by Brad Stone
Harrison Miller, Chris Payne, and their colleagues fanned out that night across Manhattan to various stores, splurging on random products and stuffing them in the trunks of taxicabs. Miller spent a thousand dollars alone at a Toys “R” Us in Herald Square. Payne maxed out his personal credit card and had to call his wife in Seattle to tell her not to use the card for a few days. The piles of products were eventually large enough to satisfy Bezos, but the episode was an early warning. To satisfy customers and their own demanding boss during the upcoming holiday, Amazon executives were going to have to substitute artifice and improvisation for truly comprehensive selection.
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In the midst of Amazon’s frenzied growth and the crush of the holiday selling season, Bezos kept coming back to the kind of culture he wanted to instill in his young but rapidly growing company. With door-desks and minimal subsidies for employee parking, he was constantly reinforcing the value of frugality. A coffee stand on the first floor of the Pac Med building handed out loyalty cards so a customer could get a free drink after his or her tenth purchase. Bezos, by now a multimillionaire, often made a deliberate show of getting his card punched or handing his free-drink credit to a colleague waiting in line next to him. Around that time, he also started traveling via a private plane, which he subleased from a local businessman. But whenever he flew with colleagues, he invariably declared, “The company isn’t paying for this, I am.”
Amazon’s purchase of Telebuch in Germany and BookPages in the UK in 1998 gave Bezos an opportunity to articulate the company’s core principles. Alison Algore, a D. E. Shaw transplant who worked in human resources, pondered Amazon’s values with Bezos as he prepared for an introductory conference call with the Telebuch founders. They agreed on five core values and wrote them down on a whiteboard in a conference room: customer obsession, frugality, bias for action, ownership, and high bar for talent. Later Amazon would add a sixth value, innovation.
Bezos began thinking about ways to inculcate those values in the company beyond hanging the lists on the walls of offices and distribution centers. To reinforce the notion of the high hiring bar, he drew inspiration from nearby Microsoft. As part of its famed recruiting process, Microsoft designated what it referred to as an as-appropriate senior interviewer, who talked to the candidate last and got to make the final judgment on the hire. Assigning an experienced executive to this role helped ensure that Microsoft maintained a consistent hiring standard. Bezos heard about the Microsoft program from Joel Spiegel and David Risher and then crafted Amazon’s own version, which he called bar raisers.
Bar raisers at Amazon—the program still exists today—are designated employees who have proven themselves to be intuitive recruiters of talent. Dalzell and Bezos handpicked the original leaders of the program, one of whom was Shaw veteran Jeff Holden. At least one anointed bar raiser would participate in every interview process and would have the power to veto a candidate who did not meet the goal of raising the company’s overall hiring bar. Even the hiring manager was unable to override a bar raiser’s veto. “Many companies as they grow begin to compromise their standards in order to fill their resource needs,” says Dalzell. “We wanted to make sure that did not happen at Amazon.”
Looking for a way to reinforce Walton’s notion of a bias for action, Bezos instituted the Just Do It award—an acknowledgment of an employee who did something notable on his own initiative, typically outside his primary job responsibilities. Even if the action turned out to be an egregious mistake, an employee could still earn the prize as long as he or she had taken risks and shown resourcefulness in the process. Considering his emphasis on frugality, Bezos reasoned that the award could not be something of high monetary value. So he bought a pair of size 15 Nike sneakers from former Northwestern University basketball player Dan Kreft, who worked at Amazon as an engineer. Those ratty shoes, and the successors that Kreft periodically supplied, became the prize.
While employees embraced Amazon’s newly articulated values, many resisted the breakneck pace of the work. As Amazon’s growth accelerated, Bezos drove employees even harder, calling meetings over the weekends, starting an executive book club that gathered on Saturday mornings, and often repeating his quote about working smart, hard, and long. As a result, the company was not friendly toward families, and some executives left when they wanted to have children. “Jeff didn’t believe in work-life balance,” says Kim Rachmeler. “He believed in work-life harmony. I guess the idea is you might be able to do everything all at once.”
Evidence of this friction usually emerged during the question-and-answer sessions at the company’s regular all-hands meetings, held for many years at Seattle’s oldest playhouse, the Moore Theater. Employees would stand up and pose direct questions to the executive team, and often they inquired about the enormous workload and frenetic pace. During one memorable meeting, a female employee pointedly asked Bezos when Amazon was going to establish a better work-life balance. He didn’t take that well. “The reason we are here is to get stuff done, that is the top priority,” he answered bluntly. “That is the DNA of Amazon. If you can’t excel and put everything into it, this might not be the place for you.”
In Amazon’s accounting group, the bean counters were working around the clock, and getting nervous. They tried to rationalize the numbers and forecast the future, but none of it added up to anything other than massive losses as far as they could see. They fretted about opening seven costly distribution centers and even about having gotten so deeply immersed in the muck of distribution in the first place. Bezos insisted the company needed to master anything that touched the hallowed customer experience, and he resisted any efforts to project profitability. “If you are planning for more than twenty minutes ahead in this kind of environment, you are wasting your time,” he said in meetings.
For two years Wall Street had forgiven Amazon’s extravagant spending. On the routine conference calls after its quarterly earnings reports came out, analysts were usually so upbeat and congratulatory that Amazon executives had to prevent themselves from sounding overly arrogant. On the tops of their earnings scripts, they wrote in giant letters Humble, humble, humble. A few times they also added Remember, Meg is listening, a reference to the eBay CEO and a reminder to remain guarded with company information.
In the spring of 1999, Wall Street’s euphoria seemed to diminish. The financial weekly Barron’s published a seminal article entitled “Amazon.bomb” that declared, “Investors are beginning to realize that this storybook stock has problems.”7 The article overreached, suggesting Walmart and Barnes & Noble would crush the upstart. But it did momentarily moderate the market’s exuberance. The next month, Amazon released a typical quarterly earnings report, with significant sales growth and deep losses. This time the reaction was more muted and Amazon stock actually fell slightly. Ominously, there were none of the usual ingratiating offers of congratulations from analysts on the conference call.
Kelyn Brannon, Amazon’s chief accounting officer at the time, says that she and Joy Covey pulled Bezos into a meeting to show him a form of financial analysis called common-sizing the income statement; it expressed each part of the balance sheet as a percentage of value to sales. The calculations showed that at its current rate, Amazon wouldn’t become profitable for decades. “It was an aha moment,” Brannon says. Bezos agreed to lift his foot from the accelerator and begin to move the company toward profitability. To mark the occasion, he took a photo of the group with his ever-present point-and-shoot digital camera and later taped the picture to the door of his office.
But the deluge of spending and the widening losses had fueled fear among Amazon’s management team—a fear that Bezos, still a young and volatile thirty-five-year-old CEO, needed additional help. And after hearing persistent grumbling from the ranks that Bezos didn’t listen to his subordinates, the Amazon board initiated one of the biggest misadventures of the company’s first decade. The board members asked Bezos to search for a chief operating officer.
Bezos eventually warmed to the idea. He believed the company should stockpile as many experienced managers as possible, and he was beginning to contemplate spending more of his time in the pursuit of his other personal passions. Amazon interviewed a number of high-powered executives, including Wall Street veteran Jamie Dimon, who had just been fired from Citibank by chairman Sandy Weill. But they settled on Joe Galli Jr., a flamboyant and aggressive salesman from Black and Decker who had developed the popular line of DeWalt power tools. Bezos, Covey, and John Doerr aggressively pursued Galli and closed the deal with him in June, snatching him away from PepsiCo, where he had tentatively agreed to take a job running its Frito-Lay division just a day earlier.8
Bezos himself drew up the unorthodox new reporting structure, according to John Doerr. All Amazon executives now reported to Galli, who in turn reported to Bezos. Galli also joined the Amazon board. The J Team was renamed the S Team (the S stood for “Senior”). Bezos was free to focus his attention on new products, public relations, his outside interests, and his family. MacKenzie was pregnant with their first child, and earlier that year, the couple had moved out of their apartment in Seattle and into a ten-million-dollar mansion in Medina, on the eastern shores of Lake Washington. “Jeff was really thinking that he would focus on his philanthropic and other interests, which were diverse, and that he would turn Amazon over more,” Galli says. “That was exciting to me.”
Galli, the son of an Italian American scrapyard owner from Pittsburgh, fashioned himself a cost-cutter and turnaround artist, and he was eager to make an impact on what was then one of the biggest business stages in the world. He walked the halls imperiously, wearing expensive Brioni suits and carrying a baseball bat for dramatic effect. Bezos seemed to love it, at first. “I hired Joe to be the adult,” Bezos told employees as he introduced Galli around the company. “But all I’ve asked Joe to do was pour more gasoline on the fire.”
Galli hit Amazon like an angry bull let loose on the streets of Pamplona. Everywhere around him, he saw employees operating without the discipline he had learned during his nineteen years at Black and Decker. “There were all these brilliant kids from Stanford and Harvard running up and down the halls,” Galli says. “But we lacked operational rigor and control. It was the Wild West.” One of his first moves was to cut a rare office perk, free Advil, which he viewed as an unnecessary expense. It sparked a near insurrection among employees.
Galli was not technical, a significant drawback at a firm whose employees somewhat defensively viewed their workplace as a software-development company, not a retailer. He read his e-mail only after his secretary printed it out for him, and he wanted to change the Amazon culture to favor phone calls instead of e-mail. He was absorbed with the trappings of authority and angled for his own private corporate jet, since he flew often to expand Amazon’s business abroad. There were widespread rumors at the company that he had parked his Porsche in a prime visitor’s spot one too many times and that a building security guard had finally had it towed. Galli remembers only parking it incorrectly.
In October of 1999, Galli led the acquisition of Tool Crib of the North, a small North Dakota hardware chain, and began preparations to open a tool category on the site. He flew to Cleveland to meet with executives from Sherwin-Williams to investigate the possibility of adding a paint category, even though paint did not ship easily and colors such as Swiss Coffee did not display well on the Web. Copying one of his successful marketing gimmicks from Black and Decker, he set up what he called swarm teams of black SUVs adorned with the Amazon logo; employees were supposed to drive them around the country and give tutorials on how to use Amazon.com and the Web in general. The effort faded amid other urgent priorities, and for a few months the vehicles sat abandoned in the Pac Med parking lot, a stark contrast with the cost-cutting efforts of the time. “Most companies have priority lists of forty-five good ideas and triage is easy,” Galli says. “At Amazon there were a hundred and fifty good ideas all the time and Jeff was capable of developing a new one every day.”
Bezos and Galli’s collaboration was troubled from the start. Though Bezos had drawn the new organizational structure himself, he kept his hands firmly on Amazon’s steering wheel throughout Galli’s tenure, voicing detailed opinions about everything from acquisitions to minute changes in the appearance of the home page. Galli thought he had signed up to run the company, and eventually he began to agitate for more authority. “Frankly, Joe was disruptive,” says board member Tom Alberg. “What Joe wanted was to be CEO, but he wasn’t hired to do that.” Bezos took some time off after the birth of his first child, Preston, and then returned to find the company in an uproar over Galli’s abrasive style. Amazon and its board of directors now had a leadership crisis.
But Galli was also making some important contributions. He turned category leaders like Harrison Miller and Chris Payne into general managers who had control over their own profit-and-loss statements and their costs and profit margins. He had experienced the push-and-pull of Black and Decker’s relationship with big-box stores like Home Depot, so he introduced traditional retailing concepts, like the idea of earning cooperative marketing dollars, or co-op, from suppliers in exchange for highlighting their products to customers. Covey was burning out after three years of nonstop work, and Galli helped Amazon hire a new chief financial officer, Warren Jenson from Delta. Galli finally had enough of the often absent Jimmy Wright, who was commuting from Bentonville, and Wright abruptly resigned, under pressure, right before the 1999 holiday season. Galli was instrumental in snagging a new head of operations, Jeff Wilke from AlliedSignal, and Wilke would play a pivotal role in the years ahead.
Customers flocked to the site over the 1999 holidays. After a year of hearing constant hype about dot-coms, consumers were ready to wade en masse into the alluring waters of the Web. The employees of Amazon held their collective breath.
There were now five distribution centers spread across the United States and two in Europe. Jimmy Wright and many of his Walmart cronies were gone, and a software system originally designed for the shipment of books had to accommodate everything from televisions to children’s sandboxes. Chaos, Amazon’s old foe, reared its head once again.
Soon after Thanksgiving, predictably, Amazon was failing to keep the most popular toys in stock. Kerry Morris, the buyer who joined Amazon from Walmart, says she organized Amazon employee visits to Costco and Toys “R” Us stores around the country and had them scoop up supplies of Pokémon toys and Mattel’s Walk ’N Wag dog, which were hot that season. She cleaned out the inventory of Pokémon products on the brand-new ToysRUs.com website and had everything shipped to Fernley, exploiting a rival’s free-shipping promotion. “Because they were so new to the e-commerce space that year, they really did not have the tools to alert them to us wiping out their inventory until it was too late,” Morris says.
The rapid growth once again required the company to initiate the Save Santa operation. Employees said good-bye to their families and headed off on two-week shifts to staff the customer-service phone lines or work in distribution centers across the country. Frugal to the bone, Amazon packed them two to a hotel room. To some, it was the greatest experience they had ever had at the company. Others hated it and complained vociferously. “I won’t say they were prima donnas but they weren’t used to it, they didn’t expect it, and a lot couldn’t handle it,” says Bert Wegner, the general manager of the Fernley distribution center.
In Fernley, some employees stayed at the Golden Nugget in Reno, and after they worked the graveyard shift, they met for beers at the casino bar at six a.m. Later, a few swore they had been working alongside furloughed prisoners from a nearby jail, though that is difficult to prove. Early employee Tom Schonhoff was among a group that went to Delaware, where the facility was having problems with the quality of the temporary labor pool. “There were a lot of temp workers that looked like the rehab center had pushed them out the back door,” he says. He watched one worker get f
ired for intoxication and then wet himself while he tried to protest.
Schonhoff and his team labored for a week clearing up Delaware’s backlog and organizing the staff. “We worked with sincerity and diligence. Can I say that without sounding like an ass?” he says. “The goal was to get Christmas out the door and uphold our brand promise. We believed in it.”
A team led by Kim Rachmeler and Joel Spiegel descended on the new eight-hundred-thousand-square-foot distribution center in McDonough, Georgia. The facility was not yet finished, so employees had to wear hard hats. Their group focused on a problem called FUD: fillable, unfilled demand. These were cases where products had been sold on the website but had not yet shipped because they were lost somewhere in the cavernous distribution center. This was a more serious problem than a hundred or so customers not getting their orders for Christmas (which itself was bad enough). During the holiday season, when the sorting machines were operating at absolute peak capacity, any order that didn’t successfully ship clogged up a chute and backed up another customer order, which then also wouldn’t ship on time. So as the FUD accumulated, it started to stall large parts of the facility. Rachmeler’s team worked to clear up the backlog but eventually it became evident that there was one item in particular that was causing the distribution center to go haywire—a missing pallet of Pokémon Jigglypuffs.
The Amazon database insisted that the Jigglypuffs had been delivered to the facility, but if so, they were either misplaced or stolen. Although Rachmeler put together a search team, the task seemed nearly impossible. The group was looking for a single box inside an eight-hundred-thousand-square-foot facility. “It was very much like that scene at the end of Raiders of the Lost Ark,” Rachmeler says. She dashed out to a nearby Walmart to buy a few pairs of binoculars and then passed them out among her group so they could scan the upper levels of the metal shelving.
