Fourth quarter sales increased 20.8%, and direct product sales are up 13.1% over last year to more than $50 billion.

Amazon.com Inc., No. 1 in the 2019 Digital Commerce 360 Top 1000, generated $280.52 billion in revenue across all business segments during 2019, up 20.5% from $232.89 billion the prior year. For the fourth quarter ended Dec. 31, sales rose 20.8% over the prior year to $87.44 billion from $72.38 billion. The rollout of 1-day shipping impacted profit, but income still rose 15.0% for the year to $11.59 billion from $10.07 billion in 2018.

Amazon’s Q4 exceeded expectations

The Q4 results exceeded Amazon’s expectations. In its Q3 2019 results, Amazon projected it would generate sales of between $80.00 billion and $86.50 billion during the fourth quarter.

Amazon’s online stores—product and digital sales—contributed $141.25 billion to 2019’s sales, up 14.8% from $122.99 billion in 2018. The segment reached similar growth in Q4, with a 14.7% year-over-year jump in sales, to $45.66 billion from $39.82 billion the prior year.

Sales through physical stores—Whole Foods, Amazon Bookstores, Amazon Go, etc.—generated $17.19 billion, down 0.2% from $17.22 billion the previous year. In Q4, sales dipped 0.9%, to $4.36 billion from $4.40 billion the prior year.

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Third-party seller services, which include commissions from third-party marketplace sales, added $53.76 billion to consolidated revenue in 2019, up 25.8% from $42.75 billion the previous year. The segment grew even faster during the holiday-focused Q4, when shoppers increasingly turned to third-party sellers, and revenue increased 30.4% to $17.45 billion from $13.38 billion the prior year. Executives said Amazon’s third-party business continued to see “good growth.”

Amazon’s 1-day shipping grew 21.6%

Amazon’s fulfillment costs outgrew its sales for the quarter, up 21.6% to $12.19 billion from $10.03 billion the prior year, as the company rolled out 1-day shipping.

Worldwide shipping costs ballooned 42.5% in the fourth quarter, to $12.88 billion from $9.04 billion in Q4 2018. This was nearly double the year-over-year jump in Q4 shipping expenses the previous year, but during an investor call, investor relations director Dave Fildes pointed to 1-day shipping as the culprit and said Amazon expected the ramp up in costs.

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Amazon spent nearly $2 billion in 2019 to offer members of its Prime loyalty program free 1-day shipping, forcing much of the ecommerce industry to catch up. Walmart Inc. (No. 3), for example, began rolling out free 1-day shipping in a few markets in May, and Target Corp. (No. 16) rapidly increased its push to offer multiple same-day fulfillment options.

The single-day shipping option will continue to roll out to new cities and internationally, but Amazon chief financial officer Brian Olsavsky said in the earnings call that it expects to lap the investment in the second quarter of 2020. Third-party sellers are increasingly participating in the 1-day shipping delivery program, which was particularly apparent in Q4, and Amazon expects the trend to continue into 2020, according to Olsavsky.

The faster fulfillment option was the No. 1 driver of growth for Amazon Prime, with more people joining in Q4 than any other quarter. There are now more than 150 million Prime members worldwide.

The rollout of 1-day delivery also means changes in where inventory is stored, resulting in one-time costs to spin up more fulfillment centers that can deliver in a single day, Olsavsky said. The space used for fulfillment and transportation vehicles grew by 15% each year for the last two years as Amazon ramped up its faster delivery network. 

In August, FedEx announced it wouldn’t renew its ground-delivery contract with Amazon when it expired at the end of the month, and Amazon cut off FedEx from delivering Prime order during the holidays.

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The moves came as Amazon has steadily reduced its dependence on FedEx as it builds out a logistics network with hundreds of fulfillment centers and adds next-day air capacity with leased jets. Amazon is also starting a home-delivery service modeled after the contractor-based ground unit at FedEx, which flagged the competitive risk in its latest annual report to U.S. regulators. FedEx’s earnings the following quarter showed the impact Amazon can inflict on competitors.

Amazon Web Service generated $66.8% of its operating income

Amazon’s operating income for the quarter was largely driven by cloud platform Amazon Web Services, generating $2.60 billion, or 66.8% of the $3.88 billion of operating income. Outside of AWS, North American sales generated $1.90 billion in income, while international sales resulted in a loss of $617 million.

Advertising likely accounted for much of the other income. While Amazon doesn’t break out how much it makes on sponsored listings and other forms of advertising on the site, it is the biggest piece of the “other” category, according to Amazon investor relations director Dave Fildes when speaking to investors on the fourth quarter call.

Advertising has been growing at around the same rate as the other category as a whole, Fildes said. This year, revenue from that category increased 39.4% to $14.09 billion from $10.11 billion in 2018. For the fourth quarter, the rise was even sharper, up 41.1% to $4.78 billion from $3.39 billion.

Amazon’s net product sales for the quarter, $50.54 billion, didn’t meet the cost of sales, $53.98 billion. For the year, the cost of goods hit $165.54 billion compared to product sales of $160.41 billion. While the cost of sales also includes spending on service sales, like engineering costs and server maintenance for third party sellers, it doesn’t include fulfillment, technology, content or marketing costs.

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Given that advertising revenue is largely profit, much of the $1.28 billion in non-AWS income likely comes from sellers purchasing advertising, not the sales of products at a profit. Without advertising, Amazon likely lost money on its retail operations.

Amazon’s record-breaking holiday performance

The shortened holiday season didn’t hamper Amazon’s sales for November and December. While Amazon didn’t release sales figures or growth for November and December, the company announced a “record-breaking” holiday season. “Billions” of items overall and “tens of millions” of Amazon devices were purchased worldwide, the ecommerce giant says.

Third-party sellers alone sold more than 1 billion items through the marketplace over the holidays and collectively grew the number of units sold globally from the same period in 2018 by a “double-digit” percentage, according to Amazon. 

“We don’t see the shortened season as a factor,” Olsavsky said. “The way we look at it, customers will have a holiday budget, and they will spend it between the early part of November and the holiday.” 

Amazon sees some polarization around Cyber Five shopping (Thanksgiving through Cyber Monday) during the weekend after Thanksgiving and again right before Christmas, but some shopping shifted to before Thanksgiving that it usually sees after the holiday. 

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Amazon also impressed customers. In a Digital Commerce 360/Bizrate Insights survey of 1,719 consumers, 63.5% of the panel rated Amazon as the best online shopping experience for the season.

Amazon won customers over because of the ease of checkout and the speed of delivery. One-click checkout, where logged-in customers use pre-filled payment info and the delivery address to purchase a product without going through a shopping cart page, was also frequently mentioned by respondents. 

2- and 1-day delivery, free for Amazon’s estimated 112 million U.S. Prime members, helped solidify the ecommerce giant’s reputation as easy, fast and familiar. Its broad selection also helped its ratings, but that wide array of choices overwhelmed some shoppers, with complaints that the site is cluttered and determining the seller of a marketplace item is too hard, according to the survey. Many of the negative views of Amazon mentioned that shoppers have limited trust in third-party sellers and see their products as lower quality than those purchased directly from Amazon.

Amazon’s biggest headlines of 2019

  • The ecommerce giant ditched its New York City split “HQ2” plan for a single second headquarters in Virginia.
  • Its annual sales holiday Prime Day lasted an extra 12 hours, generating an estimated $7.16 billion during the 48-hour sales bonanza from July 15-16, 2019.
  • Nike’s pilot program selling sneakers directly on Amazon’s marketplace came to an end. Nike (No. 33 in the Top 1000) couldn’t keep up with other sellers undercutting the athletic brand’s pricing on the site.
  • The price of Amazon’s fresh grocery delivery service, Amazon Fresh, dropped from $14.99 per month to free for Prime members. The 2-hour delivery service still requires a minimum order value, which varies by locale. It also introduced Prime Now grocery delivery in the U.K.
  • Amazon’s expanding delivery fleet, now with more than 30,000 vehicles, helped boost van sales to their best numbers in years.

Amazon’s performance in the fiscal year, ending Dec. 31, 2019:

  • Net sales of $280.52 billion, a 20.5% increase from $232.89 billion in 2018. Of that revenue, $160.41 billion stemmed from merchandise Amazon itself sold to consumers—what the retailer terms “net product sales”—up 13.0% year over year from $141.92 billion. The rest, $120.11 billion, came from commissions from outside merchants that sell on Amazon marketplaces, the Amazon Web Services (AWS) cloud computing service and other smaller revenue sources. Those “net service sales,” as Amazon calls them, were up 32.0% from the prior year’s $90.97 billion.
  • North American net sales of $170.77 billion, up 20.8% from $141.37 billion in 2018. North America accounted for about 60.9% of total net sales in 2019, or 69.6% of sales excluding AWS.
  • International net sales totaling $74.72 billion, up 13.4% from $65.87 billion in 2018. International accounted for about 26.6% of total net sales in 2019, or 30.4% of sales excluding AWS.
  • Amazon Web Services revenue hit $35.03 billion, up 36.5% from $25.66 billion a year earlier. AWS sales accounted for 12.5% of 2019 consolidated revenue. AWS earned $9.20 billion in operating income, or nearly two-thirds of the $14.54 billion in consolidated operating income Amazon reported for the year.
  • Other revenue–largely coming from Amazon’s growing advertising business–totaled $14.09 billion, up 39.4% from $10.11 billion in 2018.
  • Revenue from subscriptions, including Prime fees, was $19.21 billion, up 35.6% from $14.17 billion in 2018.
  • Net income of $11.59 billion, up 15.0% from $10.07 billion in 2018.
  • Spending on fulfillment increased 18.2% to $40.23 billion, up from $34.03 billion in 2018.
  • Spending on marketing increased 36.7% to $18.88 billion, up from $13.81 billion in 2018.
  • Spending on technology and content, including fees for licensing content for its Amazon Video service, increased 24.6% to $35.93 billion, up from $28.84 billion in 2018.
  • General and administrative spending increased 20.0% to $5.20 billion, up from $4.34 billion in 2018.

Amazon’s performance in the fourth quarter, ending Dec. 31, 2019:

  • Net sales of $87.44 billion, a 20.8% increase from $72.38 billion in the same quarter in 2018. Net product sales accounted for $50.54 billion, up 13.1% year over year from $44.70 billion. Net service sales hit $36.90 billion, up 33.3% from the prior year’s $27.68 billion.
  • North American net sales of $53.67 billion, up 21.6% from $44.12 billion in the fourth quarter of 2018. North America accounted for about 61.4% of total net sales in the fourth quarter of 2019, or 69.3% of sales excluding AWS.
  • International net sales totaling $23.81 billion, up 14.3% from $20.83 billion in the fourth quarter of 2018. International accounted for about 27.2% of total net sales in the fourth quarter, or 30.7% of sales excluding AWS.
  • Amazon Web Services revenue hit $9.95 billion during the quarter, up 34.0% from $7.43 billion a year earlier. AWS sales accounted for 11.4% of consolidated revenue in the fourth quarter of 2019. AWS earned $2.60 billion in operating income, or more than two-thirds of the $3.88 billion in consolidated operating income Amazon reported in Q4.
  • Other revenue, including advertising business, totaled $4.78 billion, up 41.1% from $3.39 billion in the same period in 2018.
  • Revenue from subscriptions, including Prime fees, was $5.24 billion, up 32.2% from $3.96 billion in the same period in 2018.
  • Net income of $3.27 billion, up 8.0% from $3.03 billion in the same period in 2018.
  • Spending on fulfillment increased 21.6% to $12.19 billion, up from $10.03 billion in the same period in 2018.
  • Spending on marketing increased 25.7% to $6.17 billion, up from $4.91 billion in the same period in 2018.
  • Spending on technology and content increased 27.0% to $9.74 billion, up from $7.67 billion in the same period in 2018.
  • General and administrative spending increased 26.4% to $1.41 billion, up from $1.12 billion in the same period in 2018.