Why Amazon, Faced With Growing Competition, Remains In A League Of Its Own

Amazon, despite having to spend $4 billion plus in coronavirus-related spending, reported much-better-than-expected second quarter profit and sales, thanks to its ever-growing number of loyal Prime members who shopped not only more often but also spent more per transaction. 

The Seattle online giant, eyed by competition from Google
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and Microsoft
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to Walmart
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and eBay, said Thursday afternoon second-quarter sales rose 40% to $88.9 billion.  Operating income almost doubled to $5.8 billion.  Both measures blew past Wall Street expectations. Amazon in April had projected its second-quarter operating earnings could have swung to a loss and land between a profit of $1.5 billion and a loss of $1.5 billion. 

Amazon shares shot up 6% in after-hours trading to a new record high late Thursday, topping $3200 a share. 

As stay-at-home consumers, led by Prime members, increased e-commerce orders, strong early demand for groceries and other essential items was followed by demand for discretionary things, which generate more profit for Amazon, Amazon chief financial officer Brian Olsavsky said on a conference call. 

Sales from the company’s bread-and-butter online store business surged 49% to $46 billion in what was traditionally Amazon’s smallest sales period, exceeding even its holiday season receipts. 

“Prime members continue to order more frequently and in larger basket sizes,” the finance chief said.  Amazon has “accelerated the growth of Prime members” both in the U.S. and overseas with new members’ also shelling out in similar fashion as existing members. 

Amazon said earlier this year it has over 150 million paid Prime members globally. In a sign of growth, its subscription-service sales, led by Prime memberships, rose 30% to top $6 billion last quarter, the company reported Thursday. 

Prime members are key to helping Amazon fend off rivals like Walmart as those members are hooked into the company’s ecosystem of two-day and one-day shipping offers and free entertainment from the likes of Prime Video and Amazon Music
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. Olsavsky said on the call Prime Video streaming hours doubled during the quarter. 

Consumer Intelligence Research Partners in January estimated Amazon had 112 Prime million members in the top market in the U.S. at the end of last year, representing about two-thirds of its shoppers. 

The company has a 34.5% share of the U.S. e-commerce market, up 1 percentage point from last year, Morgan Stanley
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analyst Brian Nowak estimated in a report this month. He forecast that Amazon’s share would rise to 37% by next year with Walmart beating eBay to become the No. 2 online U.S. seller this year with a 5% market share. 

Amazon’s second-quarter operating margin, a measure of profit, widened to 6.6% from 4.9%, also beating analysts’ expectations.  While Amazon makes “zero profit” on consumable items after costs, that was offset by increased non-essential purchases, the company’s finance chief said.

That will be crucial as Amazon’s costs continue to pile up. Shipping costs last quarter surged 68% to $13.65 billion, more than double Amazon’s operating income. 

The number of paid items global Amazon shoppers ordered surged by 57%, more than triple the year-earlier pace. Well more than half of those items were bought from third-party sellers, a point in Amazon’s potential defense as it and other tech giants face increased antitrust inquiries. 

Online grocery orders tripled as Amazon also tripled the number of grocery pickup locations. 

Not surprisingly, physical store sales fell 13% as Amazon closed some of its Whole Foods
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locations and turned them into online fulfillment centers and shut other stores including Amazon Go
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, Amazon 4-Star and Amazon Books
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. 

In another sign that Amazon—increasingly where consumers begin their online product search—will continue to attract more advertisers, its other services, led by ad income, jumped 41% to $4.2 billion. 

One gripe Wall Street had, if any, was the miss with the company’s profit crown jewel AWS cloud service, which counts clients from Zoom video conferencing to DoorDash meal delivery service. Even as AWS is seeing increased usage from video conferencing, remote learning, gaming and entertainment segments, AWS sales rose 29% to $10.8 billion in its smallest pace in at least six quarters.

While Amazon’s rivals Microsoft and Google are eager to steal AWS’s share, corporations watching their spending against the still uncertain economic impact of the pandemic could be the bigger culprit for the slower growth.

“Companies are working hard to cut expenses,” Olsavsky said, adding AWS is working with clients in industries including Covid-hit hospitality and travel sectors to scale down the cloud usage to help them cut costs. They “are looking for ways to save money and save it quick.”

Related on Forbes: eBay has a chance to become relevant again thanks to coronavirus.

Related on Forbes: Google Just Upped Its E-Commerce-Game. It’s Not Enough To Compete With Amazon