Amazon's Dizzy Diversification Dance

Continuing the game of “What business are we in now?”, Amazon apparently is moving quickly into the private-labeled goods business. There are already hundreds of Amazon-owned brands in home and garden, bed and bath, furniture, and tools . But when you add some of its other ventures — the Kindle and cloud computing — you have to wonder whether Amazon is spreading strategy and management attention so thin that it might end up hurting itself.

It was less than a week ago that I discussed Amazon, among other tech companies, as flirting with danger by essentially becoming conglomerates. I was thinking of cloud computing and the complications that business brings, much as Google wants to get its apps into the enterprise but will find that it will have to learn how to satisfy the needs of these customers, which extend far beyond functionality and apparent sticker price.

For Amazon, you can see how, unlike some other examples, all of the business extensions seem to have a natural relation to their core businesses:

• It has already built out a solid infrastructure and wants to leverage that investment every possible way. That’s why the company originally expanded beyond books, and it clearly sees cloud computing as another use of existing resources.
• The Kindle is a clever build upon the core business of selling books. It isn’t the first book seller to think about related businesses. Look at Barnes & Nobel’s publishing endeavors, which have been profitable for the company. And moving into e-books and also print-on-demand starts turning it into a vertically integrated seller — eventually to be followed by publishing itself, I’m sure, as it would be a logical step.
• Private-labeled goods have done amazingly well for such retailers as Best Buy, Target, and Trader Joe’s. Margins are higher than in reselling and companies can use customer research and buying patterns to determine new offerings.

One thing these extensions of business is that each takes resources and management attention beyond what a pure reseller does. As I’ve reported before about Best Buy, there are dangers to private labeling. Suddenly the company has a different scale of customer support and service issues. It must manage design, engineering, and manufacturing, which are different types of business, and doing the work properly requires a bigger investment than many retailers think.

Amazon appears to have been doing well, but there has to be pressure on the business from trying to do so much in vastly different areas. To be fair, I have seen no evidence as of yet that they are taking a hit from the diversification, but business experience and common sense suggest there is only so long that companies can continue to move in completely different directions at the same time.

Private label image via stock.xchng user hapekla, site standard license.