Adventures in Retailing XI:
Amazon and Newegg

by

Ross M. Miller
Miller Risk Advisors
www.millerrisk.com
October 8, 2007

I grew in times where, mail and phone order notwithstanding, most shopping took place in the physical world. For the first twenty years of my life, I simply hated shopping and the absolute worst part was when my mother would drag me out to clothing during back-to-school season. Despite my lifelong aversion to department store dressing rooms, once I was out of the nest I would take a fancy to shopping and still remember my first excursion to University Stereo (a sleazy California chain of electronics shops that died a well-deserved death some time ago) to buy the first sound system of my very own. The system turned out alright-the store-brand knock-offs of Advent speakers live on in my family room, albeit with new woofers. The super-low discount price for the system turned out not to be much less than the full retail price. (I could have paid even more had I not gone through the standard bargaining dance.)

Increasingly, I find my adventures in retailing take me out of the physical world of bricks and mortar and onto the Internet. I much prefer the physical experience of shopping in the real world, which is why my first ten adventures in retailing were located; however, online shopping has undeniably become a quicker, easier, and cheaper way to procure most items. Moreover, as online shopping has received an increasing proportion of the retailing dollar, it has seriously degraded the quality of the shopping experience out in the physical world. I used to make regular trips to Manhattan and Boston to purchase books and media galore but, as previously noted, the good specialty bookstores have bitten the dust at the hands of their Internet brethren and the purveyors of other media are not far behind them as the recent demise of Tower Records illustrates. On the hardware front, the national chains have a limited selection of goods and a limited inclination to price them competitively. Over the past several months, feeling in need of the immediate gratification that online retailers as of yet cannot provide, I purchased a Samsung monitor and Buffalo router/bridge at the local Circuit City and was not positively reinforced for the experience. The rebate for the monitor has yet to arrive and the 10%-off coupon Circuit City sent me in the mail to get me to come back to the store, which I attempted to apply to the router/bridge, was not recognized as valid by their cash register. (I am well aware that Circuit City is generally inferior to Best Buy and CompUSA, but none of their local stores are good at keeping hot Samsung items in store and neither of them even stock Buffalo's phenomenal networking equipment.)

A good chunk of my online retail business goes to Amazon and Newegg. Amazon sells just about everything and Newegg specializes in the fun stuff. Newegg is the better retailer, it usually has lower prices across the board, while Amazon's pricing strategy seems completely random, with both bargains and rip-offs galore. Unlike sleazy stereo stores, when Amazon overcharges for something there is no one to haggle with, which most people are said to consider an advantage of online shopping. Newegg has a meaningful hierarchical structure to its offerings, while Amazon's items are arranged in a complex cognitive web that is great if you don't know exactly what you are looking for, but makes targeted searches more difficult. Newegg has many astute reviewers, while most of Amazon's reviewers are dunces who should not be let near a keyboard. (In fairness to Amazon, it does appear that Newegg does more censoring of its reviews, especially the more negative ones.) Newegg has one of its warehouses in a neighboring state, so most item shipped by "ground" reach me on the next day, while many of Amazon's items might as well be shipped from the Amazon basin. Newegg has a better Epinions rating than Amazon (4½ stars vs. 3½ stars); however, Newegg is not faring too well with recent reviewers. In my experience, Newegg does a better job with packaging and delivery than does Amazon.

Amazon may not be perfect, but I still give them the bulk of my business. Indeed, I am an Amazon Prime member, which entitles me (and four of my immediate relatives) to free two-day shipping and very cheap overnight shipping on most Amazon items. If I have a hankering for a CD or DVD at two in the morning, I don't have to either feel foolish for spending most of the item's value on shipping when I cannot wait to get $25 worth of good to qualify for free shipping). However, the place that I really save money is on the cheap next-day shipping.

Of course, there is no free lunch as Amazon Prime cost $79 a year and Amazon is not the low-price reputable vendor of most items it stocks. Indeed, I increasingly find that I am purchasing Amazon Marketplace items, which do not qualify for the Prime treatment, because even with substantial fees for so-called "shipping and handling," their prices are well below either Amazon's or Newegg's. There are many reputable merchants in Amazon's Marketplace, especially for previously-owned books and media. I am reluctant to do business directly with a bunch of second-hand vendors, so Amazon's marketplace serves as a useful buffer even if it can cost somewhat more than dealing with those vendors directly. Also, unlike eBay, I can use a real credit card instead of a PayPal service that would like nothing better than to get hold of my banking information. (Fat chance, folks.)

As an economist, the whole Amazon Prime program is quite interesting. I suspect that I am costing Amazon well over $79 in excess shipping fees each year; however, I am also sending a good deal more profitable business their way than I would otherwise. Furthermore, I suspect that if I were seriously costing them money, they would terminate my membership.

Despite the exotic overtones of Amazon's name, shopping there is not an adventure. It is more like my mother taking my to get three pairs of pants for the upcoming school year and my having to waste a perfectly good afternoon shopping when I could be playing baseball. Newegg, on the other hand, is slightly adventurous. While Amazon's organization scheme tends to channel its shoppers toward the "most popular" items, by default, Newegg tends to favor the cheapest. For one thing, Newegg stocks the OEM version of some items, most notably, hard drives. OEM hard drives are just hard drives in anti-static bags or shells—no useless box, cables, installation disks, or instructions. OEM hard drives cost 10% or more less than the lowest price for the "retail" version and are ideal for creating ghosted back-ups of system drives. Newegg stocks many types of OEM memory, which can also be a big bargain.

Newegg carries some Chinese-branded items that Amazon and most American retailers are apparently unwilling to touch. Almost everything electronic is now made in China anyway, so it really doesn't matter for many items whether a piece of hardware comes stamped with the Sony or Panasonic name or from a Chinese outfit that no one has heard of yet. (In theory, the name-brand manufacturers are charging for quality control, but I have seen little evidence of that lately.) I am a bit concerned that the electronic items that I am buying today, regardless of whose name appears on them, may not last nearly as long as those that I purchased in my youth. At the rate at which technology is changing, however, it does not look like they will have to last longer than a few years.

Newegg generally charges for shipping and handling and while its prices are, with rare exceptions, consistenty low, the more aggressive Amazon Marketplace outfits are often cheaper still. Other than OEM items, the share of my business that Newegg is getting has been dropping over time and Newegg does not appear to be on the Amazon Marketplace. The romantic in me loves Newegg, but the economist in me purchases from Amazon.

Copyright 2007 by Miller Risk Advisors. Permission granted to forward by electronic means and to excerpt or broadcast 250 words or less provided a citation is made to www.millerrisk.com.