Taking Stock

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Amazon.com Continues To Dazzle With Spectacular Sales, Earnings In 4th Quarter 

Sixty billion, five-hundred million dollars in revenue. In one quarter!

Sure Amazon.com might get virtually every benefit of any doubt when it comes to its sales-to-earnings ratios, but the Seattle-based juggernaut also turned in a phenomenal profit performance for the three-month period ended 12/31/17. Earnings jumped 69 percent to $2.1 billion compared to last year’s fourth quarter.

Much of the growth came from two sources: the exploding sales of its Alexa cloud-based voice service/intelligent assistant and a huge increase in the number of new enrollees to its upgraded Prime subscription service.

“Our 2017 projections for Alexa were very optimistic and we far exceeded them. We don’t see positive surprises of this magnitude very often – expect us to double down,” said Jeff Bezos, founder and CEO of the company. “We’ve reached an important point where other companies and developers are accelerating adoption of Alexa. There are now over 30,000 skills from outside developers, customers can control more than 4,000 smarthome device from 1,200 unique brands with Alexa and we’re seeing a strong response to our new far-field voice kit for manufacturers. Much more to come and a huge thank you to our customers and partners.”

As for the rapid growth of Prime subscriptions, Amazon said 2017 was its best year ever. Revenue from all of the company’s fee-based services which includes annual and monthly Prime fees, plus other revenue from books, music, videos, games, and non-Amazon Web Services subscriptions—rose to $3.2 billion, up 47 percent from a year earlier. According to research firm Consumer Intelligence Partners, Prime is key to Amazon’s success because, well, Prime members spend more. As of September 30, 2017, the average Amazon Prime member spent $1,300 a year on Amazon compared to $1,000 for all other U.S. Amazon customers.

Brian Olsavsky, Amazon.com’s CFO, told analysts following the earnings release that the company is pleased with the performance of newly acquired Whole Foods Market thus far, despite a small operating loss in the quarter, Olsavsky added that Amazon’s physical store sales (of which WFM is the dominant contributor) were $4.5 billion. “That was slightly better than what was built into our guidance. At the time of the acquisition, we had stepped up the fair market value of certain assets on the balance sheet. That is going to increase the amortization. So far, our focus has been on continuing to lower prices even beyond the initial ones that we discussed at the close of the deal in late August,” he said, referencing price cuts on items including salmon and cage-free eggs. “We’ve launched Whole Foods products on our Amazon website and the technical work continues to make Prime the Whole Foods customer rewards program, and we expect to have more on that later in the year. We’ve also added lockers, and (with) much more to come. So, we’re very happy with the initial results out of the team in Whole Foods down in Austin.”

And just before presstime, we learned that Amazon will roll out two-hour delivery to Whole Foods stores this year for Prime members only. In fact, the first phase began on February 8 in Austin, Cincinnati, Dallas and Virginia Beach. Amazon will offer its new delivery service at all 460 Whole Foods stores by the end of 2018. It noted that there’ll be no extra charge for orders above $35, but customers who choose one-hour deliveries will be charged $8.

The efficiencies that were envisioned in the Amazon-WFM deal are quickly become visceral. However, while it’s clear that Whole Foods provides a tremendous laboratory for future growth in the bricks and mortar silo, there are certainly growing pains that have become obvious. The retailer’s move to a more centralized merchandising structure (a project that began prior to Amazon’s acquisition last June) will almost certainly rob some its local nuance and decision-making. And its recently installed order-to-shelf (OTS) inventory management system, aimed at making store productivity more efficient, has led to a huge negative social media outcry from Whole Foods associates who claim the OTS system is too complex and stressful and has led to dozens of resignations.

This may seem like a minor distraction in the vast Amazon universe especially since its physical store presence is so small. But we expect further bricks and mortar acquisitions in the next 18 months – Rite Aid, BJ’s, Target? – and those cultural issues will become more important.

As more process is installed to gain better organizational control, the culture almost always suffers. There’s a narrow intangible balance between systems and employee morale which was clear a positive differentiator with the “old” Whole Foods.

Amazon.com has never been in a business as labor intensive as running physical retail stores. Let’s hope they don’t mistake backroom efficiency for humanity.