We’re seeing some reacceleration within Amazon’s retail business, reigniting the company’s overall trajectory with near 20% total net sales growth in Q2. Amazon’s online retail operations grew 14.31%, the fastest we have seen throughout the past 4 quarters. Profitability, while still healthy, has not continued its expansion. Amazon reported $3.1 billion in operating income, ending a stretch of 4 straight quarters of record-breaking profit for the company. This is attributable to the company’s commitment to speed up Prime delivery speeds by offering one-day shipping on a rapidly increasing assortment to Prime members across the country.
The story on everyone’s mind is the below-expectations earnings on the quarter. This appears to be a short-term trade-off for Amazon, indicating on its earnings call that investments in one-day delivery during the quarter (amounting to around $800 million) did weigh on profit, but also contributed to above expected sales growth in their retail business. While it is too early to precisely say how shopper behaviour is shifting with this more widely available free one-day delivery offering, it is clear that this increased speed of delivery is driving a new consideration set of products for purchase online.
Amazon remains cagey on any shifts to the 1P versus 3P makeup of its marketplace – a key concern area for many smaller suppliers in the first half of 2019. Amazon indicated that it is indifferent to whether the shopper purchases an item from its first party inventory or a 3P seller, as long as its pillars of price, selection, and convenience are constantly improving. We saw an all-time high this quarter in 3P unit volume, 54%. Increased sales from 3P sellers is margin accretive for Amazon. At the very least Amazon collects a commission on 3P sales, and often times sees additional revenue from seller utilization of Fulfilment by Amazon or spending on advertising. We believe Amazon wants to focus its 1P business and internal headcount on key categories and top suppliers, controlling the shopper experience around the most important brands and extracting advertising dollars from the world’s largest manufacturers, all the while moving smaller vendors over to the more self-service 3P side.
SMBs are mentioned throughout the release. These small businesses sell on Amazon’s marketplace as “3P sellers” and enable Amazon’s vast assortment. In addition to a) ongoing concerns expressed around the “Amazon Effect” – i.e. the competitive impact in retail resulting from Amazon’s expansive and disruptive business model – and b) recent regulatory scrutiny in both the US and Europe that has focused on the competitive treatment of 3P sellers by Amazon, Amazon continues to provide extensive commentary on how it supports these operators.
Additional scrutiny of Amazon surrounds the treatment of its warehouse workers. This quarter’s press release highlights both its expansion/hiring plans and a number of upskilling initiatives Amazon is undertaking to support its workforce, which recently saw a minimum wage hike to $15 per hour.
Amazon the Marketer:
In addition, Amazon’s emerging leadership role as a Top 3 advertising platform, alongside Google and Facebook, with +37% YOY growth in advertising sales in Q2 2019. Amazon’s own marketing and advertising spend – that was spent by Amazon to promote its own businesses – was referenced on the call as another rapidly growing expense area. Compared to Q2 2018, marketing expenses grew 48% to $4.3 billion, more than 20% higher than the next highest expense area, and translating to 6.7% of net sales, up vs. 5.9% FY 2018 and vs. 0.6% Walmart Fiscal 2019, 0.6% Kroger FY 2019 and 2.0% Target FY 2018 which is also interesting from a competitive comparison standpoint. Pre-Prime Day investments neared the presentation levels of Alibaba’s Singles Day 11.11 Global Shopping Festival, with concerts and experiences above and beyond the price promotions themselves. Additionally, with the increasing number of devices, private labels, programs and services across regions within Amazon’s ecosystem to support promotionally, it’s not surprising to see the marketing expense % increase vs. their 2018 investment levels. It’s also important to consider that Amazon marketing programs include affiliate programs which have historically been quite a robust referral engine for the platform.
On a broader retail level, it is interesting to see the disparity between marketing investment levels of Amazon vs. other top public mass/grocery retailers. Amazon’s up-to 10X marketing investment rate vs. top competitors appears to have a strong positive correlation with their revenue/net sales growth. One potential way for these incumbent market leaders to better compete with Amazon may be to invest more in marketing their businesses to the shopper.
Prime Membership Growth from Prime Day:
Interestingly, it was shared that Prime Day 1 and Day 2 were the two biggest days for Prime Membership subscription growth. To put that into some context, the average number of US Prime subscriptions per day from Feb 2, 2005 until June 30, 2019 would be 19,989 members per day, based on June 2019 Prime estimates from CIRP. Since Prime Day launched in 2015, the largest average per day Prime membership subscription rate is approximately 60,200 between July 2016 and June 2017 (the period containing Prime Day #2 of 2016). So, while averages do not provide the outlier extremes, these stats may help ground and clarify a potential range of new memberships that Prime Days 2019 may have generated to achieve the biggest days to-date.
Key Implications for Brand Suppliers:
Suppliers are operating in an environment where supply chain efficiency is of paramount importance for their retail partners. Developing packaging that enables items to ship-in-own-container will become table stakes in working with ecommerce operators. Clear assortment strategy across channels is also important for brand and margin protection. With retailer fulfilment centers facing more intense efficiency demands, the fastest turning inventory will be the most cost effective.
Key Implications for Retailers:
Amazon is creating a “convenience” arms race with its one-day Prime delivery commitment that has spurred significant response from Walmart, Target and other key retail players. Q2 showed that Amazon has stayed true to its long-term outlook cultural mantra and is willing to sacrifice an appealing margin expansion trend for the benefit of its future shopping experience and value proposition. Other retailers must meet their shoppers increasing expectations for delivery speed by either building internal capabilities themselves or partnering to keep pace.
To find out more information about Amazon’s Q2 Earnings Report or Prime Day 2019, download the recording of our July “Amazon Monthly Briefing” webinar here.
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