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Does Amazon Lose on Retail? Numbers Say No

· October 4, 2018

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A recent article from The Information detailing Amazon’s current retail profits calls into question an assertion occasionally made about Amazon’s retail operations. It is sometimes argued that Amazon (as well as other large tech firms) operates some parts of their business at a loss, particularly during growth phases. The article outlines that Amazon’s U.S. retail operations do not, in fact, operate at a loss and are growing.

Amazon has shown positive returns from its North American retail marketplace and while that margin is smaller than other services Amazon offers, such as Amazon Web Services (AWS), it still generated $2.84 billion in operating income last year. While global Amazon retail did lose money last year, that can be attributed to its expansion overseas – Amazon is nearly complete in investing $5 billion into India. In fact, while retail has dropped occasionally, last year for instance, Amazon’s retail wing has still shown clear net growth over the years. Furthermore, Amazon’s presence in multiple sectors with varying services – AWS, streaming TV and movies, advertising, hardware devices – competes with global firms and contributes to their profits; while it too is profitable, retail is not Amazon’s most profitable sector. Amazon’s advertising brought in more than $2 billion dollars last quarter and some analysts say it will surpass AWS by 2021.

The Information article also cited Mark May, a Citi analyst, who discussed the notion that AWS is propping up Amazon’s retail business. May stated the retail division would have the ability “to not only self-fund themselves, but to continue to invest in growing the business and even to do large-scale acquisitions… Had these businesses been separated two years ago, the retail business by our estimates would still have been able to acquire Whole Foods.”

Amazon is seeing each of its services (including retail) increase its net profitability. Amazon’s operating cash has exceeded its operating costs since 2002, mathematically and cumulatively selling above cost. The data shows Amazon isn’t engaging in operating its retail operations at a loss to boost a new growth phase.

Competition

Some, if not all of society’s most useful innovations are the byproduct of competition. In fact, although it may sound counterintuitive, innovation often flourishes when an incumbent is threatened by a new entrant because the threat of losing users to the competition drives product improvement. The Internet and the products and companies it has enabled are no exception; companies need to constantly stay on their toes, as the next startup is ready to knock them down with a better product.