Amazon sales surge on Wholefoods acquisition

E-commerce giant Amazon has posted a surge in sales of 34 per cent to $43.7 billion over the last three months.

Amazon announced profits in the three months to the end of September were $256 million, up from $252 million in 2016. Despite its sales growth, the company’s profits were nearly flat as it ploughed money into tech gadgets, streaming video, data centres and warehouses to support its growing empire.

The firm also saw an increase in revenue in its profitable cloud services division which exceeded $4.5 billion, up 42 per cent.

Amazon’s recently acquired upmarket grocer Whole Foods has brought in $1.3 billion in sales for the quarter.

Upmarket grocer Whole Foods, which Amazon acquired in August, brought in $1.3bn in sales in the quarter. Excluding Whole Foods, the e-commerce giant said sales increased 29.8 per cent.

The firm has posted a 35 per cent increase in overall sales in North America, which accounts for the bulk of Amazon’s business. They increased 29 per cent in its international division thanks in part to a Prime Day surge, but the unit is still running at an operating loss.

Neil Saunders, managing director of GlobalData Retail, said Amazon has impressively managed to increase the pace of growth from its online stores, where sales increased by 22 per cent over the prior year.

“This is the highest rate of growth since the second quarter of 2016,” Saunders said. “A very successful Prime Day, the addition of more customers to the Prime ecosystem, and continued uplifts in spending from both Prime and non-Prime customers alike, all drove the outperformance.”

“All that said, it is clear that Amazon’s own online stores are no longer the star of the show,” he said. “Both the subscription services arm and Amazon’s web services division (AWS) are outpacing product sales in growth terms.”

Saunders said the former, which includes Prime fees, grew by 59 per cent and the latter by 42 per cent.

“In particular, we believe that the growth of Prime will continue to boost subscription revenue in the quarters ahead, all the more so because of the slew of new devices that Amazon is releasing,” he said.

Saunders said for all Amazon’s undoubted success, there are a few chinks in the behemoth’s armor.

“The main one of these is profit,” he said. “For the quarter, operating income was down by 40 per cent to $347 million. The dramatic growth of marketing costs, which were partly a function of the Whole Foods acquisition as well as the substantial promotion of new devices, took its toll on the bottom line.

Fulfilment and shipping costs also increased faster than sales, although the pace of increase is not quite as bad as feared.”

International also weighed down on the profit line with a $936 million operating loss during the quarter, Saunders added. This was a sharp increase on the $541 million loss the division posted last year. The launch of new services like Amazon’s unlimited music service in several European countries, and the rollout of Alexa services to India and Japan, have all taken their toll on the cost line. Amazon is still very much in the building stage in many of its overseas operations, and we think profitability is likely to get worse before it gets better. However, this near-term pressure should not be seen in negative terms; indeed, we view it as an investment rather than as an unrecoverable cost.

“Turning away to Amazon’s latest venture, Whole Foods, we believe it is too early to conclusively say whether this is a success story,” Saunders said.

However, initial signs are encouraging, and our data show some very slight movements on price perception – these are not dramatic, but they are a step in the right direction and show that Amazon’s approach is being noticed by consumers. Looking ahead, we excited about the possibilities for the Whole Foods business and believe that over the medium to longer term Amazon will make some more radical changes that will deliver stronger results.”

Overall, Saunders said, Amazon is in very good shape.

“In some ways, the deterioration in profit doesn’t matter, if only because the business has an enormous amount to show for its expenditure,” he said. “These investments – in services, devices, new ventures, pricing, international markets, and business services – will all power growth in the years ahead.”

* This story first appeared on sister site, Inside Retail Australia.

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