Amazon's net sales increased by 20% to US$72.4bn and operating income was US$3.8bn, an increase of US$1.7bn year-on-year.
Strong performance in North America
The strong fourth quarter means full year net sales increased by 31% to US$232.9bn whilst Amazon’s operating income hit $12.4bn in 2018 versus $4.1bn in 2017.
North America accounts for 61% of total net sales and in 2018, net sales grew faster in North America at +33% year-on-year, than the international business which achieved +21% year-on-year.
In the US, Amazon has been improving its Prime membership, and now a majority of Prime members have access to free one-day shipping or faster. Prime FREE Same-Day Delivery and Prime FREE One-Day Shipping reached more than 20,000 cities and towns this year. In spite of this, Amazon’s total net sales from subscription services decreased from a year to date run rate of over 50% to 26% in Q4. We think this reflects the already high uptake of Prime making It harder to attract new members.
Meanwhile, Amazon has also been developing its Whole Foods Market business in the US, with expanded free grocery delivery and pickup from Whole Foods Market through Prime Now. This enables customers to place an order through the Prime Now app and choose delivery in an hour or pickup in 30 minutes. Customers in over 60 US metros can receive grocery delivery, whilst pickup service is available in over 20 US metros, with plans for further roll out. In Q4, as Whole Foods Market customers swapped to online ordering, physical store sales were $4.4bn down, 3% year-on-year.
International business
One highlight of Amazon’s international business was the further expansion in Brazil in 2018. Customers can now shop across 12 categories with free delivery on items sold and shipped by Amazon. Products are shipped from Amazon’s first fulfilment centre in South America, located in the Greater São Paulo area.
Amazon is continuing to invest in its international business. Amazon is continuing to invest in its international business, such as India, and Amazon’s losses have fallen from US$(3)bn in 2017 to US$(2.1)bn in 2018.
Crucial pillars for the business
Net sales for Amazon Web Services increased by 47% in 2018 and it now accounts for 11% of total net sales Additionally, in 2018, 59% of total operating income came from Amazon Web Services, which can subsequently be re-invested into the wider business to support further expansion.
Amazon’s Marketplace continues to develop. In Q4, third-party sales were up 28%, in comparison to first-party sales at +14%. In 2018, almost 200,000 small and medium-sized businesses exceeded US$100,000 in sales in Amazon’s stores.
In 2018, Amazon Advertising delivered net sales of c.US$10bn. Amazon is attracting significant advertising revenue. Shoppers are increasingly using the website as a search engine and research tool, due its comprehensive selection and detailed product information. With Amazon’s sophisticated use of artificial intelligence, it can provide manufacturers with targeted advertising and the benefit of convenient ordering and fulfilment.
Forward outlook
Amazon has forecasted favourable results for Q1.
Net sales are expected to be between $56bn and $60bn. This could be a growth of between 10% and 18% compared with the first quarter of 2018. Operating income is expected to be between $2.3bn and $3.3bn, compared with £1.9bn in the first quarter of 2018.
With the number of devices with Alexa built-in more than doubling in 2018, Alexa is a key focus for the business. Jeff Bezos, founder and CEO, said: “Echo Dot was the best-selling item across all products on Amazon globally. The number of research scientists working on Alexa has more than doubled in the past year. In 2018, we improved Alexa’s ability to understand requests and answer questions by more than 20% through advances in machine learning, we added billions of facts making Alexa more knowledgeable than ever, developers doubled the number of Alexa skills to over 80,000”.
Alexa is a key competitive advantage as it gives Amazon the ability to better understand shoppers and be front of mind both in and out of the home. For further information on voice assistance, Retail Analysis subscribers can read our Digital personal assistants report here.
Amazon managing the home will also be a key focus for the business. For instance, Amazon Ring, a video doorbell service, has its best quarter ever with millions of devices sold globally. Key by Amazon also introduced new ways for customers to control and monitor their homes, such as Key for Garage. Retail Analysis subscribers can read our In-home unattended delivery report here.
For more information on Amazon, Retail Analysis subscribers can read and download our Strategic outlook for Amazon report here.