Amazon reported Q2 financial performance this week with mixed results, to state the obvious.
While net sales rose 25 percent to $38 billion, profitability fell 77 percent driven by major investments in operating businesses. Investors were not necessarily pleased with the latter news, driving Amazon stock down 2.3 percent on the news. 
In the context of recent retail industry financial performance, a double-digit increase in revenue and nearly $200 million in profitability would be a basis of celebration. But, this is Amazon, which as we all know all too well by now, marches to its own cadence of financial management. For Amazon, bold and aggressive investments that can drive business growth can often overshadow Wall Street’s expectations for high levels of near-term profitability. Company management solidified that expectation with guidance for Q3 indicating a potential $1-2 billion increase in sales with operating income ranging from negative $400 to positive $300 million.
As business media points out, while many retailers today are in crisis mode attempting to deal with declining foot traffic and negative margins, Amazon has been a compelling driver of permanent shifts in consumer buying activity, in favor of the Amazon fulfillment model.
Let’s touch upon some insights from the latest June-ending quarter:
Amazon CFO Brian Olsavsky indicated that customer fulfillment growth continued at a 40 percent growth run-rate during the recent growth. Amazon Prime membership increased to 53 percent year-over-year in Q2, and that program provides funding for Free Shipping offerings afforded to Prime members.
The Wall Street Journal noted that Q2 shipping costs during Q2 rose 36 percent year-over-year to $4.52 billion. Think about the magnitude of that number, or on the number of $18 billion in annual logistics and transportation costs. During the quarter, the online retailer launched its 25th leased air cargo plane, now representing the equivalent of a full-blown global operating air freight company. By the end of this year, Amazon’s physical fulfillment centers will total in the mid to high 30 range. The online retailer just launched a new hiring campaign across the U.S. with the goal of filling upwards of 50,000 fulfillment center openings to again meet expected volume growth for the holiday fulfillment quarter later this year.
This is why we declared months ago that Amazon to be a logistics and transportation services provider in addition to an online retailer. We continue to reinforce that insight because it is important for readers to comprehend and understand Amazon’s broader strategies related to online and physical. The B2C consumer goods, retail and third-party logistics industries are quickly understanding the magnitude of Amazon as a disruptive force, not only for retail, but for contracted customer fulfillment and logistics. And, we must add Wal-Mart as a consideration as-well, since that retailer is instituting aggressive plans to compete with Amazon for online market-share.
Another open-question is how long can Amazon keep-up with this pace of growth without a major operational hiccup. Thus far, an open checkbook, fueled by the revenue and margin growth of other Amazon businesses such as AWS, have been the cushion to insure adequate physical fulfillment capacity and capability.
There are some tough decisions to be made, and at the end of this year’s holiday fulfilment period, more industry casualties and subsequent implications will once again be evident. But time is not a luxury for many, and disruption is indeed the call-to-action.
Bob Ferrari
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