By now you’ve read all the financial details from Amazon’s impressive Q4 2017/2017 earnings. Net sales increased 38% to $60.5 billion and operating income up a whopping 69% to $2.1 billion for fourth quarter.
AWS continued its momentum as net sales increased 44.6% during the quarter to $5.1 billion and 42.9% increase for the year to $17.5 billion. AWS contributed almost 64% of Amazon’s operating income for the fourth quarter.
From a logistics perspective, the quarter was a pricey one with shipping costs up 31% from fourth quarter 2016 to $7.4 billion. Meanwhile, fulfillment as a percentage of total cost of sales rose to 23.3% from 19.8% for fourth quarter 2016. However, keep in mind fourth quarter included the all-important holiday season also known as ‘peak’ for many delivery companies.
As noted on Amazon’s earnings call, shipping costs will likely remain high as they are tied to Amazon Fulfillment Network (AFN) unit growth as well as increasing Prime adoption and faster shipping methods.
In terms of logistics net sales, third party seller services gives a glimpse of some of this. Third party seller services include commissions, related fulfillment and shipping fees and other third-party seller services. For the fourth quarter, this service increased 41% over the same period in 2016 to $10.5 billion. In fact, third party seller services has steadily increased and has almost doubled in terms of net sales since third quarter 2016 when it achieved $5.7 billion.
This growth is primarily due to its Prime membership which is expanding at a rapid clip around the world. While Amazon does not provide an exact number of subscribers, according to CNBC, Amazon noted in its recent SEC filing that it generated $6.4 billion from retail subscription services in 2017. Guggenheim Securities analyst Robert Drbul estimates that to be about 65 million Prime members. Cowen & Co. analyst John Blackledge estimates that the Prime subscriber base at closer to 80 million globally.
During 2017, Amazon launched Prime in the Netherlands, Luxembourg and Singapore. In addition, it introduced its retail and third-party marketplace offering in Australia while expanding its third-party marketplace in Brazil.
When asked about its logistics operations, Amazon’s Chief Financial Officer, Brian Olsavsky said that the company will continue to build out its logistics capability all the way to end delivery. Furthermore, Amazon has been able to increase service levels in many cases by delivering items themselves. “And although we have a strong partner network here, we will always be able to leverage our strength and our knowledge about where shipments are going, both within our network and to final customers that will create opportunities for us there as we increase or better the customer experience as well.”
The focus for 2018 will be on Amazon Fresh, Prime Now and Whole Foods and to a ‘lesser extent’ continue to build out the B2B businesses.
Our take is that Amazon is going to continue to dominate everything it touches despite its growing costs. We further expect it to take more control over its logistics network both in the US and globally to further control its customers’ expectations from the manufacturer to the final consumer’s door step.