Steve Dennis is a contributor at Forbes. He writes about the reinvention of retail in the age of digital disruption. We have previously featured his articles about omnichannel retailing, branding and more in MIAnews, and we have had the feedback that they’ve been timely and informative. In this article, he discusses that although Amazon’s growth and competitive position are the envy of just about every retailer on the planet, there were three worrisome trends revealed in a recent earnings release…
We have previously featured more of his articles in MIAnews that you may also be interested in:
Here is the original article which was featured in Forbes:
At first glance, it might seem like a preposterous question: Has Amazon hit a wall? Even after what most considered a disappointing quarterly earnings report, Amazon’s growth and competitive position are the envy of just about every retailer on the planet.
But three worrisome trends were revealed in last week’s earnings release.
First, Amazon Web Services (historically the cash cow that fuels the rest of the company) saw both a marked deceleration in revenue growth and a significant drop in margins. While most companies would kill for what counts as “bad” growth rates at Amazon—and one quarter clearly does not amount to a trend—I always pay attention when growth trends slow and margins start to compress. It could be an anomaly. It could be a short-term hit because of investments that will pay off down the road. Or it could be a sign that the company is having to buy some business through increased discounting. Of note, Microsoft’s Azure business grew nearly twice as fast in the same period, albeit on a far smaller base.
Second, the company’s North America segment (what most think of as “retail,” as it includes both online and physical store sales), which had seen deceleration it its growth rates of late, picked up the pace again delivering a robust 20% year-over-year sales increase. Unfortunately, this revenue spurt came at quite a cost. On the heels of an $800 million investment to make one-day delivery the standard for Prime members, earnings took a big hit. Shipping costs ballooned some 36% in the quarter, continuing the concerning multi-year trend of logistics costs growing as a percentage of sales. While Amazon is not long on details in its releases, it’s a pretty good guess that the primary contributor to the acceleration in growth was the roll-out of faster delivery times.
Third, Amazon’s physical store segment is treading water. While it is comparatively small—if, at $17 billion annually, hardly insignificant—and mostly composed of Whole Foods, growth was essentially flat (and we know nothing about margins). I’m on record as believing that as pure online shopping begins to mature, physical retail must become an increasingly important contributor to Amazon’s overall growth. Despite the challenges at Whole Foods, Amazon is clearly not standing still, expanding its “click and collect” partnerships at Kohl’s (and elsewhere) and continuing to experiment with its own brick-and-mortar concepts like AmazonGo, Amazon Books and Amazon 4-Star. Given that Whole Foods’ performance is thus far underwhelming, and it appears likely that the other “harmonized retail” initiatives (my term) look to be immaterial to earnings anytime soon, it’s not terribly surprising that Amazon is reportedly exploring other alternatives to resume swimming again. I would also not rule out another major acquisition in the next year or two.