This winter should be another record-breaker for Amazon (NASDAQ: AMZN) -- experts ballpark that the company will pocket 40% of online holiday shopping That kind of activity might sound like the kind of things that would mean big money for Amazon…. But that’s not exactly the case.
I’m Dylan Lewis from the Motley Fool and in this video we’re going to break down how retail doesn’t actually make much for Amazon, where the real cash cows are for the online giant, and run through just how big Amazon’s empire really is.
To do that, we hopped in “Bezos” a conference room here at Motley Fool HQ, and I’ve got named after Amazon’s founder.
In the first 9 months of 2019, Amazon has done more than $100B in “product sales” -- $109B to be exact.
Getting down to just how much Amazon actually makes on those retail sales is hard -- they don’t break out operating income for just their product sales, so we have to look at their various business segments.
The company breaks things out into 3 categories:
North America
International, and
AWS - Amazon Web Service
So far in 2019 Amazon’s North America segment posted operating income of $5 billion on revenue of over $117 billion and their international segment lost $1 billion on $50 billion in sales.
So that 4% North America margin is being subsidized by other stuff, meaning Amazon’s true e-commerce margins are likely in the very low single digits… which kind of makes sense.
Jeff Bezos is often attributed with the quote: “Your margin is my opportunity” and Amazon’s approach to retail has been to be a low-cost provider that can’t be beat on convenience.
The company made free shipping table steaks and are now pushing same-day delivery -- it’s great for shoppers, and it is totally in line with Jeff Bezos’ plan from the beginning.
This focus has gotten Amazon to the point where it owns about 40% of online sales and has enabled the company to build a nice complementary advertising business that could be a huge boost for the company down the road, but putting the customer first to such extreme lengths is expensive, you have to compete on price and invest heavily in your infrastructure and supply chain. So where does the money come from?
A-W-S
Amazon Web Services is a lesser-known part of Amazon’s operations, but it does the heavy lifting when it comes to Amazon’s finances.
The segment is the one-stop-shop for most of the tools and services that businesses need to stand up something online and it has proven wildly successful. Based on estimates, AWS owns about 50% of the public cloud infrastructure market, leaving competitors like Microsoft’s (NASDAQ: MSFT) Azure and Google (NASDAQ: GOOG)(NASDAQ: GOOGL) Cloud in the dust.
AWS was born from engineers at Amazon looking to standardize Amazon’s IT infrastructure and make it more efficient. As the team was crafting a plan to do so internally, they also realized that Infrastructure-as-a-service could be a very valuable offering, so they pitched it to Jeff Bezos.
Bezos liked the idea, that’s no surprise, it fit directly into his idea of how the company should be seizing the online opportunity.
Bezos has always looked at all things internet as green field, industries and segments whose value hasn’t been realized and whose ownership is up for grabs.
AWS is the company’s most high-profile success now, but based on all of the company’s other online operations, it’s likely there will be more to come. If you name a market segment, chances are Amazon plays in that space.
The company has internally developed offerings in streaming, smart home products, logistics, and e-readers, but they’ve also acquired names that have immediately given them huge market share in key spaces
Grocery? Amazon owns Whole Foods
Video game streaming? Amazon owns Twitch
Prescription drugs? Amazon owns PillPack
On their own, all of these things are helpful, but together under the same umbrella they reinforce the strength of each other.
Shoppers might be familiar with the idea of a loss-leader -- it’s a product a store is willing to sell at a loss or breakeven in order to get people into the stores, where they’ll also add other items to their cart.
That’s effectively what Amazon’s retail operations do.
Estimates from Consumer Intelligence Research Partners ballpark that Prime users spend twice as much as non-members on Amazon, and that gap has widened over the past few years.
You can call e-commerce the “gateway” for Amazon, and while we generally think of e-commerce as having “arrived” -- the reality is that it only makes somewhere between 10 and 15% of U.S. retail right now.
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