A Blog by Jonathan Low


Feb 4, 2017

Irrational Expectations? Amazon's Holiday Sales Figures Disappoint Investors

The emerging question is whether Amazon, or any other ecommerce pure play, can  ever attain consistent profitability, given the costs of distribution, delivery - and the higher rate of product returns they have.

Investors have been led to expect total domination and the profits that flow from it, but the economic reality may eventually temper those dreams. JL

Sally Halzack reports in the Washington Post:

Amazon drew 43 percent of all online sales in 2016. And accounted for 53 percent of all the growth in e-commerce last year, suggesting that other merchants are seriously struggling to match its momentum. A hefty share of that growth has been fueled by Amazon’s own products (But) the company once again saw its fulfillment costs swell, eating into its profit.
Amazon.com rang up strong sales during the crucial holiday season, with the e-commerce giant reporting Thursday that sales in the quarter surged to $43.7 billion, a 22 percent increase over the previous year. For the seventh consecutive quarter, the company managed to deliver a profit, recording $749 million in net income.
But investors weren’t exactly celebrating the news: The Seattle company’s stock was down more than 4 percent in after-hours trading, likely because Wall Street had been expecting an even bigger revenue haul.
As has often been the case in recent quarters, Amazon’s cloud computing division, Amazon Web Services, accounted for a sizable portion of its profits. AWS was responsible for $926 million in operating income this quarter, compared to $816 million for the North America division, which includes its U.S. retailing business. Its international division continued to lose money, with an operating loss of $487 million.
One of the cornerstones of Amazon’s e-commerce success has been its Prime membership program, in which shoppers pay $99 per year for unlimited two-day shipping on many purchases. Amazon does not disclose how many people have Prime memberships, but analysts estimate that the number is about 50 million. In a Thursday news release, chief executive Jeffrey P. Bezos said that “tens of millions of new paid members” joined Prime in the past year, a figure that suggests the program is still growing at a fast pace. (Bezos owns The Washington Post.)
The company also said that it now has 50 million items that are eligible for Prime shipping, up 73 percent over the previous year.
And yet that kind of growth comes with serious challenges: The company once again saw its fulfillment costs swell in the quarter, eating into its profit. Earnings per share for the period were $1.54.
Amazon has long been pouring money into its logistics network to try to make its supply chain costs more manageable over the long-term. Just this week, it announced it is building an air cargo hub in northern Kentucky to support the fleet of Prime Air jets it has leased for ferrying goods.
Amazon’s healthy sales increase helps complete a portrait of where the retail industry stands in the wake of the holidays. Several weeks earlier, many traditional brick-and-mortar retailers, such as Macy’s, Target, JCPenney and Barnes & Noble, reported bleak results that they chalked up to waning mall foot traffic and other issues. And yet, the National Retail Federation, a key industry trade group, reported that things actually shaped up pretty well in November and December for the wider retailing universe. Sales were up 4 percent industry-wide, suggesting that Amazon, along with small and medium-sized retailers, captured plenty of dollars from shoppers even as the old guard struggled.
A recent analysis illustrates just how dominant a force Amazon is in online shopping: Slice Intelligence, an e-commerce research firm, found that Amazon drew some 43 percent of all online sales in 2016. And, more important, it accounted for some 53 percent of all the growth in e-commerce last year, suggesting that other merchants are seriously struggling to match its momentum. Slice found that a hefty share of that growth has been fueled by Amazon’s own products, such as its voice-activated assistant gadget, the Echo. Indeed, Amazon reported Thursday that devices relying on its Alexa voice-assistant software were the top-selling products overall on Amazon’s website during the holiday rush.


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