Amazon’s 2019 sees a steady course

There has been the usual excitement around Amazon’s annual results published last week. The share price rose by around 10% after the publication alongside talk of an unexpectedly rapid increase in sales.

The reality is more complex. Certainly, sales increased, with net sales up 20% over the year, reaching $280.5bn. Stripping-out currency variability underlying sales rose by 22%. However, operating profits were up by 14% at $14.5bn whilst net income was $11.6bn, re-enforcing the point that profitability still comes second to revenue growth at Amazon.

The retailing operations of Amazon remain rooted in North America and it is here that sales growth has been strongest. Revenue grew by 21% to $170.7bn but operating income fell by $234m to $7bn. However, the ‘international’ business remained loss making despite a 13% increase in sales, although the loss shrank from the $2.1bn seen in 2018 to $1.693bn in 2019. It is noticeable that the largest increase in sales has been by third party ‘merchants’ selling through Amazon. They grew their sales by 30% as opposed to the ‘online stores’ business which grew by 15%.

It is also important to note that Amazon remains a remains a web-services company with a retailer attached, as profits from Amazon Web Services (AWS) still accounted for more than half of total group profits at $9.2bn on revenue up $371m to $35.026bn.

For Amazon, 2019 was a familiar picture of rising sales accompanied by rising costs. Of course, it is sometimes hard to disentangle the sales profile of Amazon with a mix of third party, electronic media and Amazon’s own physical inventory. However, what Amazon described as ‘cost of sales’; rose by 103% year-on-year whist fulfilment costs have been drifting upwards at around 15% for the year.

What appears to be the major driver for this cost increase is investment in infrastructure that is closer to the customer. It is well known that Amazon has been building local trans-shipment and fulfilment centres in the US and this has been driving-up capital investment and personnel costs. The objective is to increase the speed of response, itself part of an attempt to grow closer to the customer and exploit the marketing potential of devices such as Alexa.

The implications for the logistics market of these results are fairly clear. Amazon remains on its trajectory of intensive investment in new in-house, large-scale, technology driven infrastructure, supported by expansion into new market segments. It seems clear that of the latter, groceries will be a major focus in the near future. There are potential threats to Amazon. It is suggested that it is losing market-share in the web-services market, something that could undermine its financial robustness, if true. However, at present there is no sign that Amazon is retreating from its vertically integrated ambitions in logistics.

Source: Transport Intelligence, February 4, 2020

Author: Thomas Cullen