Amazon Sales Soar, But Profits Pinched

Housebound consumers have been in a one-click frenzy, with Amazon reporting that virus-fueled shopping drove its first-quarter sales up 26% to $75.5 billion. But net income slipped 29% to $2.5 billion, as the Seattle-based company grappled with the intense logistical challenges of strong demand. 

Calling it “the hardest times we’ve ever faced,” Amazon founder and CEO Jeff Bezos says in its announcement that “the current crisis is demonstrating the adaptability and durability of Amazon’s business as never before. We are inspired by all the essential workers we see doing their jobs—nurses and doctors, grocery store cashiers, police officers, and our own extraordinary frontline employees.”

While Bezos called attention to the steps the company is taking to protect those employees, the financial report hit on the eve of International Workers Day, with some Amazon employees planning to strike in multiple locations.

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Bezos says the company plans to invest the $4 billion it expects to earn next quarter on COVID-related expenses, including stepped-up investments in personal protective equipment, enhanced cleaning, more effective social distancing, higher wages for hourly workers and “hundreds of millions to develop our own COVID-19 testing capabilities.”

Although observers were expecting a strong quarter, some were impressed by just how strong it turned out to be. 

“Fantastic,” writes Neil Saunders, managing director of GlobalData Retail, in his reaction to Amazon’s numbers. “As many regular stores remain closed, more consumers are turning to Amazon for essential and especially non-essential purchases. This includes more consumers joining Amazon Prime both to secure the enhanced delivery options and to enjoy the streamed content as they stay home more. 

“Amazon’s consumer ecosystem and its superior logistics and fulfillment operations are coming into their own amid the crisis,” he adds.

In emailed remarks, eMarketer’s principal analyst, Andrew Lipsman notes, ”Amazon’s huge topline acceleration isn't a complete surprise amid the pandemic's shifting consumer spending in favor of ecommerce and online grocery. The bottom-line performance was on the lighter side, but not altogether unexpected in light of the commerce business's escalating costs of labor and delivery logistics and shift in mix towards less profitable categories like grocery.”

Still, the pandemic's operating challenges aren’t going away. Some include expenses related to cleaning and safety, “but much is also down to the higher cost of shipping where expenditures have risen by 49% over the prior year,” adds Saunders.  He expects these charges to persist into the second quarter.

He notes that the ecommerce behemoth is somewhat less adept at grocery and household orders, despite an 8% quarterly sales increase at its Whole Foods Markets. “Amazon remains at a significant disadvantage to traditional retailers like Walmart and Target, which can use stores as points of distribution and fulfillment,” he says.

Still, America’s appetite for online groceries continues to be in overdrive, as health fears keep consumers out of supermarkets. Brick Meets Click, a consulting company based in Barrington, Illinois, says that online grocery sales for home delivery and store pickup reached a record of $5.3 billion for a 30-day period in April, representing a 37% jump from March sales.

Its study, in partnership with Symphony RetailAI, reports a 33% increase in the number of online orders made per month, as well as a 3% increase in order size, to $85.

That research also uncovers a chilling shift in consumer earning power, with 39% of respondents reporting a 25% or greater drop in monthly income. That translates to 49 million households.

1 comment about "Amazon Sales Soar, But Profits Pinched".
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  1. Ron Kurtz from American Affluence Research Center, May 1, 2020 at 1:11 p.m.

    Big sales increase and big drop in profits? Perhaps this is a further clue that Amazon is less a retailer and more of a cloud supplier and advertising medium. 

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