Diapers.com
Diapers.com: Vinit Bharara, left, and Marc Lore are obsessed with Amazon and they study its every move. Photo by David Yellen
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Ten years have passed since Amazon was officially deemed something of a joke. The first to rule that the online store was kaput was Barron's. In a May 1999 cover story, the popular investment magazine declared that the model behind Amazon was finished. They titled the piece Amazon.bomb, and the text was faithful to the headline: The company was a kind of bubble, a joke, hot air with no right to exist.

Barron's gave the signal, and a few months later the rest of the business press obediently followed suit, explaining in learned analyses and op-eds why Internet retailers were virtual froth fated to fizzle out, and mainly, how Big Business would wipe the floor with all those stupid Internet startups.

True, most of the startups were stupid, and they did close down. Who remembers Pets.com, which went public at a lunatic company value, only to vanish in less than a year? Or Webvan, the online grocery that, armed with the best managers in the United States and $1 billion, went broke at what might have been record speed?

Before discussing the business model of Diapers.com, let's talk about who bought it. Who was it that cut a check for $540 million for a company whose name and business model seem stuck in a time warp?

It was Jeff Bezos, that's who, founder and CEO of Amazon. He did it.

In 2010, when Bezos signs a check with that quirky smile of his, nobody sniggers. They stand at attention and learn.

That's because Bezos, the man whom analysts scorned a decade ago as some sort of digital delinquent, has become one of the most admired people in world business, particularly the Internet.

Actually the company changing hands isn't Diapers.com. It's Quidsi, and Diapers.com is just its main website. Quidsi was founded five years ago by Marc Lore and Vinit Bharara, then 35, who'd been friends since elementary school in New Jersey. A third man on the team, Scott Hilton, came from the remains of Webvan to handle logistics.

Diapers.com is a very American story. Lore and Bharara began selling diapers on the Internet and discovered that demand was there - but that it wasn't profitable. For a long time they continued selling diapers from warehouses at a loss. They raised $4 million from venture capital funds, lost more money, and built up a client base. Then they raised $54 million from the funds to become really, really big.

Secrets and robotic warehouses

Despite the constant hemorrhaging, Lore and Bharara had no trouble finding money during their growth years because of a little secret that anybody who has read the financial statements of companies like Amazon knows. You take cash from buyers and pay your suppliers later. The result is positive cash flow during your period of rapid growth.

When the company began selling tens of millions of dollars in diapers, the two set up a giant state-of-the-art automated warehouse run by robots and began offering other baby products as well, at fat profit margins.

In 2009 they racked up revenues of $180 million; this year they expect to reach $300 million.

It isn't coincidence or luck. Behind Diapers.com stand two entrepreneurs who brought the logistics of diaper delivery and accessories to a genius level, out of their love of and total adherence to the smallest details of the delivery world. Both have quantitative and statistical vision and a tremendous passion for all the company's logistics processes.

Oh yes, they had one other thing: extraordinary business acumen.

Two months ago, the two devoted much of an interview with Bloomberg to lavishing praise on their No. 1 rival in online baby-stuff delivery - Amazon. Bezos, they explained, is their hero. Obsessed with Amazon, they study its every move, and recently read its 1996 financial statements. Amazon did so much so early, they gushed.

They knew full well that Amazon was the most likely buyer for their company. The competition between Diapers.com and Amazon had intensified in the past year. There wasn't a thing Diapers did to which Amazon didn't have a rebuttal.

Bezos excels at evaluating Internet, retail and logistics people who want nothing more than to study their clients' needs and habits and think of ways to make the operation more efficient. And he wrote them a pretty big check.

For the first nine months of 2010, Amazon reported revenues of $21 billion and net profit of $736 million. Its cash flow from operations was $2.6 billion, and at the end of September, it had $5.9 billion in cash and cash equivalents.

Amazon is a monster worth $70 billion on the stock market. In the last 12 months it racked up sales of $30.8 billion, net income of $1.12 billion and cash flow of $2.62 billion. It can afford to buy Diapers.com - it has $5.88 billion in cash.

Even Barron's realized, a tad belatedly, that Amazon's idea wasn't so stupid; there was a reason it was thrashing the competition. Barnes and Noble, for example, which had been king of the book retailers a decade ago, is now a shrunken company worth less than $1 billion.

Zdnet is still around too. Last year, when Barron's wrote a flattering cover story on Amazon, "World's best retailer," Zdnet decided to compare that article with the previous one.

In 2009 Barron's suggested that investors "add shares of Amazon.com to your shopping cart and proceed to checkout." Its grounds were that "the retailer itself makes sense to smart shoppers." No wasting time and money on gasoline and finding parking, prices that compete with veteran retailer Wal-Mart, and a vast range of goods without leaving the comfort of your own home. "What's more ... purchases tend to get delivered as promised," Barron's summed up (courtesy of Zdnet ).

Ten years before, Barron's wrote that Amazon looked like any other retailer, complete with expensive warehouses stuffed with stock. "In other words, Amazon is buying a lot of costly bricks and mortar, the very stuff that is supposedly bloating costs at traditional retailers."

This year, Barron's writes in favor of Kindles, those digital reading devices. "A Kindle runs $359, and it not only generates revenue but protects and promotes Amazon's original business - selling books," it wrote.

Ten years before, Barron's was predicting that e-books would crush Amazon like a bug. "Bezos has not really revolutionized the book industry at all. In essence, he is a middleman, and he will likely be outflanked by companies that sell their wares directly to consumers," Barron's predicted at the time. For one thing, publishers could hawk books online themselves; they don't need Amazon to do it, it wrote.

"It's true that the retail price will have to fall further before Americans buy eBooks en masse. But it will happen," Barron's predicted (wrongly, Zdnet says ). And this year, Barron's likes Amazon stock better than Wal-Mart, while in 1999, it predicted that Wal-Mart would stamp all over the online upstart. "Once Wal-Mart decides to go after Amazon, there's no contest," declares Kurt Barnard, president of Barnard's Retail Trend Report. "Wal-Mart has resources Amazon can't even dream about." End quote Barron's.

Has Amazon changed in the last 10 years? Did Jeff Bezos? Probably: He learned and gained experience. But people can't change their DNA and companies can't change their organizational culture. That special madness that Bezos had a decade ago, which was scorned so roundly back then, and Amazon's organizational culture haven't changed. They're what made Amazon the world's biggest online retailer today. What's changed is how analysts and the public see the idea behind Amazon.

Could Israel sprout a success like Diapers.com? Possibly, one smaller in scope, but there won't be many such stories. The tiny Israeli market is controlled in most categories by single players. Smaller rivals get trampled or bought out at very early stages. That's why the Israeli market isn't a breeding ground and doesn't have the ecological system to innovate in many fields. There's no demand for such innovation. It doesn't pay.

Israel's small size has other disadvantages. A state-of-the-art robotic warehouse like what Lore and Bharara set up and their unique logistical supply chain have no place in Israel. We'll have to settle for reading stories like theirs in the foreign press.