From The Motley Fool:
Amazon began life as a humble bookseller before branching out into all corners of retail. Today the company is best known as an e-commerce giant, with online retail sales set to top $100 billion this year.
But Amazon is much more than just an online retailer. In fact, Amazon’s financial reports reveal a company that is playing by different rules than its competitors. Rather than driving profits with online retail, as its peers do, Amazon is using e-commerce business to draw in customers and create a massive ecosystem, which it then leverages to generate profits in a number of other ways, including subscription services like Prime, third-party services through its marketplace, and advertising.
Amazon’s business is built on its e-commerce operations. Its hundreds of warehouses in the U.S. and around the world give it the ability to stock a wide range of inventory and achieve the two-day delivery promised by its Prime loyalty program. However, growth in direct sales — meaning transactions that Amazon handles entirely itself — have slowed recently. In the last two quarters, Amazon reported sales growth from online stores, excluding foreign exchange, of just 13% and 12% respectively, its two slowest quarters since it started reporting results in 2016.
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That pace is notably behind e-commerce growth nationwide, which stood at 15.8% over that time period. It also signals that Amazon is losing market share to rivals like Walmart and Target.
However, rather than being a sign of the company’s challenges, that slowdown seems representative of its success. Online retail is a notoriously low-margin business, often yielding lower margins than traditional brick-and-mortar retail as online sellers have to deal with shipping costs and process returns. Therefore, it’s not a great way to generate profits.
Amazon now controls about half of online sales in the U.S., but the businesses enabled by its e-commerce success are growing much faster and generating significant profits along the way. Subscription services, which include Prime along with Kindle Unlimited, Amazon Video, and Amazon Music, jumped 57% last quarter to $3.4 billion. Prime recently reached 100 million members, showing how successful the loyalty program has been.
Third-party seller services, which include commissions, fulfillment, shipping fees, and payment processing, may eventually be the company’s biggest business, as sales in the category jumped 39% in the most recent quarter to $9.7 billion. Since Amazon’s marketplace business relies on infrastructure already in place to support the company’s own e-commerce operations, it is likely highly profitable, especially given that marketplace businesses like eBay tend to generate significant profit margins.
Finally, advertising may now be Amazon’s fastest-growing business, and one made possible by its strength in e-commerce. In its most recent quarter, other revenue, which is primarily made up advertising, jumped 132% to $2.2 billion.
Link to the rest at The Motley Fool