The Everything Store: Jeff Bezos and the Age of Amazon

by Brad Stone

  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.”10

  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.11 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.12 “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.

  Then one of his deputies, a finance vice president named Greg Greeley, mentioned how airlines had segmented their customers into two groups—business people and recreational travelers—by reducing ticket prices for those customers who were willing to stay at their destination through a Saturday night. Greeley suggested doing the equivalent at Amazon. They would make the free-shipping offer permanent, but only for customers who were willing to wait a few extra days for their order. Just like the airlines, Amazon would, in effect, divide its customers into two groups: those whose needs were time sensitive, and everyone else. The company could then reduce the expense of free shipping, because workers in the fulfillment centers could pack those free-shipping orders in the trucks that Amazon sent off to express shippers and the post office whenever the trucks had excess room. Bezos loved it. “That is exactly what we are going to do,” he said.

  Amazon introduced the service, called Free Super Saver Shipping, in January 2002 for orders above $99. In the span of a few months, that number dropped to $49, and then to $25. Super Saver Shipping would set the stage for a variety of new initiatives in the years ahead, including the subscription club Amazon Prime.

  Not everyone was happy with this outcome. After that meeting, Warren Jenson took Greeley aside and berated him, in that moment seeing free shipping as nothing but another potential balance-sheet buster.

  Over the next year, Amazon executives quit in droves. They left because their stock had been vested or because they no longer believed in the mission or because their comparatively low salaries and the depressed stock price guaranteed that they were not getting wealthy anytime soon. Some were tired and just wanted a change. Others felt Bezos didn’t listen to them and that he wasn’t about to start. Almost all figured that Amazon’s best days were behind it. The company reached incredible levels of attrition in 2002 and 2003. “The number of employees at that point other than Jeff who thought he could turn it into an eighty-billion-dollar company—that’s a short list,” says Doug Boake, who departed for the Silicon Valley startup OpenTable. “He just never stopped believing. He never blinked once.”

  They all had their reasons. David Risher left to teach at the University of Washington’s business school. Joel Spiegel wanted to spend more time with his three teenage kids before they left home. Mark Britto wanted to get back to the Bay Area. Harrison Miller was exhausted and needed a change. Chris Payne left for Microsoft, where he would help launch the Bing search engine, after which he would end up as a top executive at eBay. And on and on.

  People left and afterward they took a breath and felt disoriented, like they had escaped a cult. Though they didn’t share it openly, many just couldn’t take working for Bezos any longer. He demanded more than they could possibly deliver and was extremely stingy with praise. At the same time, many felt a tremendous loyalty to Bezos and would later marvel at how much they accomplished at Amazon. Kim Rachmeler shared a favorite quote she heard from a colleague around that time. “If you’re not good, Jeff will chew you up and spit you out. And if you’re good, he will jump on your back and ride you into the ground.”

  Bezos never despaired over the mass exodus. One of his gifts, his colleagues said, was being able to drive and motivate his employees without getting overly attached to them personally. But he did usually make time in his calendar for a private meeting with exiting executives. Harrison Miller told Bezos at their parting lunch that the accomplishment at Amazon he was most proud of was the platform-services business with large retailers, which was responsible for a third of Amazon’s cash flow in 2002. “Yeah, but don’t forget, you built our first toy store and it was great,” Bezos said, another indication he remained more focused on his long-term goal of unlimited selection than on his short-term revenue-boosting partnerships, however lucrative.

  At his going-away meeting, Brian Birtwistle wrote a list on a cocktail napkin of his favorite moments at Amazon. Bezos and Birtwistle took a picture with the napkin and recalled their drive from Harvard’s business school to the Boston airport. “This whole journey started with a car ride and what a ride it’s
been,” Bezos said.

  Bezos wasn’t always so sentimental. Christopher Zyda, Amazon’s treasurer, defected to eBay, and, in a throwback to Walmart’s lawsuit over poaching, Amazon sued eBay in federal court, alleging that Zyda was violating the noncompete clause in his employment contract. The lawsuit, like the Walmart poaching case against Amazon, was settled with no consequential damages. But if his legal strategy was any guide, Bezos was clearly worried about high-flying eBay, whose market capitalization now exceeded Amazon’s by a significant margin.

  The elevated competition between the two companies put at least one person in an awkward position: Scott Cook, Intuit’s founder, was still on the boards of both companies. Now it was clear he would need to cut ties with one of them. He chose to leave Amazon and stick with eBay. “Jeff was angry, but not at me,” Cook says. “He was angry at himself for not stopping me when I said I wanted to join the eBay board in the first place. He doesn’t like losing.”

  Warren Jenson also left. Amazon’s CFO explained that he wanted to return to his wife and children, who were still living in Atlanta, and that the time was right because Amazon was finally clear of its most serious financial challenges. This was almost certainly not the whole story.

  Jenson and Bezos were at loggerheads. Jenson had tried to placate angry investors by getting the company to profitability. He raised the last round of capital from European bonds at a critical time and forced Bezos to make tough decisions when the company’s runway was getting short. But he also pushed to raise prices and campaigned against free shipping. “I would never claim to be perfect,” he says. “I always tried to do what was right for the business.”