Amazon’s Blowout 4th Quarter and What It Means for Sellers

Allison Lee

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February 26, 2020

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At the end of every holiday season, there are winners and there are losers. Amazon was a clear winner this year, revealing spectacular fourth-quarter earnings that smashed analysts' expectations. 

But another retail titan fell flat on its face. Just four days after Amazon’s earnings call, Macy’s announced it would be closing 125 stores, almost a fifth of its retail locations. 

As an Amazon seller, you’re clearly on the right side of the retail divide! In this blog, we’ll cover  just how well Amazon performed in Q4 and what contributed to its success. Stick around for insights into what this means for your business and how you can adapt to the changing retail landscape.  

Amazon’s Q4 Earnings Recap

case study about top amazon seller that reached seven times more sales

Amazon Earned a Round of Applause

More specifically, Amazon’s revenue grew 21% to $87.44 billion in the fourth quarter, beating even the most optimistic guidance of 11% to 20% growth. 

More than half of this revenue—61%, or $53.67 billion—came from holiday sales in North America. That’s an impressive 22% jump over 2018 figures.

International sales, on the other hand, showed slower YoY growth at 14% (totaling $23.81 billion). Operating expenses for the international segment also exceeded sales, resulting in a net loss of $617 million. The company cited a 2% increase in Japanese consumption tax and the timing of Diwali, an Indian holiday that normally falls in Q4 that fell in Q3, as reasons for this.

Marketplace Sellers Overcame a Short Holiday Season

Despite having fewer shopping days to work with in 2019 because of a late Thanksgiving, Amazon sellers fared just fine. 

Amazon CFO Brian Olsavsky coolly explained, “The way we look at it and the way we believe it works in our business is that customers will have a holiday budget and they will spend it between generally in the middle of November [and through the holiday season]...We don't see an impact on that [when considering six less days between Thanksgiving and Christmas]. Perhaps it's a bigger issue for stores and foot traffic, but we don't notice it in our business.” 

Amazon confirmed that third-party sellers:

  • Sold more than 1 billion items over the holidays
  • Hit double digit growth in the number of units sold YoY

Amazon didn’t release specific sales figures for its marketplace, but for some time, third-party sellers have accounted for well over half of Amazon’s sales

Prime Membership Grew...a Lot

Despite speculation that Prime membership was approaching its saturation point, Prime membership peaked. 

”We have more than 150 million paid Prime members globally now, and we mentioned that more people joined Prime in Q4 than any other quarter before,” said Olsavsky.

“Response to the one-day availability [has been] building through the year,” Olsavsky also noted, suggesting that Amazon’s huge investment in enabling one-day delivery was starting to pay off. Amazon additionally made Prime available to Brazil last September, and removed the $14.99/month fee for Amazon Fresh. 

Not to mention, Prime membership now includes free two-hour grocery delivery in more than 2,000 U.S. cities and towns, according to CEO Jeff Bezos. The number of items delivered to U.S. customers with Prime’s free one-day and same-day delivery more than quadrupled in Q4 compared to last year. 

Prime Day ‘19 didn’t disappoint, either. More people joined Prime on July 15, the first day of Amazon’s two-day Prime event, than on any other day in the company’s history. Almost just as many members joined the second day. 

Fast Delivery Came with a Hefty Price Tag

One-day shipping, by the way, was an expensive endeavor. Back in October, the company predicted that the holiday season alone would cost $1.5 billion to support one-day and same-day delivery. Amazon spent a bit less than that in Q4, but even so, the company’s worldwide shipping costs in the fourth quarter were up 43% to $12.9 billion. 

This expansion of rapid delivery is still a work in progress. Olsavsky estimated the company would escalate spending by another $1 billion in the first quarter of 2020 compared to Q1 2019. Aside from growing its fleet of vans and drivers, the company will be investing in dozens of new warehouses intended to make inventory “more local to enable local deliveries to hit the shorter cut off times.” 

While most Amazon warehouses are already a whopping 100,000 square feet, Olsavsky noted, “We grew the square footage for fulfillments and transportation by 15% each over the last two years, and we look ahead and see a step-up in that this year.”

Amazon’s continued and rapid expansion of fulfillment centers may have something to do with its shipping hiccups during the holiday season. In December, Amazon took the rare step of acknowledging that “delivery promises vary and may be longer than normal” because of volume and weather issues. Amazon’s Facebook page also saw lots of posts from disappointed customers complaining of delays. Looks like this year will be dedicated to proving the reliance—not just the feasibility—of one-day shipping.

map of all of amazon's fulfillment centers in the u.s.
Source: CNBC


More Sellers are Tapping into Amazon Ads and Services

Amazon’s revenues from third-party seller services—the money you spend on Amazon programs like FBA—grew even faster than revenues from sales in Q4. It jumped 30% to $17.45 billion from last year’s $13.38 billion.

Olsavsky attributed the increase to “more participation of third-party sellers in our one-day delivery program.” Third-party participation was particularly strong in Q4, during which sellers shipped more than 100 million items with Prime’s free one-day delivery. This translated into greater participation in Amazon's FBA services to make one day possible (see "Key Takeaways" for how your business can ship quickly without losing money to FBA).

Ads also played a big role here. While Amazon doesn’t specifically break out income from advertising in its earnings (yet), most revenue in the company’s “other” category comes from its ad service.

“The rising competition for ad space on popular search terms put upward pressure on bids to win those placements,” noted Andrew Waber, director of insights at Teikametrics, in an exclusive interview with Zentail. This resulted in greater ad spend during the holidays. His company, which uses machine learning to help sellers multiply their ROI from Amazon ads, has seen brands vigorously defend their own branded terms from competitors. (In the future, they recommend that brands refocus on generic terms that add incremental revenue to their overall business.)   

The income from Amazon's "other" category posted the biggest increase of any of the company’s business segments in Q4, jumping 41% YoY to $4.78 billion. Amazon is now the third-largest digital advertising platform in the U.S. behind Google and Facebook.    

Key Takeaways for Amazon Sellers

  1. Audit your fourth quarter. Did your fourth quarter performance mimic Amazon’s? With third-party sellers accounting for more than half of Amazon’s sales, we’re hoping you shared the bounty of this success and experienced an influx of Amazon sales of your own. If not, let’s talk. You could be losing sales to competitors for a variety of reasons—loss of buy box, non-optimized listings, slow shipping and operations. We’ll help you diagnose the problem and refine workflows to get your business working at its best. 
  2. Anticipate a stronger Q1 this year. Sales revenues typically drop back after the holidays, and this year will be no different—but it could be less of a drop than in previous years, given the tremendous growth in Prime membership and Amazon.com sales. Be ready to take advantage of the increased traffic on Amazon via optimized listings and a smart reordering process. If you have excess inventory left over from the holiday season, consider creating multi-unit kits to drive purchases (and sidestep competition on your listings). 
  3. Prepare to ship faster than ever. While shipping expectations may vary by product category, it’s clear that one-day and same-day shipping are changing the way consumers shop—and how Amazon ranks its sellers. Start drafting your own plan for getting products to your customers faster. Weigh Amazon FBA fees (and common pitfalls) against the cost of fulfilling orders yourself. Or consider tapping a third-party logistics partner (3PL) to outsource shipping while retaining greater control over costs and inventory. Note that Amazon lifted its ban on FedEx in January 2020, re-opening opportunities to ship at potentially cheaper rates than Amazon’s shipping services. 
  4. If you use Amazon FBA, keep close watch over your inventory. With Amazon expanding its warehouse network to store products closer to more consumers, your own FBA inventory may be spread across more locations. That may make it more challenging to keep adequate quantities, win the buy box in regions when there are more local resellers and/or leave you with more money tied up in inventory. In its quest to streamline the customer experience, Amazon is also accepting free returns at more than 18,000 drop-off locations in the U.S., including Amazon Hub locations, select Whole Foods Market stores and UPS. So you could experience a higher rate of returns this year. Pro tip: this is why having a modern forecasting system is critical; sellers who rely on a 30-day reordering schedule risk moving too slowly and/or repurchasing products without considering customer behaviors and trends that are unique to ecommerce. 
  5. Consider advertising. The rapid growth of Amazon’s advertising revenues indicates that sponsored product and brand listings are increasingly prevalent in Amazon search results. MarketPlace Pulse recently reported that ads are cropping up on product detail pages, too. Test ads to continue driving traffic to your best-selling products, new listings and/or slow-moving products. Teikametrics’ Andrew Waber recommends always bidding to value and factoring in desired margin, product costs and other fees when setting your budget. He further suggests uncapping your budget for manual campaigns to ensure that you can continue capturing sales from profitable keywords.



Conclusion 

Coming out of a great 2019 holiday season, Amazon and its sellers have every expectation of a strong 2020. Be ready to take advantage of it with strong workflows for handling increased traffic to your listings. Zentail’s COM platform offers powerful listing optimization tools and AI-powered automation to scale your operations. Contact us for more information or to speak with one of our seasoned Amazon experts.

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