Amazon - the service company
Photo by Andrew Stickelman on Unsplash
The Q3/2021 showed that Amazon might after all be a company that is influenced by the same real world problems that other companies struggle with. Over the years the company has grown with an unstoppable rate from quarter to quarter.
Annual growth rates of Amazon
During this last quarter company’s growth slowed down from the pandemic highs of 40+% annual growth to a “mere” 15 %. For many companies 15 % would be a great growth rate, but for Amazon it is something the company has not seen in more than six years.
During the last 15 years Amazon has grown this slow only during three quarters.
As a comparison to Amazon’s growth, Shopify reported it’s Q3/2021 results slightly earlier. Shopify was able to grow its revenues by 46 % and it’s GMV for 35 %. One could wonder if Shopify has been stealing some market share from Amazon?
From products to services
Service sales & product sales: share of revenue (left) & growth (right)
For quite some time the big picture in the Amazon business has been the rapid growth of the service businesses. At the start of 2017 the share of revenue coming from services was 35 %. Just before the pandemic services represented almost 45% of revenue. This quarter the services surpassed product sales as the bigger revenue driver for the company. The product sales is also the part of the Amazon business, which is growing significantly slower, by only 4% in Q3/2021.
Growth rates for different Amazon service segments
Where product sales stagnated, service sales grew by 29%. It was driven especially by the Ads business, which has become a significant profit generator for Amazon. With $8 billion in revenues and the growth rate of 49%, the Ads business has become AWS-like business for the company.
Only in the span of few years, the Ads business has become a $30 billion business (last 12 months).
The growth of services has declined from the highs achieved during the pandemic. Services are still growing with significantly higher levels than the products and online stores.
Geographically US sales slowing down
Growth rates of Amazon business segments (North America, International & AWS)
The biggest segment within the Amazon ecosystem is the US business, which represents almost 60% of the total revenue. The US business segment has been almost gravity defying in its ability to keep growing by 20+% quarter after quarter despite $60+ billion size.
Since the start of 2018, the US business has only twice grown for less than 20 % (18,3 % & 16,6 %). With this backdrop, the 10 % growth of the last quarter is a bit surprising.
The International business has kept on growing a bit faster than the US business, by 15,8 %. However, the International business has once again become unprofitable making a loss of $-911 million.
Revenues and operating incomes of the business segments
The profitability of the company was almost entirely driven by the AWS business segment, which was responsible for 100,6 % of operating income (International business lost more than the US business generated profit).
Growth restrictions
Number of employees and the revenue per employee
Amazon stated in their quarterly reporting that recruiting enough employees has become one big restriction for growth. The company has already invested heavily into its warehouse and logistics capacities. Also the employee count has grown dramatically over the last five quarters. In two years (since Q3/2019) Amazon has almost doubled the size of its workforce. The effectiveness of the workforce seems not to have grown accordingly as the revenue per employee measure has been gradually decreasing during the last years.
With regards to employees and work conditions Amazon has been notorious in its image as an employee. Low wages and brutal working conditions have gathered headlines over the years. Since then the company has increased it’s starting wages, but still it seems to struggle with employee recruitment and retention. One wonders if the company should do more to create a work environment where people want to stay working.
Never underestimate the longer term
“We’ve always said that when confronted with the choice between optimizing for short-term profits versus what’s best for customers over the long term, we will choose the latter”
When it comes to long term thinking, Amazon has traditionally the best in class. Despite the slowing growth and operating income numbers, Amazon has been investing heavily for the future in terms of the employee and logistics investments.
One bad quarter does not necessarily mean anything in the bigger context of Amazon.
However, Amazon needs to keep up pace, if it wants to keep growing in the future. As mentioned in the beginning, Shopify grew faster than Amazon. Also the looming threat of the Chinese marketplaces remains in the background. The threat is most obvious in the International business unit, where the Chinese marketplace will eventually start competing more directly with Amazon.
It will be very interesting to see as the results season unravels if other retailers report similar growth numbers or have they been able to steal market share from Amazon?