Bezos’s 2001 Shareholder Letter: The Lower-Cost Growth Loop and Cash Flow per Share

In 2001, Amazon began competing on price. #BezosShareholderLetter2001 To our shareholders: In July 2001, Amazon.com reached an important stage. After four years focused on growth and two focused on lowering costs, we could finally allocate resources evenly between growth and cost control. Our July price cuts reflected the change: all books over$20 were discounted by 30%. That balance paid off in the fourth quarter. We exceeded cost-control goals while accelerating growth. In January 2002, we lowered prices again: orders over$99 would receive free shipping throughout the year. Improving our cost structure lets us offer lower prices, which drives growth. Higher revenue spreads costs further, creating scope for additional discounts and completing a virtuous cycle. Customers like discounts, and shareholders can make money. Everyone benefits. We hope to keep repeating this loop. As mentioned, we exceeded fourth-quarter goals: projected profit of$59 million and projected net profit of$35 million. Thousands of Amazonians around the world worked tirelessly to achieve this, and should be proud. Further highlights: * Sales increased 13%, from$2.76 billion in 2000 to$3.12 billion. We recorded our first billion-dollar quarter in Q4, with 23% year-over-year growth. * Customers exceeded 2.5 million in 2001, compared with 2 million in 2000 and 1.4 million in 1999. * Global sales grew 74% in 2001, with one-quarter coming from outside the United States. The UK and Germany, our largest international locations, achieved projected operating profitability for the first time. Japan, open only a year, reached a$100 million annual revenue run rate in Q4. * Hundreds of thousands of small businesses and individuals earned substantial income selling new or used products through our platform. In Q4, these orders represented 15% of all US orders, far exceeding our expectations when Marketplace launched in 2000. * Inventory turns rose from 12 in 2000 to 16 in 2001. * Most importantly, we remained relentlessly focused on customers, earning an American Customer Satisfaction Index score of 84 for the second consecutive year, the highest across any company in any industry. /Customers first: our continuing commitment/ Until July, Amazon.com’s customer experience rested on two pillars: selection and convenience. In July, we added a third: continually lower prices. We remain committed to the first two as well. Our electronics store now carries over 45,000 products, roughly seven times the selection of a large electronics store. Kitchen products have tripled, with all the best brands available. We began selling computers and magazine subscriptions and established strategic partnerships with Target and Circuit City. We improved convenience through features such as Instant Order Update, which alerts customers if they accidentally buy the same item twice. People are busy and often forget what they already bought. We greatly improved self-service. Users can now easily find, cancel, and modify orders. Look Inside the Book is a new feature displaying high-resolution images not only of a book’s cover, but also its back cover, contents, introduction, and sample pages. Customers can truly try a book before buying. More than 200,000 of our millions of titles support this, compared with at most 100,000 titles in a large book superstore. As these examples show, our most significant customer-experience improvement has been **eliminating errors at their roots**, which also helps manage costs. We have reduced error rates every year since founding, and did especially well last year. Removing root causes saves us money and customers time. Our users are our most important asset. We will continue nurturing that ground through innovation and hard work. /Investment framework/ Every annual letter, including this one, attaches our 1997 letter to help shareholders confirm that we are a suitable investment for them, and to remind us of our original commitments. I think we have stayed true to them. In 1997, I wrote:“If forced to choose between better-looking financial statements and maximizing cash flow, we choose the latter.” Why cash flow? Each share represents a claim on the company’s future cash flows. Cash flow therefore explains a company’s long-term share-price performance better than other indicators. If you understand two things—a company’s future cash flows and how many shares it will issue—you can understand its stock’s value today. You also need an appropriate discount rate, but if future cash flows are *certain*, selecting that rate becomes relatively easy. This is not simple, but past performance and factors such as leverage and growth potential—“leverage point and scalaility”—can help forecast cash flows. Forecasting future share issuance requires assumptions about employee option grants and other potential capital transactions. Ultimately, your estimate of future cash flows plays a key role in deciding whether to buy the stock. Because we aim to keep fixed costs unchanged, even though they are high, we believe Amazon.com can deliver sustained, reliable free cash flow over coming years. Our 2002 goals reflect this. As stated when reporting fourth-quarter results in January 2002, we intend to generate positive operating cash flow this year, leading to free cash flow. The difference is$75 million of planned capital expenditures. We expect projected annual net-income trends to broadly follow projected annual cash-flow trends. Limiting share count means higher cash flow per share and greater long-term value. We currently aim to keep net employee-equity dilution within 3% over the next five years, although individual years may fluctuate. /Always serving shareholders’ long-term interests/ As I have often said, we firmly believe shareholders’ long-term interests are closely tied to customers’ interests. If we do our job, today’s customers buy more tomorrow, we gain more customers, and cash flow and shareholder returns increase. We must therefore extend our e-commerce leadership to create greater benefits for users and investors, whose interests reinforce one another. As 2002 begins, I am delighted to say that I remain enthusiastic about this business. More innovation lies ahead, and our business model is about to produce operating leverage. I will keep working toward this with colleagues around the world. I am fortunate and grateful. Thank you for your support, encouragement, and willingness to join this journey. If you are also a customer, thank you again. Jeffrey P. Bezos (Chinese translation by experienced Dedao user Vinchent)