Amazon – the moderately profitable logistics service provider

There has been a great deal of noise around the latest quarterly Amazon profit figures, characterised by a revenue and profit increase followed by a share-price fall.

Yet the core problem at Amazon remains, which is that it does not seem to make very much money from the business of retailing.

For Q4 the whole company net sales climbed by 22% year-on-year to hit US$35.7bn, making a total for the year of US$107bn. Of that, 60% is generated from retail and other related business in the US, whilst 33% is from outside the US and 7% from the ‘Amazon Web Services Business’ (AWS).

The profit picture has a different profile. Operating income was $2.2bn over the past 12 months, far higher than the $178m in 2014. Whilst the ‘North America’ business made $2.75bn, the AWS operation made $1.86bn. The ‘International’ business made a loss of $91m, although this is less than last year.

The picture is more complex when the nature of the ‘retail’ businesses are factored in. The sale of “Electronics and Other Merchandise” accounts for $50.4bn of the $63.7bn sales in North America, the rest being either ‘Media’ products or advertising. Amazon does not explode-out the profitability of its physical retailing activities, however it would appear likely that the profit margin in this area is less than the 4.3% operating margin seen in the North American business as a whole.

The cost of “Fulfilment”, which primarily entails the costs incurred in operating and staffing fulfilment and customer service centres, grew by around a quarter over the year from $10.8bn in 2014 to $13.4bn in 2015. It is also worth noting that Amazon commented that around half of its physical throughput in terms of units of items are sold by it on behalf of its client vendors.

Therefore, it might tentatively be suggested that Amazon as a retail logistics business is making an operating profit of around 4% or less at present. This would place it at around the average or possibly slightly higher than the leading contract logistics service providers, with the major proviso that Amazon is vastly more heavily capitalised.


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