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Amazon’s Mixed Q4 results – plus a Prime-increase on the horizon?

January 31, 2014 | Posted at 1:06 pm | By Scot Wingo

Yesterday, Thursday January 30th, 2014, Amazon announced their Q4 2013 results.  As we mentioned in our preview, expectations were high, essentially everyone was looking for a Q3-level y/y growth rate in the >23% range.  Amazon came in at 22%, below Wall St. expectations.  The good news is that Amazon had the highest operating margins in over two years and said they are looking at raising the cost of Amazon Prime (currently $79/yr) by $20-40.  Wall St. loved this because 22m*$40 = $800m in ‘incremental revenue’.   The devil is in the details and we’ll have to watch when/how Amazon approaches this price change to Prime and how consumers react.

This quarter continues the long 3-4yr ‘story arc’/theme we have seen with Amazon – more and more GMV is flowing through 3P which causes revenues to decelerate (because for every $100 in GMV that move over, Amazon ‘loses’ $90 in revenue due to accounting treatment – thus decelerating revenues).

In this post we’ll rise above all that Wall St. noise and look at Amazon’s results in detail and what they mean for online sellers/retailers.

Concerns overblown (for sellers) – or – Don’t Panic – Keep Calm and Amazon On!

 

Keep_calm

There are headlines out today about a massive slowdown at Amazon, etc.  Sellers may read this and panic that the growth years of selling on Amazon are behind us.  I actually think that’s very far from the truth.

It’s important to remember that e-commerce grew at 11% as of Q4 (comScore) so at 22% y/y revenue growth, Amazon is growing 2X the rate of e-commerce.  It’s also important to remember the scale – this is a ~$75B online retailer growing at that pace – the share gains even at a ‘paultry’ 22% growth rate are astounding.  While this decelerated from 26% as of Q3’s growth rate, Q4 2013 was a challenging holiday with fewer days, delivery capacity concerns, etc.   For example, had Amazon grown ‘in-line’ with e-commerce at 11% the revenue would be $23.6b or $2b less than this result.  Behind that $2b if you factor in 3P there is $4b in share gain that Amazon enjoyed in Q4 2013.  That’s essentially the same online sales of a Liberty, Sears, Office Depot, Dell, BestBuy that Amazon gobbled up in ONE Q!  As we peel the onion on the Q, you will see that segments like North America non-media grew much faster: 25% y/y.

To put it in perspective, here’s a chart that shows retail sales vs. e-commerce sales vs. Amazon:

Amzn_q4_a_vs_r_vs_ecomm

So what’s going on is Wall St’s expectations go ahead of Amazon’s growth by a bit, which will cause some adjustments in the stock market, but hopefully you will see that the opportunity to sell on and grow with Amazon is still very much alive and well.

Amazon Q4 2013 Key Performance Indicators (for sellers) Dashboard

Each Q we look at the key metrics that are important to sellers and they are collected in this handy dashboard that has columns for the results, Wall St’s consensus estimates and Amazon’s guidance.     Let’s dig in and understand what happened this Q.

Here is the Q4 dashboard: (click to expand)

Amzn_q4_13_dashboard
Highlights from the Q:

  • Active users – Active users increased to 237m, up from Q3’s 224m – another 19% growth.  This bodes well for the future as Amazon hasn’t seen any slowdown in customer acquisition.
  • Paid unit growth – Paid units were a major concern for Wall st. coming in at 25% vs. Q3’s 29%. Again, this is 2X the rate of e-commerce and not a view for concern from a seller’s perspective.
  • Other growth rates  – These are detailed in our regular feature, the quarterly Amazon growth rate ‘cube’, found in the next section.
  • % paid items from 3P – Amazon reported that 39% of paid items were from 3P sellers – in-line with the last 2-3 quarters.
  • Amazon’s Q1 2014 guidance was for 19% at the mid-point, another reason Wall St. is concerned, we will have to see how this comes in.
  • Amazon added 7 FCs in 2013 with vague plans to keep

From the conference call there were some other points of interest:

  • 60% of revenue is NA and 40% is international (similar mix to Q3)
  • EGM hit a new high-water mark at 67% of sales compared to 28% Media (the reason those don’t add up to 100% is a category called other that we don’t cover)

Q4 2013 Amazon growth rate cube

Note: EGM stands for Electronics and other General Merchandise – Amazon-speak for anything that isn’t a (e)book, movie, dvd, cd, mp3, videogame.

In the following cube we summarize all of the different Y/Y growth rates that Amazon reports (ex-FX).  We find this helpful as you can quickly see where the growth is (NA EGM) and where things are slowing (intl media).

Amzn_q413_growth_cube

Looking at the categories of media/EGM – Amazon’s media business grew in-line with e-commerce thanks to an acceleration in the NA/Media component, and Amazon’s EGM business grew >2X e-commerce both domestically and internationally.  Clearly when you look at NA vs. Intl, International is decelerating primarily driven by the media side of things.

The growth cube is helpful, but it doesn’t give you a trend.  This chart shows the growth of each segment over the last year:

Amzn_q4_cat_chart

I mentioned early the deceleration Amazon is showing and this chart really illustrates it well. (Note all these metrics are ex-FX):

  • First you can see the green line (EGM US) decelerated from  the low 30’s in Q2/Q3 to 25% in Q4.
  • Next the purple line shows some deceleration – that’s international EGM.  Most likely this is due to EU headwinds.
  • The next line (light blue/aqua) shows the overall Amazon growth rate trend decelerating from the EGM pressure.
  • Finally the US Media line showed some nice improvement – likely driven by kindle e-book sales, apps, and mp3 sales that are filling the hole created by the lack of physical sales in those categories. Unfortunately it doesn’t seem like International media has caught on to the digital trends and it remained relatively flat (the red line at the bottom).

 

How big was 3P in Q4 2013?

Amazon provides a couple of datapoints that we regularly use to triangulate the 3P GMV.  For our analysis, we choose to use the % of items that are 3P as the ‘anchor’ and use some educated (and conservative) guesses around take rate, and 1P/3P average prices.

Here’s our analysis for Q4 2013 (click to enlarge)

Amzn_q4_3p_calculation

For Q4 2013, our analysis indicates:

  • $23.1b in 1P GMV
  • $24.6b in 3P GMV
  • Total GMV: $47.7b

Here’s what that looks like historically:

Amzn_q4_1p_plus_3p

I think this chart does the best job of showing the ‘real’ economic impact of Amazon’s Q4 – that $4b in incremental GMV above the ‘e-commerce growth baseline’ came from somewhere – be it other online retailers, offline or some mix.

Marketplace battle: eBay vs. Amazon 3P

This chart compares Amazon’s 3P GMV (no 1P) compared to eBay’s GMV (ex-autos).

Amzn_q4_ebay_vs_amzn_3p

Notice that each Q4, Amazon surges past eBay to fall behind the next Q4, but in Q4 2013, Amazon is $4b ahead of eBay in GMV, so it will be interesting to see if eBay can regain the top spot in Q1 given such a big lead.

Conclusion

Amazon’s paid-unit y/y growth rate in Q4 decelerated to 25% from Q3’s 29%.  But, the overall growth of 22% and segments like US EGM grew at 25% which are growing well over 2X the rate of e-commerce give us confidence that Amazon is set to continue  taking share in 2014.  Amazon’s guidance for Q1 suggests a deceleration to 18% y/y growth and we’ll be watching closely to see if that comes to fruition or if it turns out to be conservative.

 

Written by Scot Wingo,CEO, ChannelAdvisor.