Amazon has reported strong performances across its two largest international markets in Germany and the UK. According to the company’s annual SEC filing, sales in Germany reached USD16.95bn (EUR15.31bn) last year, representing a year-on-year increase of 17.4% in local currency. Meanwhile in the UK Amazon’s sales jumped 24.9% in local currency to reach USD11.37bn (EUR10.27bn).
In both markets the retailer has focused on growing Prime membership and introducing new products and services, including its Amazon Fresh grocery home delivery service and rapid delivery service Prime Now. The UK market also gained nine bricks & mortar stores through the acquisition of Whole Foods Market in August, although two stores in Glasgow and Cheltenham subsequently closed. During 2017 in Europe Amazon also launched Prime in the Netherlands and Luxembourg and added Dutch language support for its shoppers.
For the full year Amazon recorded a 31% increase in net sales to USD177.9bn (EUR160.72bn). Operating income decreased 2% to USD4.1bn (EUR3.70bn), whilst net income reached USD3.0bn (EUR2.71bn).
Amazon’s annual results once again prove that there is no stopping the online juggernaut. It’s fourth quarter sales were up 38% year-on-year, which is a phenomenal achievement for a company of any size, let alone one that turns over hundreds of billions in revenue. Interestingly the company also exceeded expectations for operating income and achieved a 4.5% operating margin in North America, the highest for many quarters.
Much of Amazon’s success can be attributed to factors that the majority of retail competitors do not have within their arsenal: service revenue from AWS which now makes up 10% of company turnover, growing advertising revenue through sponsored product ads, and the company’s Prime membership ecosystem which ties loyal shoppers into increasing spend across categories and shopping more regularly with Amazon.
Last year the company generated 60% of revenue in North America and 30% in its international markets, of which Germany and the UK are the two largest. However, a trend that LZ Retailytics is observing is that as Amazon's phenomenal growth trajectory outpaces that of the entire market, it is now also impacting e-commerce competitors as well as bricks & mortar and multichannel operators. Whilst some retailers are partnering to benefit from this growth e.g. Morrisons and Booths in the UK, others are withdrawing from their Amazon tie-ups e.g. Basic in Germany has in recent weeks withdrawn the online store that it was operated with Amazon Fresh. It is also questionable what will happen to Amazon's Prime Now partnership with Feneberg now it is joining Edeka as a co-operative.
In its investor call, Chief Financial Officer Brian Olsavsky gave some insight into priorities for the coming year at the online behemoth. The company will focus on rolling out increased selection and more benefits to Prime members, with a big push expected in the groceries and consumables category. The retailer expects to see Amazon Fresh, Prime Now and Whole Foods working more closely together to increase their offer and service to customers. At the same time the company has been growing its focus on private labels in the past 12-18 months, focused largely on the FMCG and fashion categories. The company says this fits within its broader strategy of offering a wide selection, quality items and convenience for shoppers. However, it also represents a potential long-term threat to brand manufacturers (and an opportunity for private label partners).These private labels are offered exclusively to Amazon Prime members, tying shoppers into the ecosystem further.
Whole Foods also drove Amazon’s revenues during the second half in the US, adding USD5.8bn (EUR5.24bn) to sales volumes following its acquisition in late August. The company said that it will continue to focus on lowering prices, even beyond those initially discussed. Whole Foods is already being promoted across Amazon websites in the US and UK, adding lockers to stores and working on integrating Prime as its rewards programme. There will be increased collaboration and integration moving forward. A small operating income loss was recorded in the balance sheet for Whole Foods during the fourth quarter, owing to front-loaded expenditure.
Meanwhile Amazon continues to disrupt as its innovations reset expectations and change the way customers want to shop. The scale of growth for the company’s Alexa voice technology came as a “positive surprise” according to Olsavsky, driven by investment and external partnerships helping to accelerate adoption. There are now 30,000 skills available for Alexa as device sales soar. In our opinion voice is set to have a similar impact in the coming months as mobile did a few years ago. Similarly, walk out technology such as that showcased at Amazon Go in Seattle will disrupt physical stores, particularly in the convenience channel.
For the coming quarter the company anticipates net sales to increase between 34% and 42% year-on-year. LZ Retailytics figures show that we can expect Amazon to strengthen its dominance of the retail scene, where it will become the seventh largest retailer in Europe by 2023, from 12th position in 2017.