Amazon’s return to profit tells little about the success of logistics

Before the effects of currency, sales increased by 15% year-on-year to US$29.3bn in the fourth quarter, with the core physical product retailing business accounting for 68% of this. Profit was a different matter.Net income (stated on a GAAP basis) was US$214m whilst operating income was $591m.

The business is very complex and it is difficult to strip-out the different constituent businesses from the overall group. It is unclear how much of this profit is attributable to the retailing business, the media business and the apparently very successful ‘Amazon Web Services’ server business. This makes the effectiveness of its heavy investment in logistics infrastructure hard to estimate.

Certainly Amazon’s investment in logistics has continued to increase. The cost of ‘fulfilment’, which includes web-site costs as well as physical logistics, increased by 25% year-on-year, as compared to sales which increased 27% in the US and 10% outside the US. This represents a slowing of the rate of increase with 2013 seeing a 34% increase and 2012 a 40% increase in comparison. Despite this the cost of fulfilment as a proportion of sales has risen from just over 10% a year-ago to over 12% this quarter.

Judging by the performance of the entire group the returns as yet are not brilliant, with return on invested capital being 9% this quarter, which is still an improvement on the performance for most of 2014. Yet this number includes the server business which is reputably highly profitable, suggesting that the returns on the core retailing business are lower.

Its worth noting that the business outside the US, which accounts for approximately a third of sales, saw a meagre profit of US$20m, down by 87%, although after currency effects this represents a 43% fall.

Amazon themselves cite marketing initiatives such as Amazon Prime as important drivers behind the profits recovery in the last quarter of the year yet this relates more to the media related business not to the return on physical logistics assets. Consequently the results of the 4th quarter do not tell us an enormous amount about the profitability of Amazon’s logistics structure and the little that is disclosed suggests that Amazon continues to invest in growth rather than looking to take profits on the capital expenditure of the past few years.

To find out more about the e-commerce market, and how Amazon fits in, please take a look at Ti’s latest Global e-commerce Logistics 2015 report here.