Amazon crushes it
Amazon’s first quarter results blew past analyst expectations. When all was said and done, Amazon’s net sales increased 28 percent for the period and profits were up for the fourth consecutive quarter.
On the retail side, Amazon saw Prime memberships for the quarter increase 47 percent in the U.S. In an earnings call with analysts yesterday, CFO Brian Olsavsky tied the increase to “a culmination” of investments the company has made in its own devices and original content.
“We are seeing tablets where we sold twice the volume in Q1 year-over-year. Fire TV Stick, you may have read in our press release that it has greater than 100,000 customer reviews, the most reviewed product ever; 62,000 or over 62,000 of those reviews are five-star reviews,” said Mr. Olsavsky (via Seeking Alpha). “We’ve not only had the Echo, but we have the Echo Dot and Tab, so we’re branching off that product line and having trouble keeping those in stock.”
Amazon’s original video content has played a significant role in attracting new Prime members, according to Mr. Olsavsky. The e-tailer recently launched a monthly subscription plan that enables members to stream videos of $8.99 a month, a dollar lower than Netflix. Amazon’s CFO said the company plans “to significantly increase” spending on original shows over “the next few quarters.”
Netflix is not the only retail rival being challenged. Amazon continues to invest in grocery product categories while building relationships with CPG companies through programs such as Dash.
“We continue to have a strong Fresh business in a number of cities in the U.S. We know customers love it. We’re making good progress on the economics,” said Mr. Olsavsky. “And you’ll also notice that we have other ways for people to buy consumable products. We have Prime Pantry. We have Prime Now. So we’re playing with a lot of different models to see what resonates with consumers and it’ll guide our investment decisions going forward.”
- Amazon.com Announces First Quarter Sales up 28% to $29.1 Billion – Amazon.com, Inc./Business Wire
- Amazon.com Q1 2016 Results (Earnings Call Transcript) – Seeking Alpha
- Amazon posts EPS of $1.07, shares pop 12% – CNBC
- Amazon profit crushes estimates as cloud-service revenue soars – Reuters
- Retail drama: Amazon undercuts Netflix – RetailWire
Discussion Questions
DISCUSSION QUESTIONS:
What is your take on the health of Amazon’s retail business based on the latest earnings report? Where do you think the company and its retailer rivals be in a couple of years?
Poll
BrainTrust
Dick Seesel
Principal, Retailing In Focus LLC
Max Goldberg
President, Max Goldberg & Associates
Four consecutive profitable quarters look good for a company that seemed willing not long ago to keep losing money in order to gain share and invest in infrastructure. Those logistics investments are starting to pay off, and the growth in Prime membership reinforces Amazon’s brand image as the best “execution” retailer in the business. The growth in Amazon’s overall profit gives the company some breathing room to reach into more and more categories — from grocery delivery to apparel — at the same time that it tests the waters in brick-and-mortar retail too.
Why shouldn’t Amazon be growing? They have almost every product in stock. All consumers have to do is click once and their orders promptly arrive at their doors. And they back their business with best-in-class customer service. On top of this, they have award-winning devices and offer top quality original content. Amazon will continue to grow and innovate. Other retailers need to find ways to differentiate and innovate or see their sales decline.
How can one dispute the health of Amazon? They are well-funded to support their broad spectrum of products and are disrupting the retail business in both growth segments (electronics and programming) as well as finding innovative ways to take business in established categories like grocery. Amazon is to this decade as Walmart was to the ’80s and ’90s!
Amazon will be bigger and rivals won’t. One of Amazon’s competitive advantages that is rarely mentioned is that it is one of the few retailers who doesn’t play the quarterly game and takes a long-term view. They invest in long-term plays, build and are happy to wait on results even to the detriment of the quarterly results. That long-term play seems to have crossed the line where the investment is matured and paying off. At the same time they continue to put the next long-term plays in place.
I don’t think any single area is responsible for their success. It’s really the breadth of offerings that sets them apart. They started with retail but had expanded to many other corners, each somewhat related. This diversification makes them stronger than ever. It just took the discipline to weather short-term loses while making the right investments. Now it’s paying off.
Um, am I the only one who noticed that the profits came from AWS, not retail?
I’m waiting for the activist investors to start demanding to split up the company.
Amazon has moved fluidly from books to hard goods and electronics, on to soft goods, with plans to move into the consumable categories. They have been building and continue to build infrastructure to capture an increasing portion of the retail pie of both revenue and profitability.
Will they wipe out all retail and will consumers live a life of e-commerce under one merchant? Definitely not. Consumers, as they have for centuries, are going to find their way to the bazaar. Competing retailers have numerous ways of capturing the high ground on the path to purchase of the consumer. They have to listen to the consumer, first and foremost, as the customer is the center of the equation.
That being said, retailers would do well to understanding that without an effective omnichannel strategy that has the 360 degree view of the consumer, they will be playing the game with one hand tied behind their back. Consider this column that Prosper addressed on Forbes.com.
Retailers, like manufacturers, service providers, sports teams and any other organizations, have to understand their competition. Amazon is one of them. They then have to run to the strength that they have in place.
The numbers speak for themselves. The knock against Amazon was that its model was not profitable or sustainable. Quite the contrary. The company’s continuing innovation, its customer intimacy and logistics system are without compare in either the online or the brick-and-mortar spaces.
Some things we know about digital media and online sales: The average time spent with digital media surpassed TV viewing time for the first time last year. Plus, e-commerce holiday share grew to 12 percent in 2015. Over half of all CPG sales in the next four years will be driven by digital/e-commerce. Further, it is predicted that 10 percent of all CPG sales will be online by 2020. In light of these facts, store based retailers need to invest in e-commerce.
Finally, if you were running a brick-and-mortar retailer and knew that 25 years from now one-third of your sales would be online, would that affect your quarter-to-quarter approach to the business? Remember, the mill cannot grind with water that is past.
The two solid drivers for growth in any business are investments in research and development, R&D, and marketing and sales — sales here meaning investments, not ongoing operational expenses. Both these investments are seriously fraught with risk. But what is going on with Amazon is massive winning over massive investments in these two areas. For those who have always believed in the future, no surprise. But for all the “hooting and hollering” about growth without profits, this is a serious demonstration of what investment is about.
Of course, in writing about “Selling Like Amazon… in Bricks & Mortar Stores!,” I identified Amazon as nearly the only self-service retailer that understands what selling really is, but illustrated how Costco “sells like Amazon.” That is, the retail world’s two most reliable growth engines share an actual “sales machine,” with one having a nearly infinite long tail (“the everything store,”) and the other being strictly big head (only 4000 SKUs in mammoth stores.)
I think we are well past the point where every use of “big head” and “long tail” should require definitions and discussions. Never mind that Walmart is stumbling over the issue, as are large numbers of brick-and-mortar stores, that are sitting ducks for the forces sweeping the industry. But in a $15 trillion industry, there are plenty of nooks and crannies for lesser players than Walmart to hide in, hoping the winds will blow over.
Here’s a clue. They are NOT going to blow over, and scientific retailing WILL impact you, either adversely (eyes and ears covered,) or by accelerating YOU into the kind of future these retail growth giants are heading into. Both are seriously addressing the problems of the future, with GREAT success. How about YOU?
I have always been one to say kudos to Amazon for trying new things and that if anyone can do it, they can. But I have also been one to say, where’s the beef? Yes, they are showing a profit. Finally but, like Paula mentioned, those profits are from AWS. This does not have anything to do with their retail business.
So folks, let’s not get too cocky about this. As a retailer, they still have some miles to go before they sleep.
For my 2 cents.
I agree with Paula. The financials show strength in AWS, which doubled margins and represents 60 percent of Amazon’s operating income.
Further, much of the recent publicized activity is outside the direct retail business. This includes logistics, with Fulfillment by Amazon potentially disintermediating UPS and FedEx, hardware, especially Echo and Kindle and Prime subscription costs, which were lowered to challenge Netflix.
Unlike others, I don’t see activist investors agitating to split up the company. Microsoft, Google and Apple missed expectations, continue to invest for the long term in money losing businesses like Amazon and face insignificant breakup pressures today.
Profit. Finally. But it would be interesting to know from whence it came. If (most) all the sales volume is still in traditional retail, whereas the profit is in Cloud and related video services, what would that say about Amazon’s model?
This would be nice to compare to the performances of Amazon’s competitors during the same period. The numbers are great, but online sales in general are going up so we can’t attribute all of it to Amazon’s awesomeness. However, Amazon is poised for a much better future.
This article should dig a bit deeper. In the past year, there was one quarter where nearly 1/2 the profit was from cloud services. Now this quarter they had over 60% increase in cloud revenue. Given margins, that could be their entire net profit.
Plus, with their report of huge tablet gains, how much of this has to do with their general “reselling/retailer” style biz and how much are their technology specialties?
Put that up against shipping costs that are skyrocketing for them and the Amazon spin (“look at how great we are”) begins to pale.
I’ve always been concerned that the perception of Amazon as juggernaut was a mirage. They are big and have a good business. But they got there by putting out the image of “we threaten retail” except outside media, like books, in most individual categories they are pretty tiny. The perception of “huge” is because they add up relatively small sales across their massive breadth of products.
I think we can look at this release and ask: Is Amazon far weaker than the headlines say? At least it makes for an important discussion.
AWS is a technology platform that enables virtual businesses. Netflix runs on AWS, Amazon is now competing with Netflix.
Amazon’s ability to expand their footprint is due to the fact that they can, specifically:
a. have customers willing to try new offers that are friction free
b. have leading edge digital tech know-how that allows them to project a virtual experience to digital touchpoints (AWS)
c. and there are more categories that can be “occupied.”
AWS is not some random piece of the AMZN success story, it is integral to their growth story. Software is eating the world, and our world includes commerce and retail. But as they say around here: Start-ups die of indigestion not starvation, and AMZN is acting like a start-up. Should retailers be happy about this? I don’t know.
It is great that Amazon is growing, but it is still not making a profit. The real key here is whether Amazon can sustain their model and be profitable. For Amazon this is a major hurdle in light of their immense sunk costs and ongoing growth expenses.
Amazon continues to set a standard for retail. Period. Focus on the customer, make their world better through knowing them and making it easier for them to buy and receive their purchases, whether analog or digital. And repeat.
While Amazon as a company has turned profitable, majority of its profits still come from web services, despite AWS being a small business for Amazon overall. Online retail continues to be a relatively hard business to make profits in.
In the near future, we see Amazon investing behind three big things. These will have implications for Amazon’s rivals as well.
First, Amazon will continue to grow its private label business, especially in apparel. Amazon has been rolling out a number of private label apparel and shoe brands in addition to AmazonBasics. In fact, Amazon now owns 7 fashion brands including Franklin & Freeman, Franklin Tailored, James & Erin, Lark & Ro, North Eleven, Scout + Ro, and Society New York. Private label brands help retailers with boosting margins while reducing the element of price transparency in consumers’ minds. In order to compete, rivals will need to bring out their own private label brands or compete effectively vs. Amazon’s private labels. Apparel brands that now happen to compete with Amazon as a result of this can likely not pull back from selling on Amazon but will need to strengthen their own e-commerce engines.
Second, Amazon prefers to build a high density of fulfillment structures and stay close to customers to ensure quick delivery, especially for items such as groceries. Given Amazon’s increasing scale, we are likely to see further investments in fulfillment infrastructure such as the deal for leasing 20 Boeing 767s recently signed by Amazon for shipping cargo. Going forward, Amazon will need to make sure it can successfully execute on these moves and make fulfillment a profitable venture. Their recent foray into food delivery from restaurants is likely an attempt to help their last mile logistics business share economies of scale with other initiatives.
Finally, we expect Amazon to continue to be perceived as a value retailer. Price transparency for frequently purchased commodity items has led Amazon and other online retailers to price such products very competitively, sometimes even sub cost. In order to compensate for such “loss leader” commodities, retailers could increase prices for less commonly purchased “long tail” items. This means that while shoppers win almost every time regardless of where they buy such fast moving commodities, they run a risk of paying high prices if they do not price compare on “long tail” items. Online retailers will need to build these capabilities internally or seek external help to play competitively given this strategy.