Amazon has published their Q3 results and the headline was either “Amazon Misses Q3 Profit” or “Amazon Sees Continued Growth and Profitability”. In the case of the later title, the Amazon release leads with good news (cash flow) so that the bad news is buried, and then gives us a huge list of bullet point accomplishments (Q3 Financial Results can be found here.).

Both of the headlines are factually accurate. But what’s really going on? Amazon reports revenue in three categories designed to push their narrative. (All companies do this – nothing new here.) But digging deeper here’s what we see:

• 75% of the Amazon profit was from cloud services; which grew to nearly 10% of their revenue. (Sweet margins!).
• The other 25% of their profit came from the incredibly huge and vague “everything else” (aka “North American”) category. This includes content, Amazon brand devices, books and music, and all their retail-like sales. This 60% of revenue drove 25% of profits… Not such sweet overall margins.
• Their international operation lost money.

What should we think?

• Profit from “everything else” is most likely from content and Amazon brand devices – not their retail equivalent business.
  • This seems confirmed in their press release via the long lists of all new TV content they’re creating, and the success of their new devices.
  • In fact, the press release says nothing about retail-like sales. Out of a massive list of bullet points, there’s nothing. Except that they’ll hire some seasonal people.

My bottom line:

• Looks like Amazon is losing money on their retail-equivalent sales. For every dollar they take from a traditional retailer, they lose money.
• Manufacturers might be doing okay through Amazon – the loss is Amazon’s and not handed on to the manufacturer.
• The serious problem caused by all this is that Amazon raises unreal expectations for retail because their investors are paying for these services. How does a retailer compete with that unless they, too, find investors who want to lose money?
• It also means (as we see with most digital adventures) that Amazon will likely “pivot” at some point (maybe in 3-5 years) and their retail equivalent market will go away – In the meantime, what kind of damage will they do?

So the Amazon adventure continues. They continue to distract retailers who really need to focus on leveraging their brick and mortar advantage while supporting strong online orders and online promotions that grab searching consumers.

Now, we wait to see what Q4 delivers.

*For more, this WSJ article is interesting. It suggests investors aren’t going to like the bulk of profit coming from cloud services because of the tiny portion of revenue it represents and because it’s more vulnerable to knock-off.

*You also might enjoy reading my previous post:  Amazon – Retail’s 800-pount Gorilla or Crafty Coyote? which digs into Amazon numbers in even more depth.

Copyright 2016 – Doug Garnett – All Rights Reserved