As of the third quarter of 2018, Amazon's global profits are at an all-time high. The tech and retail giant is now responsible for one out of every three pounds spent in online retail in the UK and ranks as the 5th-largest retailer by sales after only the big four grocers. Key to Amazon's current and future role as one of the preferred shopping destination for consumers in the UK is its growing share of consumables. Consumable household essentials are at the heart of Amazon's retail sales, providing a steady stream of sales and ensuring that consumers keep coming back to the platform. As the bulk of these products fall under Health & Personal Care, let's take a broad look at the state of Amazon in Q3 2018 through the lens of this critical – and competitive – product group.
In late October, Amazon announced record Q3 profits amounting to $2.88B (£2.25B). That's triple the profits reported in the same quarter of 2017 – and yet, the company's stock prices sunk following the announcement.
Anticipating Amazon's Q3 report, projections estimated sales at £44.6B, but actual sales were just slightly lower, at £44.2B, enough to cause the stock market to respond negatively. Heading into the holiday season, shares in the tech and retail juggernaut fell by 9 percent in response to lower-than-expected Q4 projections.
This likely influenced the tone of a recent all-hands staff meeting during which Jeff Bezos told employees 'one day Amazon will fail'. Citing the recent bankruptcy of Sears, once the world's largest retail chain, Bezos acknowledged with frank realism the typical lifespan of large companies, which tends to be closer to 30 years than to 100.
This glass-half-empty perspective glosses over the most important part of Amazon's quarterly report: the record profits. Even the most conservative projections show Amazon breaking the 3 billion USD threshold during Q4, the busiest retail quarter of the year.
Today, success is measured by growth. In the retail ecosystem, Amazon's growth has been the envy of the world for years and sales continued to grow by 30% into Q3 2018. But for Q4, the company projected a growth of between 10 and 20 percent, still well beyond most competitors' capabilities but something that amounts to a slowdown by Amazon's standards. But we must acknowledge that this slowdown is a result of their success, not a sign of their impending failure. Sales growth beginning to reach equilibrium is a natural consequence of the company's strong market penetration and growing ubiquity.
As the high-growth phase begins to taper off, the long-term success and sustainability of Amazon as a retailer will rely on sales of consumables. Though the company started out as a seller of media, HMV recently overtook Amazon as the UK's biggest seller of physical music. Amazon's role in the home automation market has certainly paid off, especially with the huge success of the Echo line of smart speakers, but most of these product are big ticket one-time purchases. At its core, Amazon's revenue stream relies on sales of low-price, high-volume consumable products – and the central consumables product group is Health & Personal Care.
Health & Personal Care is responsible for more than a third of Amazon's total consumables sales in the UK and experienced year-over-year growth of 28% during Q3 2018, led by Nutrition & Food.
Health & nutrition is a key focus of Amazon in the UK. The company recently partnered with the NHS to offer health advice to users of the Alexa voice-activated assistant. Patients can now describe their symptoms to Alexa devices and receive a diagnosis relayed from the NHS Choice website and can even be talked through a self-examination for conditions such as breast cancer.
Besides the social good these services offer, this partnership also allows Amazon to grow its reputation as a trusted source for health and nutrition and in turn drives sales in these areas. Some of these effects can be seen in the Nutrition & Food category, which grew by 24% in Q3 compared to the same period in 2017, reaching estimated sales of £25 million.
Nutrition & Food is currently dominated by protein products. Optimum Nutrition, specializing in protein powders, commands roughly 20% of category sales, followed by PhD Nutrition and Grenade each commanding 8% of the category. Sports Nutrition continues to be a high-growth subcategory, but the biggest opportunities for brands lie in Amazon's burgeoning role as a health product provider and the growing consumer demand for Vitamins & Minerals and Dietary Supplements, the latter of which grew by nearly 50% YoY.
Oral Care, the #2 category, grew at a similar rate during Q3 2018, but unlike the top category a large share of growth can be attributed to third-party sellers. In the last few years, Amazon.co.uk has experienced a rapid influx of 3P sellers. Globally, the share of total sales controlled by 3Ps surpassed 50% in 2017 and is still growing as of Q3 2018. The overall trend among first parties is to appeal to a broad demographic and focus on high-volume products, while 3Ps have succeeded – and captured more market share – by appealing to niche consumer interests unfulfilled by larger brands.
1P brand Oral-B still dominates the Oral Care category, securing every single spot in the top 10 bestsellers list including the #1 Health & Personal Care item overall, Oral-B Pro 2 2500N CrossAction Electric Toothbrush, making Electric Toothbrushes still a primarily 1P subcategory. However, the #2 and #3 subcategories, Teeth Whitening and Mouthwash, are now dominated by 3P sales, which doubled in volume from Q3 2017 to Q3 2018.
Amazon's cornering of the consumables market is working. The company is the now the 5th-largest retailer in the UK behind only the big four grocers – Tesco, Sainsbury’s, Asda and Morrisons. Amazon is also outgrowing its competitors, with particular success in the valuable Household Consumables category which grew by 60% YoY during Q3.
Already responsible for over a third of the UK's total ecommerce spend in 2017, Amazon.co.uk is gaining ground in essential goods such as Feminine Care and Adult Incontinence, both of which nearly doubled in size from Q3 2017 to Q3 2018 making them the main drivers of growth in the Household Consumables category. Household cleaners such as Laundry and Surface cleaning products similarly saw above-average growth led by Vanish and Dettol respectively.
Paper Products, the largest subcategory, also witnessed strong growth. Toilet tissue in particular grew by 27%, led by Andrex with their Classic, Supreme and Gentle varieties ranking as the top 3 Household Consumables products during Q3. Meanwhile, Amazon's private label Presto! has made strides in the valuable Paper Products category, doubling its sales from Q2 to Q3.
Baby Care is another targeted category in Amazon's private label strategy. Mama Bear baby wipes nearly tripled in sales from Q2 to Q3, one of the only brands showing strong growth in a relatively stagnant category. Doubling or tripling sales from one quarter to the next is an impressive feat, but both Mama Bear and Presto! are still relatively new brands and the extent of their ability to compete with major brands like Andrex, Johnson's, Kleenex and Huggies is yet to be determined.
Despite their infancy, increasing the selection of exclusive products (marketed as 'Our Brands') is a key ingredient in Amazon's strategy to capture the predictable – and profitable – consumables market. With household essentials, consumers tend to find something they like and stick with it, a habit that is only enhanced by Amazon's Subscribe-and-Save program. By encouraging customers to regularly replenish their consumables, Amazon cements itself as a trusted retailer and keeps people coming back for more.
As we enter the critical holiday shopping season, Amazon is well positioned to once again set a new all-time sales record and consumables are bound to play a major role. As the gap continues to close between Amazon.co.uk and the big four grocers and its share of ecommerce spend continues to approach a majority, the retail and tech giant is virtually guaranteed to record its most profitable Q4 yet. When consumers make the switch to Amazon for their everyday essentials they rarely go back to brick-and-mortar, so HPC brands, who rely on repeat customers, can't afford to underestimate the UK's 5th-largest retailer – and counting.
