Last week, Amazon reported what has been widely reported as a blowout financial and operational performance for the all-important December-ending quarter. These latest results are impressive in many dimensions and add to the perception of a retail juggernaut in both online, and now physical store presence.

Q4-2017 financial performance highlights were: 

  • Total quarterly revenue growth rising 38 percent to $60.5 billion, beating most all estimates.
  • Net income more than doubling to $1.9 billion, the largest in the retailer’s history.
  • Revenues from subscription fees, including Amazon Prime membership increased 49 percent to $3.2 billion. Operating income rose 46 percent to $1.4 billion.
  • Q4-2017 Operating Margin was reported as 4.5 percent, quite impressive for a retailer of the current size of Amazon.
  • Q4 represented the first full quarter that included the financial results of the Whole Foods natural foods chain. Revenues in the category of “Physical Stores” which also includes Amazon Fresh outlets, were reported as $4.5 billion. The Wall Street Journal noted that Whole Foods reported $3.5 billion in revenues in the year-ago quarter, and that Amazon did not provide a formal year-to-year comparison.
  • Revenues related to Amazon Web Services, the cash cow for many other Amazon businesses, posted a 45 percent increase to $5.1 billion.
  • Benefit of a provisional $789 million boost from the recent enacted U.S. corporate tax legislation.
  • By some reported estimates, Amazon captured upwards of half of all online retail sales.

2017 Full Year Financial Performance

  • Net sales increasing 31 percent to $177.9 billion.
  • Operating income decreasing 2 percent to $4.1 billion, compared with $4.2 operating income reported in 2016. Net income was reported as $3.0 billion, compared with $2.4 billion reported in 2016.
  • Operating cash flow increasing 7 percent to $18.4 billion for the trailing twelve months, compared with $17.3 billion for the trailing twelve months at the end of 2016.

 

Operational and supply chain performance was mind-boggling for Q4:

  • Shipping expenses were again reported with double-digit growth, Q4 reflecting a 31 percent increase, albeit lower than previous quarters.
  • Reuters indicated that upwards of half of all U.S. households, upwards of 60 million, are estimated to have Amazon Prime membership which includes free shipping.
  • CFO Brian Olsavsky indicated that the retailer’s operational teams performed very well in handling record order volumes during the all-important holiday quarter. All the 30 percent of added 2017 capacity was noted as being put to full usage during the quarter.
  • On the topic of warehouses, customer fulfillment and other physical space, the 2017 Annual Report indicates that such space now includes upwards of 253 million square-feet, up 42 percent from that of the prior year. More than 80 percent of Amazon’s total space consists of warehouses and data centers, which is an indicator that corporate support and administrative staff people likely reside in mostly high-rise buildings. Of the total number, only upwards of 7.2 million square feet is classified as owned, meaning that the online retailer’s real estate strategy is grounded heavily in leased facilities.
  • The Consolidated Balance Sheet on a year-to-year basis indicates an incremental $4.5 billion in 2017 inventory investment, nearly a 68 percent increase over 2016 levels.
  • Total employees, both full and part-time, were reported as 566,000 at year-end, up over 60 percent from a year-earlier.
  • Business network CNBC reported that Amazon recently launched a new program, FBA Onsite, which allows the online retailer to have access to dedicated space within a participating Fulfilled by Amazon seller’s warehouse. That is likely another method to secure leased warehouse space.
  • Regarding the incidents of empty shelfs of mostly fresh produce at Whole Foods outlets, CFO Olsavsky indicated that Amazon had not made any operational changes to the chain during the quarter, other than lower prices on many items. He attributed the lower pricing and severe winter weather as likely causes of such stockouts. That is a likely indication that Amazon has yet to place its operational mark on Whole Foods current and future distribution practices under a combined online and physical presence.
  • As we have noted in our annual predictions for global supply chains, and in prior blog commentary, Amazon continues with aggressive investment in online presence outside of the U.S., with a particular battlefield being that of the India online market. In the quarter, the retailer doubled its international operating loss to $919 million.
  • Readers may have noticed very aggressive and attractive promotional pricing for the online retailer’s Echo, Alexa powered speaker devices. That was a purposeful strategy to influence future consumer demand product preferences. In its reporting, The Wall Street Journal indicated that Amazon now commands roughly three-quarters of the smart-speaker or shopping assistant segment. The financial performance release indicates “tens of millions of Echo devices” sold during 2017. That statistic, from our Supply Chain Matters lens, is a compelling indicator of online lock-in toward future online sales, and one that will be of concern to many other online retailers. In the Q4 financial performance earnings release, CEO Jeff Bezos indicated that projections for Alexa devices were very optimistic, and given actual results, expect the online retailer “double-down” in this area.

 

Overall, Amazon’s financial and operational performance within the online retailer’s most critical quarter was indeed mind blowing, with obvious future implications for competition in the online segment in the months to-come.

Bob Ferrari

© Copyright 2018. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.