Monday, 29 April 2013

Amazon results 2012 - Logistics is still the new marketing?

So, Amazon publishes its full year results - a loss of $39M - and everybody is happy that their strategy is still on track. Would this work for your business?

Anyway, in a series of brief posts, I'll take a bit of closer look at some of the obscurer numbers buried in that 10K filing. First of all, my favourite "logistics is the new marketing" figures.

Net shipping costs fell as a % of sales apparently from 2011 to 2012, from 5.1% to 4.7%. Amazon overall sales grew from $48Bn to $61Bn, but $3.3Bn of that growth was services (up to $9Bn). So if you assume shipping only applies to the sale of goods and not services, actually those numbers adjust to 5.5% in 2012 versus 5.8% in 2011.

This doesn't appear to be driven by any improvement in shipping costs, despite lots of hype in the 10K about how they manage their fulfilment and delivery partners. Outbound shipping costs were a painful 9.9% of goods' sales(!) in 2012, compared to 9.4% in 2011. It's a bit unclear whether Kindle downloads count as goods or services, but assuming they are "goods" then this suggests a rather alarming trend - shipping costs are significantly up on a unit basis, despite a presumed increase in non-physical goods in the mix.

They actually make a reference to this: "We expect our net cost of shipping to continue to increase to the extent our customers accept and use our shipping offers at an increasing rate, our product mix shifts to the electronics and other general merchandise category, we reduce shipping rates, we use more expensive shipping methods, and we offer additional services. "

Then comes the interesting contradiction. The reason net shipping costs have fallen, despite this increase in outbound shipping costs, is that they are charging customers more for shipping. Shipping income is up from 3.6% to 4.4% of goods' sales. And this is what Amazon has to say about this:

"We believe that offering low prices to our customers is fundamental to our future success, and one way we offer lower prices is through shipping offers."
So, interestingly "lower prices" appears to include charging more for shipping...

For consumer electronics retailers it's quite difficult to make the business case for home-delivered eCommerce add up once shipping costs get included: the margins on most consumer electronics won't stand it. I can't help wondering if Amazon is actually finding the same issue - only in Amazon's case they can afford to cross-subsidise heavily from very profitable categories like media/books (and presumably Kindles)? They are very careful to evade margin questions other than a general note that gross margins are up overall but they don't believe it's the right way to measure the business.

Not only is logistics the new marketing, but a loss appears to be the new profitable...