US Insights

Amazon Earnings Were Fueled By These 3 Areas of Focus

Rachel Dalton

Director

Retail 02.05.2019 / 16:00

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Amazon continues to prioritize R&D for its devices as it looks to embed Alexa everywhere.

After a successful 2018 holiday season, Amazon posted worldwide quarterly net sales growth of 20% to $72.4 billion and operating income growth of 78%, or $3.8 billion. Amazon’s net sales for fiscal year 2018 reached $232.9 billion, up 31% year-over-year, and operating income was a whopping $12.4 billion, more than triple that of 2017. To drive its business in Q4 and beyond, Amazon focused on three key areas: investing for the future, extending Alexa beyond stand-alone devices, and winning holiday. 

Investing for the Future

Throughout Q4 2018, Amazon invested to support its long-term operations, especially in fulfillment and assortment. While expanding Prime Now pickup and delivery at Whole Foods continued to be a priority in Q4, Amazon also invested in its fulfillment network more broadly. Most notably, in December 2018, Amazon announced it was extending its partnership with Air Transport Services Group, leasing 10 additional planes to join its fleet of 40 cargo aircraft. By building out its own air cargo network to supplement its third-party logistics providers, Amazon can continue to enable fast and free shipping for Prime members. Amazon also increased its fulfillment square footage in the quarter with two new fulfillment centers in California and Mississippi.

In its efforts to reign as “the everything store,” Amazon introduced new tools for small and medium-sized businesses to sell through its site. The tools helped 50,000 small businesses surpass $500,000 in sales on Amazon in 2018. The retailer also became the official retail partner for “Shark Tank,” allowing successfully funded startups to feature their products on Amazon.

Finally, Amazon set the stage for creating a pipeline of future leaders in its workforce. Amazon Future Engineers was launched in November to encourage students to study computer science and coding. On Nov. 1, Amazon increased its minimum wage to $15/hour for all employees, including seasonal hires. After the announcement, Amazon received more than twice as many job applications for hourly positions than the prior record for the number of applications received in a month. Amazon also officially announced that its HQ2 locations would be in New York and northern Virginia, offering 50,000 new jobs between the two locations.

Extending Alexa Beyond Stand-Alone Devices

Amazon continued to prioritize research and development for its devices as it looks to embed Alexa everywhere and lead the way in smart home innovation. “The number of research scientists working on Alexa has more than doubled in the past year … We improved Alexa’s ability to understand requests and answer questions by more than 20% through advances in machine learning,” said CEO Jeff Bezos in a statement. The number of devices with Alexa built in more than doubled in 2018, and a range of Alexa-enabled products was announced at CES 2019 in January. The big shift with voice overall is that it is embedded more broadly in a range of devices and hardware across a variety of product categories instead of being showcased only in stand-alone devices.

Winning Holiday

Amazon once again experienced its “best-ever holiday season,” leveraging the occasion to further expand the reach of its Alexa device portfolio and recruit new Prime members. Amazon consistently featured devices on the homepage as its top recommended holiday gifts, and cross-merchandised and heavily promoted the devices with the goal of getting Alexa into more homes. Interestingly, for the first time, Amazon offered free shipping to all shoppers during the holiday to better compete with other retailers. While doing so diluted Prime’s core proposition, the retailer emphasized Prime-exclusive products and deals throughout the holiday season to maintain the program’s appeal. With record-breaking sales of Alexa devices and tens of millions of new Prime members worldwide starting free trials or paid memberships, Amazon achieved its core holiday objectives as the top-shopped holiday retailer.   

Looking Forward

Amazon will continue to build a strong long-term business, as shown by its expanded fulfillment operations, wider product assortment, and workforce development initiatives. Advancing its position as a technology company, particularly with device innovation, remains core to its outlook, as does Prime. However, since Prime’s growth rate slowed considerably in 2018, watch for Amazon to focus on increasing Prime members’ shopping frequency and basket sizes to get more out of its existing shopper base. Amazon will also focus on advertising as a revenue platform, indicated by exceptionally strong growth of “other” revenue, which was up 97% in Q4.

Source: Kantar Consulting

Editor's Notes

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