What is it about Amazon’s retail profitability that we just don’t get?
Through a special arrangement, presented here for discussion, is a summary of Steve Dennis’ recent Forbes article. Steve is President & Founder of SageBerry Consulting and a senior Forbes Contributor. He is the author of Remarkable Retail: How to Win and Keep Customers in the Age of Disruption.
If my Twitter and LinkedIn feeds are even a small indication, there remains a wide-spread belief that Amazon.com makes little or no money in “retail”, and that its wildly profitable Amazon Web Services (AWS) division continues to subsidize the company’s phenomenal e-commerce growth.
While true for many years, it certainly isn’t the case any longer. But it also speaks to the broader issue of comparing Amazon’s retail business on the basis of traditional retailer metrics. It’s time for a radical rethink.
Unfortunately, the way Amazon reports its earnings makes it difficult to glean the relative profit contribution of its various business segments. While AWS is clearly a huge and growing cash cow, even on a relatively simplistic segment analysis basis, it’s pretty likely that North American Retail is generating plenty of cash.
As Benedict Evans, Jason Goldberg and others have been pointing out, the largest, fastest growing and most profitable part of Amazon’s retail operations is its marketplace. Here, Amazon owns no inventory and receives a fat fee on the nearly $400 billion in GMV (gross merchandise value) it helps sell. Since third-party sales largely leverage the same fulfillment network as its first-party sales — where Amazon does in fact operate like a more traditional retailer — there is no way for outsiders to precisely determine relative profit margins. Given the escalating commissions and inventory-holding savings, it’s hard to imagine that Amazon would allow this part of its business to grow if it weren’t profitable.
But the big reveal in last week’s earning report was Amazon’s confirmation of the size of its advertising business. At over $31 billion, it’s now likely Amazon’s most profitable line of business. Critically, this business simply does not exist without retail. The size and growth of retail enables the massive profitability of advertising.
The idea of using one product line to help sell another is far from new. Polaroid sold cameras to make money on the film. Gillette sells razors to make money on blades. Costco still derives the vast majority of its earnings from membership fees, not selling products. And on and on.
Analyzing a typical retail business is pretty straightforward. With Amazon, not so much.
- What We Get So Very Wrong About Amazon’s Retail Profitability – Forbes
- Amazon.com Announces Fourth Quarter Results – Amazon.com
- Amazon’s profits, AWS and advertising – Benedict Evans
- The Future Will Not Be Evenly Distributed with Publicis’ Chief Commerce Strategy Officer Jason “Retail Geek” Goldberg – Remarkable Retail
- Amazon Reveals Its Most Profitable Business – Forbes/Jason Goldberg
DISCUSSION QUESTIONS: What areas of Amazon’s business do you think are most lucrative and how is retail tied to its overall strategy? Can traditional retailer metrics be used to measure Amazon’s retail performance, and is there a point in trying?