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Why the Amazon of the Future Could Be Much More Profitable Than It Is Today

14 September 2018

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

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2 Comments to “Why the Amazon of the Future Could Be Much More Profitable Than It Is Today”

  1. Ah, ‘The Motley Fool’ thinks Amazon could make investors more money.

    Haven’t we heard that from them before? Normally with them wanting Jeff to do something other than what he’s doing?

    “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.”

    Yeah, about that. We’re already seeing whining/complaints here of them overdoing the ads when you’re looking for something. Growing that part of the business too much might hurt Amazon more than it helps …

    We have to remember that The Motley Fool cares not a wit about how well or poorly Amazon does, only what their investors might make off of it.

  2. Amazon from its inception has been the poster child of how to build an internet-related business, evolving varied but complementary business lines like an inspired tapestry.

    So much better than all the early-mover one-trick ponies out there. Google benefited from algorithm & timing. Facebook doesn’t know what it’s doing and remains vulnerable to going out of fashion with nothing to turn to for additional support. Old favorites, like WalMart, are unable to pivot well from their roots.

    Amazon has deliberately built a well-rounded synergistic concern, with remarkably few mis-steps. It’s kept its corporate culture fresh and responsive — a major trick in its own right — while remaining open to internal criticism and healthy debate.

    Bezos deserves a great deal of credit. How many people have seen how Amazon has grown from its inception and been unwilling/unable to emulate it, even with the example clear before them? Tech may be the enabler, but it’s the business vision of synergy that drives it all in the right direction.

    (I liked building my smallish companies, so I’ve always admired the master at work throughout my career…)

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