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Amazon Retail – Costs Rising Sharply

by Robert Hetu  |  April 24, 2015  |  1 Comment

This weeks press release by Amazon focused largely on the first breakout of revenue from is web services (AWS) but as a retail analyst I am more interested in the underlying retail business performance.  As reported overall revenue was +15%, and a net loss was recorded for the first quarter of 2015.  While gaining an in depth understanding is somewhat difficult I used its press release to calculate the percentage increase or decrease in overall revenue and costs as follows:

amazon recap q1 2015

Assuming that AWS is included in the services and that cost of sales represents the cost of goods sold, its possible to assume that the retail products business saw the cost of goods sold outpace the increase in revenue by 1%.  I have realigned the costs above in order of magnitude based on dollars.  Fulfillment, most likely directly attributable to the retail products business, saw costs rise 19% year over year.  In fact all expenses after the cost of sales far outpaced the net gain in revenue.  Overall costs and revenue both grew at 15%, not a model to which most businesses would aspire.  Admittedly this is a high level analysis but my experience tells me that the retail products business continues to grow unprofitably.

At some point the market will wake up and begin to demand profitability from Amazon’s 20 year old retail products operation. My point in highlighting this is only to reinforce to multichannel retailers that effective use of your existing network of stores and distribution centers to maximize inventory availability and customer service is a winning model.  My expectation is that Amazon’s costs will continue to rise and mirror those of traditional retailers.  The game is far from over but multichannel retailers have to play smarter to win.

Top Actions for Multichannel Retailers

  1. Understand your customers.  Identify your best customers and understand their shopping behavior.
  2. Don’t try to beat Amazon at the pricing game.  Know the value that your best customers place on your business model.
  3. Be prepared to exit some business categories.  If price is the only differentiation and you cannot compete profitably drop the category.
  4. Up your game by executing on the basics of retailing.  Take advantage of your strengths that are differentiators such as service, experience, availability.
  5. Collaborate with customers.  Treat customers as a source of valuable information.
  6. Innovate like crazy.  If there is one thing to be learned from Amazon its the value of innovation.
  7. Remove internal barriers to success.  Shake up the support organizations so they focus on customers – always.
  8. Use information to drive decisions.  Get useful analytics into the hands of people to drive every decision with timely and accurate information.
  9. Keep aware of the digital business opportunities.  Technology will create threats and opportunities, don’t let another “Amazon” come along to eat your lunch.
  10. Understand your customers.  Worth repeating.

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Category: customer-analytics  pricing-policy  retail-trends  

Tags: amazon  analytics  competition  consumers  customer-analytics  customer-centricity  infocentricity  multichannel  omni-channel  price-transparency  pricing  retail  revenue  satisfaction  stores  

Robert Hetu
VP, Analyst Retail
7 years at Gartner
29 years IT Industry

Bob Hetu is a Research Director with the Gartner Retail Industry Services team. His responsibilities involve tracking the technology markets and trends impacting the broad-based retail merchandising and planning areas. Mr. Hetu is an expert in the areas of brand, vendor and assortment management, merchandise planning, allocation, and replenishment. Read Full Bio

Thoughts on Amazon Retail – Costs Rising Sharply

  1. Jean Duchaine says:

    9- Keep aware of the digital business opportunities. Technology will create threats and opportunities, don’t let another “Amazon” come along to eat your lunch.

    Yes. But you have to think differently.
    Imagine & create a new playground to battle with Amazon. Its big weakness is downstream.
    Launch a commercial method up&down in which consumer is really the first actor, a new time management for him.
    Work on flows, less on market area.
    There are other ways to look at retailing.
    I know it.

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