business news in context, analysis with attitude

Amazon yesterday said that as its most recent quarterly profit hit a new high of $3.56 billion, it would begin investing some of that profit to guarantee one-day shipping to Amazon Prime members, cutting in half the current two-day shipping promise.

“We have been offering obviously faster than two-day shipping for Prime members for years — one day, same day, even down to two-hour delivery for Prime Now —so we’re going to continue to offer same day and Prime Now, morphing into or evolving into a free one-day offer,” says Amazon CFO Brian Olsavsky, adding, “We expect to make steady progress quickly and through the year. We feel like we’re doing something very important for the customer and we’re trying to take advantage of the fulfillment capacity and the transportation capacity we have.”

The Wall Street Journal writes that “the e-commerce company’s bottom line got a big boost in the first quarter from its cloud-computing unit and burgeoning advertising business, helping to offset sluggish growth from the core online retail business. The profit more than doubled to well above what analysts were expecting.”

That “sluggish growth” refers to the fact that “revenue rose 17% to $59.7 billion. Growth was 43% in 2018’s first quarter, though it was boosted by the acquisition of Whole Foods.” In other words, the growth rate was less than half of what it was during the same period a year ago.

The Journal notes that Amazon continues “to lean on higher margin businesses and put a lid on costs … After years of plowing nearly every dollar made back into its business, Amazon has entered a new era of more modest revenue growth and consistent profits. The company had spent heavily in prior years to build out its warehouses to meet surging retail demand and branch into new industries such as cloud computing, filmmaking and groceries.” During the most recent quarter, “expenses grew 12.6%, the lowest percentage rise in at least a decade, while Amazon’s operating margin climbed to 7.4%, its best over that time.”

Some additional context from the Journal:

• “As Amazon has become a behemoth with more than $200 billion in annual sales, its revenue growth has naturally shrunk. But it is also because of some trouble spots. For one, Amazon has run into problems overseas, particularly in India, where new e-commerce rules favor domestic companies over foreign giants like Amazon. The company also recently pulled the plug on its third-party online marketplace in China after struggling to battle the incumbents there.”

• “Amazon started delivering record profit last year as it eased spending while newer businesses like advertising and cloud computing took off, helping to offset the lower margins of its traditional retail business. Its online retail marketplace now relies more heavily on third-party vendors—58% of sales on the platform come from taking a cut from these outside businesses, as opposed to selling goods directly itself.”

• “After an early head start that has made it the dominant player in renting computing power to businesses and government agencies, Amazon is confronting stiffer competition from Microsoft Corp. and Alphabet Inc. On Wednesday, Microsoft said quarterly revenue at its Azure cloud-computing business rose 73% from a year earlier.”

Meanwhile, the Washington Post points out that “sales at the company’s physical stores — which include about 500 Whole Foods stores, as well as a growing fleet of Amazon bookstores, pop-ups and cashier-less convenience stores — grew just 1 percent to $4.3 billion from $4.26 billion a year ago.”
KC's View:
Some of the same people who have criticized Amazon over the years for not having enough profit will now be suggesting that a revenue increase of 17 percent means that the end is near and that the age of Amazon is over. Which is, of course, nonsense - maybe revenue growth has slowed a bit, but I’d argue that most retailers can only salivate at the possibility of percentage growth that size.

And sure, its growth in physical stores revenue may not be what some expected, but one of Amazon’s great strengths has been its understanding that building an ecosystem is not a short-term project, but rather something that requires patience, mistakes, constant calibration and recalibration, and the combination of long-term vision and flexibility as a core competence.

I didn’t see the one-day shipping promise coming, to be honest, but it makes sense - it allows Amazon to be a little more competitive with the click-and-collect options out there, and raises the stakes on what consumers expect. Which among other thing, raises the costs for companies trying to compete with Amazon on this turf.