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July 28, 2011

A Retailer's Perspective on Amazon's Amazingly Awesome Q2 2011 results

Amazon released Q2 2011 results on Tuesday, 7/26 that put to bed any criticisms that Wall St. had about their heavy investment this year.  The company posted it's fastest y/y growth rate, 51%, in the last ten years.

There's already been copious press about this monster Q, but in true Amazon Strategies tradition, we have a retailer's view (if you partner or Amazon is a competitor, I think you'll find this of interest) for you today.

Note - click on any charts to expand them to a larger size in a pop-up, I kept them smaller as this is a long post.

Highlights

This section could be really long because it was just a stellar quarter, but here are the highest of the high, highlights:

  • Amazon's revenue came in at $9.9b vs. Wall St's expectations of $9.3b
  • Paid units (a new measure this Q!) grew 56% y/y
  • North America grew at 48% y/y
  • EGM (non-media or Electronics and General Merch) is now 59% of sales - you'll see why in detail later in this report
  • Seller units (what we call 3P or marketplace) were 36% of paid units - up from 34% share last year - which means that 3P is growing at 76% y/y - wow (details later)
  • Management has formally announced 15 FCs (fulfillment centers) and plans on a few more. They will all be up and online for Q4, which will give them 65-75 FCs! (wow).
  • Active customers are now over 144m

We've been talking to hundreds of retailers about the secret sauce to Amazon's continued success and this Q is a great opportunity to highlight two key drivers - 3P and Prime/free shipping.

Key Driver - 3P: Amazon's Unit growth and 3P growth

3P is jet fuel for Amazon -it allows Amazon to dramatically increase selection and grow faster than it could if it had to outlay the cash and resources to buy, inventory/hold, ship everything.  It also helps push down prices on Amazon as 3P's fight for the buy box.

Frequently we get asked questions such as: "Will Amazon keep doing 3P" and "What if Amazon competes with me".

In this chart you can see that 3P (the blue line) is actually growing materially faster than 1P.   That doesn't mean Amazon won't sell the same products as you will, but clearly 3P is where the bulk of the growth is coming from and in many markets, Amazon is almost using 3P to stock entire categories.

Amzn_q2_3p1p

The growth of 3P has driven 3P units up to 36% of units sold. When you think of all those kindle books in that unit number on the media side, I'd imagine that in EGM the number is more like 50% of units are 3P.

Key Driver - Amazon Prime - The power of Amazon Prime

Another key driver is Amazon Prime - Amazon's program that gives annual free two-day shipping for a $79 subscription.  Jeetil Patel over at DB has some great analysis on Prime where he has been tracking it's adoption in NA and International (Europe primarily).  In this chart he charts the NA and EU launches against each other as if they started at the same time (even though EU launched Q1_09 and US was Q1_07.

You can see that Prime in Europe is driving significant growth in EU as it gains traction.  In the US it has leveled out somewhat, but still drives huge up-ticks in buyer frequency.

Amzn_q2_prime

 

Justin Post @ Merrill Lynch has a good chart that shows that programs like Prime and Super saver don't come cheap.  In fact, in Q2, Amazon posted record shipping costs.  This chart looks at them as a % of sales and you see that they now at 4.9%   So for every $100 sold, $5 goes to supplement S+H.  The optimist would say 'great' this means more prime users locked into Amazon.  The pessimist would say that this is going to essentially erode margins towards 0.

Amzn_q2_ship_cost


Another analysis we are known for is oure detailed dive into Amazon's segments, which is in the next section.

Dissecting Amazon's segments (us/intl/media/egm)

Part of the fun of following Amazon is that they are notoriously tight lipped.  The best information they release that I have found that gives retailers a good baseline of how Amazon is doing and how they should be doing (in addition to our Same Store Sales data that is) can be derived from four segments Amazon releases:

  1. Media US - Media (books, music, video games, kindle ebooks) domestically
  2. Media Intl - Same as above but non-domestic and I always look at ex-fx to take out changes in the US Dollar and foreign currencies (this is called ex-fx for 'ex' or take out 'FX' or Foreign eXchange rates).
  3. EGM US - Electronics and General Merch in the US
  4. EGM Intl - same as above but non domestic ex-fx
  5. Amazon overall - I also put in Amazon's overall growth rate ex-fx in here as a baseline so you can see the leaders/laggards.

Amzn_q2_segs

What this chart tells us:

  • Leader - EGM US grew to 67% - right in line with our SSS incidentally!  This is impressive because the US is Amazon's most saturated market.  If they are 3-5 years ahead in the US and still growing at 67%, then it seems like Intl could grow this way for a decade!  Remember that these segments are all in the $10B run-rate scale and growing 50% at that scale is massive - certainly not the same as 50% on $1b.  They are adding something like two JCP.com's a year at this pace.
  • Leader - EGM Intl at 53% (>60% w/ FX) - Very impressive, and still early days.  I suspect when the Intl FCs come on line, this will accelerate again
  • Amazon overall - 44% - this is lower than the 51% recorded because I'm looking ex-FX for apples to apples.
  • Media US and Intl were the same at 20% - largely driven by kindle.  Remember this is a Q when Borders filed for bankruptcy and Amazon's media business accelerated as they anticipated the move from physical to digital and are a driver of that, not a victim.

Food for thought: E-commerce is growing at 14% and every Amazon segment is growing faster.  EGM US is growing 5X US e-commerce.  

Final thought - Amazon tablet and are they out Walmart'ing Walmart?

Finally, there's a ton of speculation that Amazon will release an Android-based tablet in Q3 for the holidays.  The company didn't say anything about it, but the Q3 forecast did have a pretty big bump up in several cost lines which made some analysts on Wall St. speculate there was $ in there for a big launch.

Finally, many analysts are starting to call Amazon the Wal-mart of e-commerce. To that end, Scott Devitt @ Morgan Stanley had a cool chart.  This chart shows Amazon and Wal-mart's net sales (adjusted for inflation) as if they companies started at the same point in time.  

Remember that Amazon only counts their rev share on 3P in revenue, so the gross sales from Amazon are actually a good $10b bigger/yr than even this chart shows!

Amzn_q2_wmt

 

With this core thesis that Amazon will essentially be the next Wal-mart, but faster because they don't have to build out thousands of physical store, he smacks a 2014 revenue bogie of $100B for Amazon.  Seems crazy, but with the company doing > $40b this year and a 50% growth you can get there pretty quickly (60b in 2012, 90b in 2013, 120b in 2014) - and actually that assumes things slow down somewhat, so $100B could actually turn out to be conservative!

 

Conclusion

This quarter provided more mounting evidence that Amazon is essentially running away with market share in e-commerce.  Consequently, we believe retailers urgently need to think of an Amazon Strategy - partner, compete, co-opetition?  Amazon is becoming so big and growing so fast, you almost can't afford not get on this train.

 

SeekingAlpha disclosure - I am long google and Amazon. eBay is an investor in ChannelAdvisor where I am CEO.

 

 

 

 

 

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