US Insights

Here's What Mattered in Amazon Earnings

Meaghan Werle

Senior Analyst

Retail 07.30.2018 / 12:00


Amazon is focused on retaining members by reinforcing Prime’s value.

Nine days after its best-ever Prime Day sales event, Amazon released another strong round of quarterly results, with second quarter sales up 39% to USD52.9 billion. While Amazon missed on sales projections, the retailer delivered impressive profit in Q2, recording $2.5 billion in net income. This profit was the result of accelerating growth in areas such as Amazon Web Services, subscription services, advertising, and marketplace, as well as better-than-expected operating efficiencies. In turn, Amazon is able to offset expenses associated with operating its first-party retail business, which remains its biggest source of revenue. However, on the retail front, Amazon continues to invest in initiatives that evolve Prime’s value proposition, extend and elevate Alexa’s reach, and innovates on delivery, all in an effort to deepen Prime engagement across its ecosystem.

Reinforcing Prime’s value

With Prime’s $20 price increase now in effect, Amazon is clearly focused on retaining members by reinforcing Prime’s value. In turn, Prime members continue to receive preferential treatment when it comes to price: most notably, Amazon rolled out Prime savings at Whole Foods locations nationwide this quarter, now offering Prime members 10% off on sale items and discounts on select popular products. According to Brian Olsavsky in Amazon’s Q2 earnings call, Prime members have adopted this benefit at “one of the fastest rates we’ve ever seen.” In doing so, Amazon is leveraging Whole Food as a recruitment vehicle for Prime while trying to drive increased Whole Foods traffic and shopping frequency.


Similarly, Prime Day 2018 was oriented around showcasing Prime’s value, including expanded private label lines (such as its new pet food brand) and other Prime member exclusive launches, discounts, and services. The retailer favored Prime card holders in particular, offering even more cash back on purchases across categories and at Whole Foods stores. At the same time, Amazon incentivized omnichannel shopping behaviors with a $10 Prime Day credit for shoppers that spent $10 or more at Whole Foods, reflecting intentions to reward its most engaged members both online and offline.

However, Amazon seemingly has little to worry about when it comes to Prime renewals: even prior to Prime Day, Prime members signaled a continued willingness to renew despite the price hike (Figure 2). Instead, Amazon will be pressured to broaden Prime’s appeal among underpenetrated demographics. PillPack, for example, could be one means for Amazon to attract older shoppers to Prime, should PillPack’s “highly-differentiated customer experience” be incorporated into the ecosystem once the acquisition is complete.

Fig 2: Likelihood of renewing Prime Membership at higher rate after price increase

Source: ShopperScape, March 2014 and May 2018


Widening use cases for voice

In Q2 2018, Amazon continued its expansion of Alexa-enabled devices, now moving toward greater integration with the screen. Amazon is doing so through its Fire portfolio: for example, the new Fire TV cube can be controlled by Alexa, and Fire HD tablets now have an enhanced Alexa experience with Show Mode. By enabling Alexa through these devices, Amazon hopes to reduce barriers to voice shopping with the addition of a screen. As Amazon becomes more embedded in the home, shoppers can now learn more its smart home technologies at new Amazon Experience Centers, located in Lennar model homes throughout the country. In addition, Amazon is extending Alexa’s availability beyond the home, as evidenced by Alexa for Hospitality and its new partnership Marriott. The retailer has also partnered with manufacturers — including Sonos, ecobee, Lenovo, and Toyota— to allow customers to “use Alexa wherever they are,” according to Jeff Bezos.

Simultaneously, the retailer is widening use cases for voice, a theme that was apparent on Prime Day. While voice shopping was deemphasized during this year’s event (in favor of members-only early and extended access to deals via voice), Alexa-enabled devices appeared among deals in atypical categories, such as cooking, parenting, and fashion. Additionally, Alexa’s capabilities continue to evolve, with the Echo Look style assistant now available to all U.S. shoppers and more than 45,000 skills. The retailer is even rolling out new ways for disabled users to interact with Alexa through Tap to Alexa and Alexa captioning. As Alexa becomes more widespread, developers can now further monetize this new shopper touchpoint with seamless in-skill purchasing and Amazon Pay for Alexa.

Delivery method expansion

Amazon continues to innovate on how it gets goods to shoppers. In addition to the roll out of Prime Now delivery of Whole Foods to 14 new metro areas (now in more than 20 U.S. cities), Hub by Amazon launched this quarter, serving as a new, secure delivery solution for shoppers living in apartment buildings. To keep up with demand on the fulfillment side, Amazon introduced a new delivery program in Q2, which gives entrepreneurs the ability to start their own business as an Amazon Delivery Service Partner. However, Amazon expects fulfillment square-footage growth to be lower than last year given the efficiencies that it has achieved so far.

Looking ahead

Going forward, watch for continued focus on advertising as Amazon gains traction in this space with vendors, sellers, authors, and third-party advertisers. The retailer will broaden its portfolio of ad products to better enable awareness, discovery, and conversion on its platform. The retailer also alluded to more measurement capabilities to help advertisers better understand return on ad spend. With greater emphasis on the on-screen experience, anticipate new video-related services, such as video in search and potentially shoppable, Alexa-compatible content through Fire TV. More broadly, Amazon will likely elevate its site presentation in key categories such as fashion, beauty, and grocery to encourage browsing and further position the site as a marketing tool for suppliers.


Source: Kantar Consulting

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