Analysis: Amazon’s Q3 retail results show Walmart, others making inroads
Amazon has produced another set of numbers that will no doubt make other retailers green with envy. However, by its own historical standards, there are some areas where performance feels a little light. This is most noticeable on the top line, where net sales growth has moderated to 29.3%. While this is still a very credible result, it is the weakest growth rate in over a year and represents a material slowdown from the past three quarters.
Looking at sales in more detail, it is evident that there is a divide in performance between the product and service sides of the business. Service revenue, including Amazon Prime subscriptions, continues to rise at a healthy pace. However, product growth slipped to 17.3% from 28.8% last quarter. Some of this is down to the acquisition of Whole Foods partially annualizing out this quarter, but that is not the sole reason for the more modest outcome.
Online sales, which includes products and digital media content where Amazon records gross revenue, was a relatively slim 10% this quarter. Some of this slowdown appears to be coming from the international division where sales growth came in at 13.4%, down from 30.8% growth last quarter. Given the weakness in key economies where Amazon trades, including the UK, this is perhaps not surprising. Nevertheless, it is still a relatively disappointing outcome, especially as the international division remains loss-making.
Closer to home, growth in North America came in at a much more robust 35%. This too is a little below average, although this is mostly because the benefit of Whole Foods' contribution is now partial. Stripping that out, Amazon's underlying growth rate was around 24%, which is the same rate of growth posted in the last quarter. This is far from poor and indicates Amazon is still growing its market share, but again the contribution from services means that Amazon's own product sales are not rising as quickly as they once did - a slightly worrying prospect given the healthy consumer economy.
In our view, there are three main reasons for this. First, there is a natural maturation curve that Amazon is now on, especially for well-established categories. Second, consumers are less price sensitive than they once were and that means the number of people migrating to Amazon for low prices is not as pronounced as it was last year.
However, by far the most significant reason is that there is more online competition in online retail than there has ever been, and that competition is more effective than it has ever been. Walmart and Target have both upped their games considerably, especially in terms of delivery and pick-up capability.
Other retailers, like Macy's, have also invested in their online propositions. Our own data show that online consumers are now using more online retail sites than a year ago, and spend is being spread more thinly among a greater number of internet retailers.
Make no mistake, Amazon remains a behemoth in the online market nor do we believe it is under any serious threat. However, others are now getting better at nibbling away at its dominance. In a perverse way, this is good news for Amazon as it underlines the fallacy that the company is a monopoly or has some kind of special powers to force consumers to shop with it. It also likely means that the company will focus more heavily on driving growth in areas where it is under-potential, including the B2B market - where it is adding a raft of Prime services - and consumer categories like home furnishings where it plays second fiddle to Wayfair.
Looking specifically at the Whole Foods division, we remain pleased with the progress Amazon is making in turning Whole Foods into a properly run, commercial business. While we hear the occasional squeals from old-hand stakeholders within the Whole Foods operation, we believe the changes Amazon is making are necessary and delivering reasonable initial results. That said, we maintain our view that Whole Foods is generally overpriced and does not have a proposition that fully justifies the premium on many basic items. There is much more work needed before Whole Foods can successfully grow its market share.
Overall, Amazon remains a firm to be reckoned with and the progress it is now making on the bottom line is very impressive. This will give the company more room to innovate and experiment as it looks to boost growth. However, in our view, Amazon needs to work doubly hard on the retail side as other determined players are now becoming more aggressive and are gaining ground.
Looking at sales in more detail, it is evident that there is a divide in performance between the product and service sides of the business. Service revenue, including Amazon Prime subscriptions, continues to rise at a healthy pace. However, product growth slipped to 17.3% from 28.8% last quarter. Some of this is down to the acquisition of Whole Foods partially annualizing out this quarter, but that is not the sole reason for the more modest outcome.
Online sales, which includes products and digital media content where Amazon records gross revenue, was a relatively slim 10% this quarter. Some of this slowdown appears to be coming from the international division where sales growth came in at 13.4%, down from 30.8% growth last quarter. Given the weakness in key economies where Amazon trades, including the UK, this is perhaps not surprising. Nevertheless, it is still a relatively disappointing outcome, especially as the international division remains loss-making.
Closer to home, growth in North America came in at a much more robust 35%. This too is a little below average, although this is mostly because the benefit of Whole Foods' contribution is now partial. Stripping that out, Amazon's underlying growth rate was around 24%, which is the same rate of growth posted in the last quarter. This is far from poor and indicates Amazon is still growing its market share, but again the contribution from services means that Amazon's own product sales are not rising as quickly as they once did - a slightly worrying prospect given the healthy consumer economy.
In our view, there are three main reasons for this. First, there is a natural maturation curve that Amazon is now on, especially for well-established categories. Second, consumers are less price sensitive than they once were and that means the number of people migrating to Amazon for low prices is not as pronounced as it was last year.
However, by far the most significant reason is that there is more online competition in online retail than there has ever been, and that competition is more effective than it has ever been. Walmart and Target have both upped their games considerably, especially in terms of delivery and pick-up capability.
Other retailers, like Macy's, have also invested in their online propositions. Our own data show that online consumers are now using more online retail sites than a year ago, and spend is being spread more thinly among a greater number of internet retailers.
Make no mistake, Amazon remains a behemoth in the online market nor do we believe it is under any serious threat. However, others are now getting better at nibbling away at its dominance. In a perverse way, this is good news for Amazon as it underlines the fallacy that the company is a monopoly or has some kind of special powers to force consumers to shop with it. It also likely means that the company will focus more heavily on driving growth in areas where it is under-potential, including the B2B market - where it is adding a raft of Prime services - and consumer categories like home furnishings where it plays second fiddle to Wayfair.
Looking specifically at the Whole Foods division, we remain pleased with the progress Amazon is making in turning Whole Foods into a properly run, commercial business. While we hear the occasional squeals from old-hand stakeholders within the Whole Foods operation, we believe the changes Amazon is making are necessary and delivering reasonable initial results. That said, we maintain our view that Whole Foods is generally overpriced and does not have a proposition that fully justifies the premium on many basic items. There is much more work needed before Whole Foods can successfully grow its market share.
Overall, Amazon remains a firm to be reckoned with and the progress it is now making on the bottom line is very impressive. This will give the company more room to innovate and experiment as it looks to boost growth. However, in our view, Amazon needs to work doubly hard on the retail side as other determined players are now becoming more aggressive and are gaining ground.