Amazon Q3: sales and profits up sharply

Date : 28 October 2016

We review the retailer’s third quarter results as it gets set to grow its grocery-focused operations.

Sixth consecutive quarter of profit growth

Amazon’s third quarter sales increased by 29.0% to $32.7bn, with net income rising to $252m from $79m in Q3 last year. This was the sixth consecutive quarter of profit growth for the retailer, although it was below the $857m recorded in Q2, and behind analysts' expectations. 

Sales were up by 25.8% in North America, and by 28.3% in its international markets, while Amazon Web Services saw a 55.0% increase in net sales. Product sales increased by 21.0% to $22.3bn, while service sales grew by 50.5% to $10.4bn.

Focusing on improving Alexa’s capabilities

The strong level of sales and profitability growth was driven by several factors, including the sales of Amazon devices, the new version of Echo Dot, and the introduction of Alexa and Echo to the UK and Germany. This continues to be a key area of development, with the range of Alexa skills increasing three-fold over the last three months. A new Fire tablet and next generation Fire TV Stick were also introduced in the quarter, while it also continued to enhance its Prime membership with new features such as Prime Reading and improvements to Prime Photos.

Aiming to play a larger role in the grocery sector

Amazon’s grocery-focused initiatives have also been gaining traction over the recent months, demonstrating its intention to play a larger role in this area, and grow market share. Grocery remains an attractive service for its customers and Amazon continues to test different models as it focuses on costs and profitability.

Expanding Amazon Fresh

Recent initiatives include the expansion of AmazonFresh to Chicago, Dallas, Northern Virginia, Boston, Baltimore, and London, UK, building on its existing presence in Seattle, New York and California. The retailer is satisfied with the performance of the service in both existing and new cities. Amazon has also made a recent change to the subscription service, with customers now able to use AmazonFresh through a monthly top-up fee as an add-on to their Prime membership, rather than an annual payment.

Building grocery and fresh capabilities

In the US the retailer has also been building out its fresh food capabilities through partnering with a range of regional retailers and wholesalers, including Sprouts Farmers Market and Spartan Nash, to support its Prime Now program, either through direct distribution into Amazon's DCs or using stores as picking locations. However, the margin pressures with this model are more pressing, although Amazon believes that its scale and geographic proximity to customers will support it as it grows. The retailer also noted that it would open 26 new fulfilment and sortation centres this year for its broader product offer, driving a 30% increase in space. This will help it manage extra capacity during the holiday season, along with the plans that it had already put in place with its shipping partners.

Developing physical stores to complement online presence

The retailer is also in the process of developing a standalone drive-thru click and collect facility for online grocery in the Seattle area, the first of several which it is expected to open. Recently the Wall Street Journal reported that Amazon is also looking to develop standalone grocery stores which will sell a range of fresh foods including milk, meat and vegetables, with other reports speculating that the retailer could open up to 2,000 stores in the US. Amazon had no specific comment to make on these reports, although the retailer stated that it is pleased with the three physical bookstores that it has opened, particularly as they enable it to showcase its devices, and that it will continue to test different fulfilment models.

Expanding the Dash Button program

Amazon is also partnering with an increasing number of CPG suppliers as it continues to expand the scope of its Dash Button program, recently adding 60 new brands, bringing the total to 200 which are available to its Prime members. Beyond the US, this program was expanded internationally to Austria, Germany and the UK over the summer. Many suppliers are seeing strong growth through this initiative, with orders via the Dash Button occurring more often than orders via Amazon.com for some products as shoppers opt for this convenient solution.

Partnership opportunities for suppliers but different approach required

However, for suppliers, partnering with Amazon often requires a different approach compared to working with traditional grocery retailers, particularly in terms of managing profitability, pricing, aligning supply chains, and determining which programs to support. As their business grows with Amazon, many suppliers will need to consider building longer-term, more strategic relationships. While the retailer may currently only have a small share of the grocery market, its track record in other categories suggests that over the longer term it has the potential to become a major operator in the market.

Don't miss your chance to meet with and hear from the Amazon UK leadership team, including UK Managing Director, Doug Gurr and Patrick Pondaven, Director of Consumables. Patrick recently spoke to us about Amazon's consumables business and shared three top tips for trading success. Watch the full video here.

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Stewart Samuel, Program Director, IGD Canada
Based in Canada, Stewart heads up all of IGD's research and coverage across the US and Canada. He is also responsible for shaping IGD's research program in the region. Contact Stewart at [email protected] for further insight on key market trends and retailer strategy.
@Stewart_IGD