Amazon’s sales growth slows, stock up

Amazon’s sales growth slows, stock up

Well, this latest financial report wasn’t “Amazon’s unusual business as usual”.ūüôā

Amazon is famous for making lots of sales and little profit (or even taking a loss).

It’s been a model they’ve largely had from the beginning…grow the business over time, and don’t worry about short term returns.

As CEO (Chief Executive Officer) Jeff Bezos said years ago, “Market share will never be cheaper than it is now.” That’s from memory, but it should be close.

However…

That was then, this is now…and how much more market share does Amazon need, since marketshare¬†is presumably now much more expensive than it was?

Amazon’s sales growth slowed…but profit increased.

That’s¬†what investors have been waiting to hear.

The stock went up about 2.5% yesterday, which is a considerable reversal of¬†direction (it’s down over 1% for the year so far):

Money.CNN.com graph

Media sales slowed, but it’s important to note that this relative increase in profit doesn’t necessarily mean that Amazon is raising prices on e-books and other consumer goods.

Amazon Web Services (AWS) continues to grow as part of the business…that’s bolstering the bottom line and doesn’t impact what we readers pay.

The slowing in media growth appears to have more to do with video game consoles being released in the previous, comparative period.

I also wonder how

Kindle Unlimited (at AmazonSmile: benefit a non-profit of your choice by shopping*)

figures into media sales. Do the subscription fees count as media, or are they in some other category? My sense is that individual book sales are to some extent being cannibalized by borrows through KU…and it may take a bit to sort out which numbers mean what. It could be that a book is more likely to be read than it was before, but it might not show up in the accounting.

Another important (and interesting) statistic on

the call…you can replay yesterday’s webcast here

transcript from Seeking Alpha…free account required

was that paid Prime memberships increased 53% worldwide last year.

53%!

So, if there had been (and I’m just making this up) 100 million Prime members in 2013, there were 153 million at the end of 2014.

I keep emphasizing that a lot of things Amazon does are designed to get people to become and to stay Prime members, because Prime members not only buy more items (they do), they also buy higher margin physical items (“diapers and windshield wipers”, as I like to say).

As a former brick-and-mortar bookstore manager, I can tell you…consumers focus on the individual transaction, businesses focus on the population of transactions.

In other words, you might wonder how you got such a good deal on something from Amazon…how could they do that without losing money? The answer is, they can lose money on¬†one sale, if it inspires other profit-making sales.

The one thing to which Amazon has to pay super close attention, the one thing they can’t let slip, is their relationship with their customers.

I think in the future, increasingly, we’ll see Amazon sell customers to business.

No, not directly…but Amazon can make its money in the retail sector by getting businesses to pay them for access to their customers.

Not your private information, nothing nefarious like that.

I mean that third party sellers, for example, give Amazon a part of each sale so they can appear on appear on the Amazon website.

As Amazon can increasingly provide happy, trusting (again, not misplaced trust…this isn’t about tricking customers or treating them as a commodity) customers to other businesses, Amazon can turn a profit by charging those businesses, not the customers.

How does Amazon do that?

By following their three tenets: Service, Selection, and Price.

That’s why their public fight with the publisher Hachette was a mistake.

Customers saw it as Amazon preventing them from buying something, or at least, making it difficult to buy something.

Amazon can’t have that. They should drop a product before they are seen as blocking people.

At this point, no big business that needs customers to buy through the internet is going to skip Amazon.

Amazon can make that even more true in the future.

That’s why products like the Amazon Echo¬†are key.

Amazon is becoming the retail infrastructure…I’ve called that their “golden path”.

If Amazon is the way people shop, everything goes through them…and they make money by charging the businesses for access to their customers, not by charging customers more.

Let me explain this a bit more.

One of the things I train at work is time management, and in particular, how it relates to your use of technology.

I tell people that I often hear people talk about the number of “clicks” when discussing how efficient a workflow is.

Clicks don’t matter.

I can come to someone who is using ten clicks to accomplish a task, and show them how to do it in three.

If I go back a month later, the odds are good that they are using ten clicks again.

What do they say if you ask them why?

“It’s how I know how to do it.”

It’s not clicks that matter…it’s decision points.

That’s what takes a long time when you are using a computer…the human being deciding something, choosing which action to take.

Suppose you have a sale you make¬†which sometimes requires printing a receipt and¬†sometimes doesn’t. We’ll say…oh, if the transaction is over $10,000 a receipt¬†has to be printed.

You could have two buttons: one with printing the form, one without.

Alternatively, you could have a single button for that sale, and then choose to print within the next window.

Which is more efficient?

The single button.

Why? When you do have to print, it’s an extra click, right?

It’s because that button is never wrong. You can click (or tap) it when you need a receipt, and when you don’t.

You don’t have to take time deciding which kind of sale it is.

Within the workflow, you will have been exposed to the amount of the sale enough that when you come to that “extra” print click, you won’t really need to think about it.

When you watch the Superbowl this Sunday, think about this: how much of the game is actually playing time, from snap to down?

If it’s typical, it will be something like eleven minutes.

That’s right…eleven minutes for the entire game.

The rest of the time is commercials, play review, Katy Perry…but a ¬†big chunk of the field time is spent in making decisions.

I’ve said to my geeky friends (and I’m a proud geek) that football is the most intellectual of the big sports.

Name another sport where they pause every few seconds to decide what they are going to do.ūüėČ

When people are Monday morning quarterbacking, they never say, “We should have been bigger than them.” It’s always about, “They shouldn’t have gone for it on fourth down,” that sort of thing.

I’ll entertain arguments for baseball, since there are a lot of decisions made there as well (lineups, who is pitching, should they have thrown to second), but I think football is¬†¬†defensible¬†as the most “thinking” big sport.

What Amazon wants to do is eliminate decision making when you go to purchase something…it shouldn’t be, “Should I shop for this at Amazon?” That should be a given.

Customers will appreciate that efficiency…provided that they trust Amazon and like them.

The Echo, Amazon’s yet-to-be-generally-released “ambient computing” product may become people’s main way to interact with the internet at home. It’s not going to be that right away, but it will take part of that traffic.

Part of it is enough for Amazon to profit, if they can monetize it with the businesses.

Here’s a use case: movie ticket sales.

You could get your phone, open up the phone (hopefully, you have it password protected, or in some other way, identity specific), get to Fandango, look up the movie times, choose to buy it, complete the transaction, and so on.

In the future, with the Echo, it could go like this:

Customer: “Alexa, get me two tickets for the new Avengers movie for this morning.”

Echo: “Done. Just show your phone when you get to the theatre for the 10:30 show.”

Behind the scenes, the Echo would:

  • Know where you are and where you live
  • Know which theatre you like to visit
  • Look up the movie times
  • Know if you qualify for any discounts, and if you prefer to pay more for 3D or digital, or if you need accessibility¬†¬†accommodations
  • Purchase the tickets for you using your designated payment method (Amazon, of course)
  • Send the “tickets” to your phone
  • Remind you when it was time to leave (based on current traffic, and with a knowledge of how early you like to get there), and provide directions for you if needed

Even if that went through Fandango, Amazon could charge Fandango for that having happened.

Alternatively, Amazon could hypothetically set up a deal with theatres directly, getting a cut for having sold the tickets for them…cutting Fandango out of the picture.

Amazon has the computing power to do that sort of thing…other companies buy computing power from Amazon (that’s the AWS thing), not the other way around.

Oh, and I also figure in the future, you wouldn’t even need to show your phone to anybody. You get there, your phone realizes you are at the theatre, communicates to the theatre itself, which lets you into the building seamlessly. You need your phone (or a wearable…or maybe it can be done through facial recognition or other biometric) to get into the specific theatre showing your movie at your time. The theatre would happily pay for that, too, since it would be cheaper than having a ticket taker (as long as people liked the system well enough that it didn’t impact sales).

That’s being the retail infrastructure.

As the Echo learns you, it would also be able to volunteer things later.

“There’s a new Avengers movie coming out…would you like me to get you tickets?”

Naturally, you could turn off those sorts of notifications…maybe even have to opt in to get them.

But would you?

The Echo is also a “hive mind”…it connects everybody through the web.

It might notify you (maybe only if you ask it for “What’s happening?” or say, “Alexa, I’m bored.”) that a movie was playing¬†which people who went to The Avengers’ last movie had ranked with a very positive RottenTomatoes score (and RottenTomatoes would pay for that…or again, Amazon could eventually buy RottenTomatoes or cut them out of the process by fulfilling that role).

At this point, I would guess that nothing makes you default to Amazon more than being a Prime member. Your shipping is commonly free and fast for physical items, and you have music and video with a good selection. They could still get something better going for e-books…the KOLL (Kindle Owners’ Lending Library) doesn’t really cut it as a reason to have Prime. I think we could see some deal with Kindle Unlimited and Prime this year…

So, bottom line: Amazon’s bottom line was better.ūüôā Prime is the key for the retail part, and AWS (Amazon Web Services) is an important part of the infrastructure part (as may be Kiva robots for fulfillment).

Amazon just needs to keep their eye on one thing.

Happy, trusting customers are their number one product.

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This post by Bufo Calvin originally appeared in the I Love My Kindle blog. To support this or other blogs/organizations, buy  Amazon Gift Cards from a link on the site, then use those to buy your items. There will be no cost to you, and a benefit to them.

6 Responses to “Amazon’s sales growth slows, stock up”

  1. Lady Galaxy Says:

    The biggest problem I’ve had with Amazon orders lately is that I order one item and receive a different but similar item instead. It’s happened twice in the past month. The first time, I ordered a storage bin that was designed to store books. I received a similar bin that was just enough shorter that hard back books wouldn’t fit into it. It was also less expensive than the one I ordered, but I was charged for what I ordered and not what I received. I was afraid if I ordered a replacement, the same thing would happen, so I kept the wrong bin and used it for other purposes and Amazon credited me with the difference in price. Then I ordered a Valentine magnet for my back door. I ordered a Teddy Bear. I received the world’s ugliest dog. Again, I was afraid to reorder. I was going to send it back, but Amazon customer services said to keep it and they would refund the purchase price. Again, I was afraid to reorder. I don’t know if these problems are caused by the pressure to fill orders so quickly or if their robots are having problems finding the right products, but it’s making me lose confidence that when I place an order I will receive what I actually ordered.

  2. Edward Boyhan Says:

    A couple of thoughts about the earnings.

    About the reported net income — I just think that reinforces my view that Amazon can (within limits) report any net income that they’d like — as long as gross margin percentages are robust (and they are — they even grew a few hundred basis points last quarter).

    As your size gets large (and Amazon is now a $90 billion/year company), maintaining large growth percentages becomes very difficult (because your base is so large).

    That said Amazon revenues missed street expectations only by a hair, and income dramatically exceeded expectations. For the first time they lost hundreds of millions in foreign exchange (the dollar is getting stronger, and exchange rates are becoming extremely volatile — the Swiss franc recently appreciated vs the Euro by 30% in a single day — this in a market where a 1% move is considered extreme)

    One thing that came out of the conference call is how much efficiency improvements they are wringing out of fulfillment — partly due to increased volumes, partly due to sortation centers, and partly due to the deployment of the Kiva robots, and other systems improvements.

    For 2015 the focus is going to be increasingly on fulfillment productivity. They also stated that henceforth AWS will be reported as a separate business segment. Amazon will now report 3 segments: Media, EGM (Electronics & General Merchandise), and AWS.

    One last thing was how beneficial 3P sales have become. These represent pure profit to Amazon because fulfillment costs are zero. Because of this even though 3P represents 40% of revenues, FBA (Fulfilled by Amazon) sales are becoming an ever larger share of the 3P pie. FBA transactions are good for customers because even though you are not buying from Amazon, you get some of the benefits of the excellent Amazon customer service.

    • Bufo Calvin Says:

      Thanks for writing, Edward!

      My understanding, and it could be wrong, was that AWS as 10% of the business now sort of had to be reported as a separate category.

      Amazon’s efficiency in fulfillment is one of those “infrastructure” things they can sell to third parties…so it makes sense that they have a significant focus on it.

      • Edward Boyhan Says:

        FASB rules generally require separate disclosure when a business generates 10% of revenues as you say. What surprised/pleased the street was that Amazon was going to separate reporting early (end 2014 AWS revenues are estimated to be only 5-6% of Amazon’s total revenues — look at North American “Other” revenues for AWS). A couple of analysts hypothesized that Amazon was, by this action, preparing AWS to be spun off.

        Gosh, I hope that’s not the case — it would IMO be a big mistake. There are many under the covers technical IT synergies between the Amazon online store infrastructure, and the AWS infrastructure. I think that the street is looking/hoping for some way for Amazon shareholders to get a quick hit windfall — I think/hope that that is just pent up shareholder wishful thinking.

        To be clear about 3P vendors, there are two kinds: those that do their own fulfillment, and those that let Amazon do the fulfillment for them. From Amazon’s perspective the former are preferred because almost all revenue from them goes right into the bottom line. For the FBA 3P vendors, Amazon gets less added to the bottom line, but customers presumably feel safer (at least I do) dealing with FBA vendors (some of which even participate in Prime). 3P vendors often compete with Amazon on price which helps to keep overall price levels down. 3P is also a relatively easy way for Amazon to improve their selection of goods offered.

      • Bufo Calvin Says:

        Thanks for writing, Edward!

        I agree about AWS. Amazon is building a whole sales cycle, from advertising to delivery to Customer Service, and AWS is part of that (although that isn’t all it is).

        In terms of third party: you are thinking that Amazon is losing money on Fulfillment By Amazon (which is what would result in the lower bottom line)?

      • Edward Boyhan Says:

        No, not at all — I think it adds to reported revenue (as all 3P sales do), but that FBA 3P sales contribute LESS to the bottom line. I would guess that FBA margins are similar to regular Amazon product sales.

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