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Amazon’s rising tide lifts marketplace sellers

July 24, 2015 03:48 PM
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Amazon.com Inc.’s blockbuster second-quarter results were not only good news for CEO Jeff Bezos and his colleagues, but also for the many merchants and brands that sell on Amazon.com and Amazon’s 13 other e-commerce sites around the world.

The world’s largest online retailer reported that other merchants selling on its marketplace accounted for 45% of units sold in the second quarter, up from 41% a year earlier. While Amazon does not report the dollar value of those sales, ChannelAdvisor executive chairman Scot Wingo, who follows Amazon closely, estimates that those outside merchants accounted for $27.9 billion worth of purchases on Amazon’s sites, while Amazon sold $20.4 billion worth of merchandise it owns. That puts third-party sellers at 58% of the $48.3 billion in the value of merchandise sold on Amazon’s sites in the quarter, Wingo says.

“It looks like we should see this number continue to move up through 2015 if the growth rates hold,” Wingo wrote on his blog. He says outside sellers account for a bigger percentage of sales by dollars than units because many of the items Amazon sells are relatively low-priced, such as books and music. ChannelAdvisor helps merchants sell through online marketplaces, including Amazon.

335 merchants in the 2015 Internet Retailer Top 1000 sell through Amazon.

Wingo characterized Amazon’s results, which included 25.5% revenue growth in North America and 19.9% worldwide with a single word: “Bazinga!” Other analysts were similarly enthusiastic. Colin Sebastian, an investment analyst with Robert W. Baird and Co., called it “a pristine quarter almost across the board.” Also boding well for merchants selling through Amazon: the increase in active customer accounts. Amazon chief financial officer Brian Olsavsky told analysts on Amazon’s Q2 earnings call Thursday that Amazon had about 285 million active customer accounts in the quarter.

And many of those customers buy frequently. “Excluding customers who only had three orders in the preceding 12-month period, worldwide active customers were approximately 265 million, up from approximately 237 million in the comparable prior-year period,” he said, according to a transcript of the call obtained from Seeking Alpha.

Amazon, No. 1 in the Internet Retailer 2015 Top 500 Guide, had an unusually profitable quarter, reporting profits of $92 million compared to a loss of $126 million during the same period last year. Analysts say that’s good news, but investors should temper their expectations as Amazon is continuing to invest heavily in fulfillment centers and other parts of its business.

“Q3 probably will have more pre-holiday-related investments, but overall, Amazon is showing that many of their investments in fulfillment centers, shipping efficiency and technology and starting to pay off,” says Colin Sebastian, an investment analyst with Robert W. Baird and Co. “On the flip side, we still think the company is in investment mode, so in our view, investors should not expect ever-increasing profit margins.”

Prime and FBA

However, Amazon’s Q3 earnings report will be eagerly anticipated as they will include revenue generated on Prime Day, the e-retailer’s 20th anniversary sale that generated a number of high-water marks for the company. More customers signed up for memberships in its Amazon Prime customer loyalty program on that day than on any other in the company’s history, according to Amazon, though it did not release numbers. Sales soared 266% on July 15 compared to the same day last year, and sales were 18% higher than on Black Friday 2014.

Even better news for third-party merchants was the spike in items shipped through Amazon’s Fulfillment By Amazon service, or FBA, which allows marketplace sellers to store goods in Amazon warehouses. Amazon then makes those goods eligible for free shipping for Amazon Prime members, who pay $99 a year for free two-day shipping on 20 million items and are eligible for perks such as free streaming video and e-books. Olsavsky says goods shipped through FBA on Prime Day were up nearly 300% from the same day last year. The increase in sales for sellers enrolled in FBA isn’t limited to Prime Day, however. Olsavsky says Amazon survey data shows that 71% of third-party merchants registered a sales spike of at least 20% after entering the program.

“We're thrilled with the results of Prime Day,” Olsavsky told analysts. “It surpassed all of our expectations. Any metric we look at, everything was a huge success. Customers saved millions. New Prime members signed up in higher rates than we've ever seen. People bought more devices than on any other day. So, it's a great success.”

Amazon says it will work to improve the overall Prime experience to capitalize on the momentum generated through the first half of the year.

“We're looking to invest to strengthen the Prime platform,” Olsavsky says. “That includes video content including Amazon Originals, Prime Music, Prime Now. We have robust device business including the launch of a new Paperwhite Fire TV Echo with general availability and numerous other products that we're very excited about. We know that those devices drive customer engagement and sales.”

Staffing and AWS

As sales grew, so did Amazon’s workforce. It hired 18,100 new employees during the quarter, bringing its total head count to 183,100 full-time and part-time employees, a 38.1% increase from a year ago.

“The vast majority of that is in operations where we are adding people for our new FCs [fulfillment centers] and call centers,” Olsavsky said.

The Amazon Web Services unit that provides online computing capacity and data storage to a wide variety of companies and government agencies grew particularly rapidly during the quarter and played a big role in Amazon booking a profit.  Olsavsky told analysts that revenue generated from Amazon Web Services accounted for $1.820 billion in sales during the quarter, up 80.9% from $1.006 billion during the same period last year. Operating income for AWS increased 407% year over year to $391 million. With the company reporting a profit of only $92 million for the quarter, that means the e-commerce segments of the business remained unprofitable.

Analysts say the strong results from Prime Day and the second quarter gives them reason for optimism about Amazon’s prospects for the rest of the year.

“Amazon has momentum going into the back half driven by growth in Prime members (no doubt boosted by Prime Day), a step function improvement in delivery speed (Prime Now, Same Day Delivery, Fresh), and a wide array of new products (Home services, Pantry, Echo, to name a few),” Wells Fargo analysts Matt Nemer and Trisha Dill wrote. “We think Amazon is well-positioned for share gains with the best customer experience in retail (lowest prices, best selection, best service) and substantial structural cost advantages.”

 

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