In this edition of PLMALIve! Roy White explains what it means that online retailer Amazon reported big earnings, in large part due to its growing Prime program.
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Amazon Primed for Growth
On the surface, Amazon’s most recent fiscal report looks pretty much like the same old, same old – great sales increases, lots of innovation and an enormous list of initiatives – but the first half of the current year has one big difference: the internet retailer and service provider not just made money, it made a great deal of it.
This is an important change. Over the past five years, Amazon’s bottom line has waffled between being low or being depicted in red ink. But for the six months ended this past June, net earnings totaled nearly $1.4 billion, up from only $35 million in the first half of last year. The $1.4 billion, moreover, represents 2.3% net on sales, not so bad for a retailer.
Profitability was helped in no small way by a 30% increase in net sales to nearly $60 billion for the half. A major source of profit dollars was the immensely lucrative Amazon Web Services, which provides cloud services for individuals and businesses. AWS earned $1.4 billion on sales of $5.4 billion. That’s an operating profit ratio of 25%.
When launched ten years ago, it was dismissed by many as one of Amazon’s false steps. They were apparently wrong. The rapidly increasing customer usage of this service drove a 61% rate of sales growth for the first half of this year, and its importance to Amazon has been underscored by the recent announcement that it’s now a reportable segment in the company’s fiscal filings.
Meanwhile, the rest of Amazon – the retailing segment – is not just sitting back and doing nothing. Dollar sales of the North American operations were up 27%. Unit sales were up, including sales by marketplace sellers. Media rose nearly 10%. Sales of electronics and other general merchandise climbed 32%.
Amazon’s Prime membership program is also a key driver for sales growth. Well over 50 million consumers are currently participants and the number is growing. This year’s annual Prime day experienced a 50% increase in orders versus last year. Two million toys, over a million pairs of shoes, and 90,000 TVs were sold.
In addition, the Prime Pantry grocery business continues to expand. Studies indicate that Amazon has been able to capture about a third of grocery spending in those markets in which it competes via its online ordering and delivery format. Prime Pantry is also adding private label items, under the Wickedly Prime, Happy Belly and other logos. Perishables as well as baby food, tea, coffee, spices, nuts, vitamins and household items are included. A brand-new, possibly far-reaching Amazon project is the grocery pick-up brick-and-mortar depots. They’re under 12,000 sq. ft. in size, and are yet another way Amazon can reach customers.
Amazon has proven itself capable of generating solid earnings. While the cloud services are important to this profitability, the retail segment has performed very, very well in developing the company’s sales and profit dynamic – while not missing a beat in its formidable ability to innovate and initiate.