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Amazon sales boom but increased supply costs weigh down growth

Amazon sales grew faster than expected as more people shopped online amid COVID-19, but it missed on earnings as COVID-19-related costs across the supply chain increased

Amazon enjoys record sales quarter

The online retail giant said it plans to spend all of its profit for the second quarter of this year, an estimated $4 billion, on its response to the coronavirus pandemic.

The mixed results show how the coronavirus outbreak is leading to more shoppers on Amazon, albeit at an increased cost as the company is dealing with a number of costly changes, including supply chain lockdowns and warehouse safety upgrades.

Amazon CEO Jeff Bezos said that the epidemic is causing a lot of uncertainties, adding that the company expects to spend all of the $4 billion it’s projected to make in second-quarter profits on COVID-19-related expenses.

That would lead to an operating income in the range of $1.5 billion to a loss of $1.5 billion in the second quarter, down from last year’s $3.1 billion, the company said.

“If you’re a shareowner in Amazon, you may want to take a seat, because we’re not thinking small,” Bezos said in a statement. “Under normal circumstances, in this coming Q2, we’d expect to make some $4 billion or more in operating profit. But these aren’t normal circumstances. Instead, we expect to spend the entirety of that $4 billion, and perhaps a bit more, on COVID-related expenses getting products to customers and keeping employees safe.”

Amazon clearly saw a massive demand surge as more people bought things online to avoid physical stores during the pandemic.

Paid unit growth jumped 32%, up from last year’s 10% growth rate. Even its “Physical Stores” sales, which includes Whole Foods revenue, grew 8% from last year, an unusual spike for a segment that hovered around 1% growth in the past year.

Meanwhile, costs increased as Amazon had to put additional safety measures and pay raises across its warehouses. Amazon is hiring 75,000 more warehouse and delivery drivers, after having added 100,000 new employees since March. Shipping costs also jumped 49% to $10.9 billion. Operating income dropped $400 million from last year to $4 billion for the quarter.

Amazon’s cloud service continued to be the company’s main profit-driver. It reported $3 billion in operating profit, accounting for 77% of Amazon’s total operating profit. Meanwhile, AWS crossed the $10 billion quarterly revenue mark for the first time, growing 33% from last year.

Despite concerns of the pandemic causing less spending on Amazon’s advertising service, the segment saw a 44% sales increase to $3.9 billion in the quarter, showing little impact on one of its fastest growing business segments.

Listen to the earnings call below:

Industry analysis

Paul Kirkland, Director of Retail and Hospitality,said: “Amazon’s results are testament to the incredible resilience of its ecommerce and delivery models. While physical stores have faced customer limits as a result of social distancing and, in some cases, been forced to close altogether, Amazon has thrived by filling the gap traditional retailers left behind.

“And the key to Amazon’s success is its flexibility. At the beginning of this year, Amazon had firmly set its sights on the high street and was building up to take the physical stores by storm through by opening its cashier-less Amazon Go stores in the US. But, with lockdown orders now keeping people indoors, Amazon has pivoted its focus back to eCommerce and bolstered its resources for home deliveries at a time when consumers need it the most.

“In fact, to keep up with the increased demand, Amazon plans to hire 100,000 new workers at a time when other businesses have downsized or shut-up-shop completely. It has even partnered with the UK government to deliver at-home testing kits, reaffirming its position as more than just a retailer but a trusted utility. The fact that consumers are looking to Amazon at the very beginning of their buying journey for inspiration demonstrates just how loyal its customers have become. And, if it’s possible, that growing brand loyalty may mean Amazon emerges from this pandemic even stronger than before.”

Frank Kochenash, President, Marketplace Services, Wunderman Thompson Commerce, said: “Amazon’s Q1 earnings come at a significant time; when the eCommerce platform is at the centre of the global effort to serve its customers during the COVID-19 lockdown. Its revenue figures show just how important Amazon is becoming, while its profits and costs indicate how challenging it is to operate in this COVID-19 affected world. Amazon’s prominence in retail during this period has risen even further and with nearly two-thirds of consumers starting their shopping journey on Amazon, its vast infrastructure network are showing the importance of its service – in fact 75% of consumers said that they wished that all online retailers offered the same services as Amazon.

“The timing of the results is a major factor; most sales gains for Amazon came in Q1, but its armoury of new hires and additional delivery costs will filter into its Q2 finances. Nonetheless, its sales will likely increase further still in the coming quarter. With 65% of all consumers expecting to use digital shopping channels in future, Amazon’s position as the go-to marketplace means more consumers will continue to turn to its services. Other online retailers and brands must step up to ensure that they can compete.

“There’s no escaping the fact that the retail giant provides a vital service to those who are unable to leave their homes and is helping to improve brand exposure during lockdown; which should be its overarching message in the coming quarter.”

Anthony Capano, Managing Director, International at Rakuten Advertising, said: “Amazon’s performance reflects wider trends as consumers increasingly turn to online shopping in response to the coronavirus pandemic. Indeed, data from our US e-commerce panel has shown that Amazon’s top competitors have significantly grown their market share, increasing their overall share of spend from 24% to 33% from the first week of January to the first week of April this year.

“While the unsurprising upsurge in online shopping benefits established online retailers, it also gives retailers and challenger brands the opportunity to reassess marketing and advertising strategies. We are seeing positive trends across our performance networks indicating that consumers are receptive to advertising as long as it’s relevant and timely. Data driven performance strategies such as affiliate marketing and programmatic display campaigns address this, engaging consumers with targeted and personalised ads, at a time when authenticity is so valuable.

“Brands are increasingly responding to the current reality and over the past few weeks, we’ve seen social-retargeting purchases increase 185% year-on-year in the UK in March. Deal sites have grown their share of traffic by 72% year-on-year in late-March, while orders across our affiliate network have increased 23% year-on-year. Marketers have an opportunity, as well as a responsibility, to adapt and meet consumer needs during these challenging times.”

Read more about Amazon’s results here

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