned
Nov 15, 2017
Dennis Scully

Last week, another wave of low-priced, midcentury-inspired furniture came crashing down upon the online retail landscape, with enough force to sharply drive the shares of Wayfair, Restoration Hardware and the rest of furniture sector lower that same day. Amazon confirmed its long-rumored intentions to make furniture a much bigger part of its online offerings by announcing the launch of two private-label furniture brands: Rivet and Stone & Beam.

Amazon's Rivet Tufted Sofa
Amazon’s Rivet Tufted Sofa

Each brand will offer a 30-day return policy and both lines will be eligible for Amazon Prime. Delivery times will usually be within days and shipping will be free to Prime members.

Amazon Prime is one of the company’s powerful weapons in its fight for market share dominance. Prime is the most successful and most lucrative membership reward program in retail history. It has forever changed consumer expectations regarding delivery times and how much customers are now willing to pay to have items shipped, even something as sizable and heavy as a sofa.

A recent study estimates that more than 80 million Americans have an Amazon Prime account. Scott Galloway, the NYU Stern School of Business professor who wrote the book The Four: The Hidden DNA of Amazon, Apple, Facebook and Google, pointed out recently in an interview: “A higher percentage of American households have an Amazon Prime account than currently have a landline telephone, own a gun or voted in the last presidential election.”

Amazon takes aim at furniture retailers, profits be damnedAmazon doesn’t need to make money selling furniture online. Profitability is never the focus when the company sets its sights on a new market.”

Another weapon in Amazon’s arsenal as it takes aim at this segment of the market is data. Amazon gathers data on every seller on its site, tracking every inquiry, every sale, every return, every piece of furniture ever shipped. The company has been studying the furniture market for years. It has known for some time that furniture is the second-fastest-growing segment of e-commerce sales. According to IBISWorld, 15 percent of the $70 billion business in U.S. furniture sales is now transacted online. That number is growing quickly.

Jeff Bezos, CEO of Amazon
Jeff Bezos, CEO of Amazon

Perhaps what makes Amazon the most challenging competitor of all, though, is that the company doesn’t feel the need for its retail division to even turn a profit. Amazon runs a highly successful cloud computing platform known as Amazon Web Services. AWS provides storage and web hosting services for corporations and governments all over the world. Netflix and Hulu run on AWS. The division is on track to generate over $16 billion in revenues by the end of 2017 and its profits have long been helping to underwrite Amazon’s other investments.

Amazon doesn’t need to make money selling furniture online. Profitability is never the focus when the company sets its sights on a new market. Amazon goes after market share and usually does so by offering the lowest price and quickest delivery.

The company knows that once it has the leading market share in any business, it can then adjust prices as it sees fit. By driving down prices in the market it is targeting, Amazon can usually drive out competitors who simply cannot afford to offer their products at a comparable profit margin, especially if that margin is zero.

One company that seems to have borrowed a page from the no-profit playbook, and is likely to be the most impacted by Amazon’s latest introductions, is Wayfair. Shares in that company fell by more than 15 percent recently, after it announced an even wider-than-expected loss in the third quarter. The losses come despite revenue gains of 42 percent, on sales of $1.2 billion in the quarter. The company is spending so much money on customer acquisition (i.e., advertising, and hiring additional staff in its logistics division) that it is hard to see when it will ever be able to make money.

Amazon takes aim at furniture retailers, profits be damnedBy driving down prices in the market it is targeting, [Amazon] can usually drive out competitors who simply cannot afford to offer their products at a comparable profit margin.

But perhaps the importance of profitability is just an old-fashioned notion these days. When it comes to Amazon, Restoration Hardware and Wayfair, the stock market seems to think so.

While it has been a good year for stocks in general, with the S&P 500 up by more than 13 percent, Amazon shares are up 41 percent year-to-date. Wayfair shares, even despite the recent pullback, are up 64 percent. Restoration Hardware is the biggest winner of all, with its shares up 194 percent for the year. Who’s worried about selling furniture at a profit? Certainly not the investors in those three companies.

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