Amazon.com Inc.’s third quarter announced plans to transform its Prime loyalty program into a one-day free shipping offer, the retail giant’s sales jumped nearly 20%.
The change drove consumers to buy more on Amazon. But it was also a “shock to the system” as Amazon, No. 1 in the Internet Retailer 2019 Top 1000, exceeded the $800 million it planned to spend on the change, said Brian Olsavsky, the retailer’s chief financial officer, during a conference call with analysts.
2021 Amazon Report
Analysis of the most dominant business in North American ecommerce. Includes over 80 charts, Amazon’s worldwide online sales and market share in apparel, home goods and grocery, and the potential impacts of U.S. regulatory action.
“We saw some lower productivity as we were expanding rather quickly,” he said. “We also saw some costs from [our need to] buy more inventory and move inventory around in our network to have it be closer to customers.”
Amazon’s one-day shipping push did put a damper on the company’s bottom line. After the retailer’s profit more than doubled in the first quarter, its net income growth rose just 3.6% in the second quarter compared with the year ago period. Amazon’s investments are a “short-term pain for long-term gain” that is necessary for the retailer to compete with physical retailers, says Charlie O’Shea, a Moody’s analyst who covers Amazon.
The retailer is in the “middle of the journey here,” Olsavsky said, noting that Amazon’s one-day shipping volume accelerated throughout the quarter. And it expects that volume to continue to grow over the next few quarters in North America and around the world.
Amazon’s growth was bolstered by its ever-growing marketing spending. Amazon’s marketing costs rose nearly 48% year over year to $4.291 billion in the second quarter ended June 30. For the sake of comparison, that’s more than luxury giant LVMH, No. 20, generated in online revenue in all of last year.
At the same time that Amazon is boosting its marketing spending, it is also rapidly growing its own advertising business. The retailer reported $3.002 billion in revenue in its “other” revenue category, which is largely made up of Amazon Advertising. That’s nearly a 37% increase from the same period a year earlier.
Amazon’s push offline didn’t put much of a dent in its top line during the quarter. Sales at physical stores—Whole Foods, Amazon Bookstores, Amazon Go, etc.—generated $4.330 billion to the second quarter’s sales, up slightly from $4.312 billion a year earlier.
While there were a number of promising signs during the quarter, Amazon does face some potential challenges, in particular, a U.S. Justice Department antitrust review that examines whether the retailer is using its power to thwart competition.
Amazon’s key Q2 2019 retail and business developments
Amazon ended the first half of the year with a workforce of 653,300, up 13.2% from a year earlier and rolled out a number of retail and business technologies and services aimed at solidifying its ecommerce dominance.
During the quarter, Amazon:
- Expanded AmazonFresh to Las Vegas with the option for one- and two-hour delivery.
- Continued its expansion of grocery delivery from Whole Foods Market. The service is now available in nearly 90 metro areas in the United States.
- Opened its first two new Amazon Go locations in New York City. There are now 13 Amazon Go stores in Seattle, Chicago, San Francisco and New York.
- Opened up pre-order for HAUS Laboratories, an exclusive makeup collection co-created by Lady Gaga and makeup artist Sarah Tanno.
- Launched new Amazon Fashion shopping experiences, including The Drop, which offers shoppers exclusive access to limited-edition collections designed by fashion influencers via the Amazon app, and StyleSnap, an artificial intelligence-powered feature that lets customers shop by taking a photograph or screenshot of an item.
- Rolled out Prime in the United Arab Emirates.
For the second quarter ended June 30, Amazon reported:
- Net sales of $63.404 billion, a 19.9% increase from $52.886 billion in the same quarter in 2018. Of that revenue, about $35.856 billion stemmed from merchandise Amazon itself sold to consumers—what the e-retailer terms “net product sales”—up 12.5% from $31.864 billion year over year. The rest, $27.548 billion, came from commissions from outside merchants that sell on Amazon marketplaces, the Amazon Web Services cloud computing service and other smaller revenue sources. Those “net service sales,” as Amazon calls them, were up 31.0% from last year’s $21.022 billion.
- North American net sales of $38.653 billion, up 20.2% from $32.169 billion for the second quarter of 2018. North America accounted for about 61.0% of sales in the second quarter of 2019.
- International net sales totaling $16.370 billion, up 12.0% from $14.612 billion in 2018. International accounted for about 39% of sales in the second quarter.
- Amazon Web Services revenue was $8.381 billion during the quarter, up 37.3% from $6.105 billion a year earlier.
- Other income–largely coming from Amazon’s growing advertising business–totaled $3.002 billion, up 36.8% from $2.194 billion.
- Revenue from subscriptions, including Prime fees, were $4.676 billion, up 37.2% from $3.408 billion.
- Net income of $2.625 billion compared with net income of $2.534 billion in the same period in 2018, a 3.6% increase.
- Spending on marketing increased 47.9% to about $4.291 billion from $2.901 billion.
- Spending on technology and content, including fees for licensing content for its Amazon Video service, increased 25.1% to $9.065 billion from $7.247 billion.
- Spending on fulfillment increased 16.9% to $9.271 billion from $7.932 billion.
- General and administrative spending inched up to $1.270 billion from $1.111 billion.
Favorite
