Amazon 10K 2013 - a profitable services company with a loss-making retailer attached? Amazon through the looking glass.

Another year, another Amazon 10k, another conjuring trick

So Amazon have published their annual report (10K) for 2013. I've looked in previous posts at some of the numbers and trends, especially their ongoing treatment of "free shipping" type offers as a marketing expense.

As usual, they confuse the data by presenting shipping as a percentage of total revenue instead of only applicable revenue (i.e. by including services such as AWS, instead of excluding them and looking only at product sales fulfilled by Amazon). Once you strip out the obfuscation, then shipping income has risen in 2011-2013 from 3.7% of sales to 5.5% of sales: a pretty hefty 37% hike over 2 years. Shipping costs, meanwhile have risen from 9.5% of sales to 10.9% of sales (a huge number). Net shipping costs, after a dip last year, have stayed constant 2011-2013 at 5.8% of sales.

Just to put these numbers into context, the cost of subsidising shipping has come down from 49% larger than the marketing budget to a mere 12% larger than the marketing budget.

Where it all gets a bit more interesting is when you start to strip out the effects of shipping and consider Amazon as a retailer of products only i.e. exclude their services. According to their 10K, "product sales represent revenue from sales of products and related shipping fees". So presumably, deduct the shipping fees and you find out what their true product-only sales are.

Similarly, cost of sales apparently includes shipping fees, so we should strip these out to get to actual "product" figures only. If we do this, we end up with gross profits of $10.26Bn on sales of $57.81Bn, or a gross margin of 17.7%.

Look no margins!

The first thing to note is that this is significantly less than the 27.2% mentioned in the 10K, although to be fair they do point out that gross margin is not a particularly sensible way to measure their overall business. No it isn't, but it is a fair way to measure their business purely as a retailer.

The second thing to note, is that these figures are gross margins: they exclude variable (i.e. non-fixed) operating costs. Being very kind and treating marketing, I.T., content and admin costs all as fixed costs, then we are left with the costs of fulfilment as a variable operating cost.

What happens then when we try to calculate an operating margin excluding services and (temporarily) excluding shipping fees and income: operating margins on product sales suddenly look quite sick: 6.4% in 2011, 4.4% in 2012, and a mere 2.9% in 2013. Wafer thin in other words. Once you figure in net shipping costs (fees minus costs) of 6.1% it all starts to look a bit sick.

It's all rather "Amazon-through-the-looking-glass". Suddenly we see a loss-making (and barely break-even prior to 2013) retailer effectively acting as the traffic-driving operation for a very profitable marketplace and services business.

One day, when they finally get big... NOT

And before the standard cry of "wait until they reach their full scale" goes up, then I should point out that this excludes anything that might be considered a cost that reduces with scale. It's all directly variable costs - shipping, fulfilment, cost-of-goods on which scale has no effect at all.

What then is the biggest threat to Amazon? No it isn't BestBuy getting their act together, it's eBay (and its equivalents in other markets such as Allegro, Rakuten and TaoBao) getting theirs together instead. If you really want to scare the life out of Amazon, open a marketplace with half their fees. Because their retail operation isn't the part that makes the profits, it's just their visitor source.

No wonder the BestBuy's of this world have a few problems. They're up against a retailer that  isn't particularly interested in making a profit from their retail operations!

Amazon: the first chink in the armour?

OK, I know I'm probably a bit slow with the flow here, but did anyone else think that the announcement by Amazon that marketplace sellers - in the EU at least - will now be able to sell their products cheaper on their own site than on the Amazon marketplace is more strategically significant than it might look at first reading? (See for example the story as reported on the BBC news site).

The trouble with Amazon is that too much of it looks more and more like a play on price alone, albeit one powered by the cash-cow of its awesome core media/books business. It looks more an more like 4 separate animals, although of course being able to leverage a single CRM view has to be a huge boost:

1. cash cow media/books; even here it is obsessed with being the cheapest. When did you last see a seller listing cheaper than Amazon itself, assuming Amazon holds the title at all? Or take a look at the royalty rates for publishing on Kindle; basically there's a massive incentive to keep the title at < $10, and you absolutely have to commit to being cheaper than the print version
2. 2nd rate (and generally expensive for Sellers) marketplace; eBay, Allegro (in countries where eBay hasn't made it) are usually the #1
3. Reasonable IT services business, into which it is pouring investment
4. Retailer outside media/books: totally a play on price, and dominated by the nightmare category of consumer electronics. The website isn't even that good at selling presenting this stuff (OK it is evidently good at selling lots of it). Margins, given how coy Amazon is on the topic, are evidently a big issue

Now that the "last man standing" multichannel retailers are starting to fight back properly - viz Dixons making a profit again at last, or Best Buy making proper price promises - then maybe, just maybe, price price price can't continue to be the be all and end all of Amazon's business. It certainly wasn't where it started in books.

It's just had to back down in a very small way. Is this the thin end of the wedge? Maybe the fact that it is preferring to invest in the services side of the business in preference is a sign that Amazon itself is reading the tea-leaves the same way.

Some more ratios - and why does wikipedia need my donation?

Having started to delve into the annual reports / 10-K for Amazon and Asos for my last post, I thought I'd extract and compare a few more data points from their published information. Firstly their fulfilment centre density.

Asos have just opened a new 1.1M sq ft facility (for metric readers, 1 square metre = approx 10.7 sq ft, 1:10 is an easily memorable ratio). According to their published figures, they expect to be able to serve £1.2 Bn of sales from this warehouse: a ratio of £1090 per year per sq ft. This fairly high figure presumably reflects the relatively high price points of clothing.

By contrast, Amazon publishes (non-services) sales of $42Bn from 44M sq ft of warehousing (although it is not clear how much of this warehousing space is already open, and how much is secured/under construction for the future). Converting the currency, this is equivalent to around £600 per year per sq ft. Interestingly this figure is remarkably close to the ratio for Ocado, the online only grocer, at around £630 per year per sq ft; this either reflects very well on Ocado - typical price points for grocery are around £1 per item - or rather badly on Amazon.

(It's also interesting to compare with sales / sq ft / year in a typical supermarket of around £1000 in the UK, although less than half that in the US.)

 

 

Secondly, sales per visitor. Asos also publishes visitor numbers in its annual report, based on comScore data. Most online retailers seem rather reluctant to publish these numbers, but comScore occasionally publishes data points for huge sites like Amazon (282M visitors in June 2012 worldwide) which can be used for estimation. With these caveats on the reliability of the numbers (and some allowances for seasonality), it's possible to estimate revenue-per-visitors figures.

 

 

Assuming the data is reaonably trustworthy, it becomes more evident why Amazon is such an effective machine: the cash it extracts per visitor to its website is quite spectacular. Almost 5 times what Asos manages, and treble eBay - and the eBay figures include the income from paypal. (Note that this is eBay's revenues, not the total value of transactions on eBay).

 

Although this is nothing to do with multichannel retail, on another tab I am now looking at yet another appeal from Wikipedia for donations. Why? I know it is supposed to be a wonderfully pure site, unsullied by commercial interests, unbiassed in its editorial approach. Would it, I wonder, be compromising its principles too far by becoming the biggest Amazon affiliate in the world? Most Wikipedia entries (should!) have a list of citations and sources; many of these are books. Would it be a commercial step too far to advertise just the books that are specifically in the citations; a wikipedia citation is almost an advertisement anyway? And Wikipedia has visitor numbers that make Amazon look really rather pathetic - at least double. Just a thought...