Amazon continues steady growth with increased profitability
For years, the retail industry focused on Amazon rather than generating profits. The company has been profitable for 20 years already, but the arguments remained for a long time. For the last year, Amazon has significantly improved its profitability. Since Q1/2023, the company has more than tripled its Operating income, from $4,7 billion to $15,3 billion. This translates into a 10,7% Operating margin in Q1/2024.
The North American retail division and the AWS segment drive the increase in profitability.
North America and AWS growing Operating profits significantly
Services driving growth
When it comes to driving growth, service sales have been Amazon's undisputed champion. The original core of the business, product sales, has not seen double-digit growth since Q2/2021. In contrast, service sales have been on a steady upward trajectory. At the start of the year, product sales grew by +7%, whereas service sales saw a remarkable +17% growth, underscoring the pivotal role of Ams gr’s growth strategy.
Services account for already 57,5% of Amazon's revenue. This year, the company will most probably see service revenues surpass 60%.
It was only in Q3/2021 that service revenues reached the same level as product sales. Soon, services produce twice the revenue of product sales.
Of the services, the biggest growth was driven, again, by the Ads business. It grew by +24% and is about to reach $50 billion in annual revenues. Ads produce approximately half of the revenue that AWS generates but are said to have a significantly higher operating margin. Thus, it is highly likely that Ads are already producing similar profit levels for the company.
Another notable growth driver is the biggest service segment, third-party services. At $100+ in annual revenues, the segment continues to grow at a high double-digit rate: +16%.
The core of the third-party services is the logistics infrastructure. Over the years, the company has invested heavily in this infrastructure. Amazon CEO Andy Jassy emphasised the strong performance of the logistics operations.
“We remain focused on driving better experiences for our customers while also delivering efficiency improvements. Our financial results are an encouraging reminder of the progress we’re making.
We’ve continued to get faster while improving our safety performance. In this past Q1, we delivered to Prime members at our fastest speeds ever. In March, across our top 60 largest U.S. metro areas, nearly 60% of Prime members orders arrived the same or next day.
Faster delivery times have another important effect. As we get items to customers this fast, customers choose Amazon to fulfill their shopping needs more frequently, and we can see the results in various areas, including how fast our Everyday Essentials business is growing and the continued increase in Prime member purchase frequency and total spend with us.
We’ve talked about how our regionalization efforts have helped lower our cost to serve. We’ve continued to inspect our fulfillment network for additional opportunities and are working on several areas where we believe we can lower costs even further while also improving customer experience. One example of this is our work to increase the consolidation of units into fewer boxes.”
