ChannelAdvisor Scot Wingo By Scot Wingo

Deep Dive into Amazon’s Q4 Results for Sellers – What’s Cool? $100B (and $200b!!)

On Thursday January 28, 2016 Amazon reported their Q4 2015 earnings.  In this blog post we analyze the earnings with an eye towards implications for online and offline retailers and Amazon sellers.  While the headlines made the results look dismal, this was largely a Wall St. expectation thing and the underlying parts of Amazon we track all seemed to be doing just fine or accelerating.

Before digging into Amazon’s Q4 results, it is worth taking a pause and reflecting on a huge milestone – Amazon just crossed over $100 billion in revenue for the year in 2015.

What’s cool?  $100B (Well really $225B)

Jeff Bezos memorialized the milestone with a great quote in the press release:

“Twenty years ago, I was driving the packages to the post office myself and hoping we might one day afford a forklift. This year, we pass $100 billion in annual sales and serve 300 million customers,” said Jeff Bezos, founder and CEO of Amazon.com. “And still, measured by the dynamism we see everywhere in the marketplace and by the ever-expanding opportunities we see to invent on behalf of customers, it feels every bit like Day 1.”

Long-time readers will recognize that while this is impressive, we believe Amazon’s reported revenue actually dramatically understates the economic impact of Amazon (total GMV) by 50%, masking a much larger business.  This is because Amazon only (due to accounting rules) reports the commission on 3P marketplace sales (which we estimate at roughly 10% of the GMV) and not the gross sales value (GMV) like they do with 1P sales.

For example, if you look at 2015, by our estimates what it looks like when you ‘unpack 3P’ was:

  • 1P GMV: $93.8b
  • 3P GMV: $131.8b (which at 10% commission equates to roughly $13b in revenues)
  • Total GMV: $225.6b

Walmart vs. Amazon

Now that Amazon is at $100b in revenue, it’s interesting to compare how Amazon did compared to the world’s largest retailer, Walmart, both from a scale perspective and how fast these two vastly different retail giants started and grew their businesses (offline vs. online showdown).

How long did it take Walmart to get to $100b?

While Walmart was ‘founded’ in 1962, it really started to scale in 1977.   In 1997, Walmart hit $100b in revenues.    Amazon started in 1995 and 20yrs later also hit $100b, so it’s essentially a ‘tie’ – Amazon and Walmart both hit $100b in roughly the same amount of time.  From an e-commerce perspective this doesn’t make intuitive sense.  Walmart had to open up hundreds if not thousands of stores to get there.  While Amazon has opened 150-200 FCs to get to this scale, it seems like Amazon should be scaling faster than Walmart.

Well, let’s pull in the 3P GMV and see what it looks like.

 How long did it take Walmart to get to $200b?

Again, we think that to really compare Amazon and Walmart, it’s appropriate to ‘unpack’ the third-part marketplace GMV.  Even though we believe Amazon only ‘counts’ roughly 10% of 3P GMV as revenue, the reality is still that for each $100 item sold, another retailer ‘lost’ $100 in revenue.  In other words, retail is a zero sum game and the ‘real’ zero sum game footprint for Amazon is the total GMV, or $225.6b.

Using that as the benchmark, Walmart got to $200-225b in 2002/2003, or in 26 years.  Amazon got there is in 20yrs, or ~30% faster.  Intuitively from an e-commerce perspective, that feels like the right outcome – Amazon’s pure e-commerce model outpaced Walmart’s ‘build stores’ brick and mortar path.

Walmart ex-grocery vs. Amazon

In fact, the $200b number is interesting, because today Walmart is a $485b/yr retailer and clearly much larger than Amazon, even if you count the 3P correctly.  But, about half of Walmart’s sales are groceries, and groceries are very, very small for Amazon.  Therefore if you really want to compare Amazon and Walmart apples to apples:

  • Walmart ex-grocery: $242b
  • Amazon with 3P: $225b

Punch line: from our way of thinking about this, in 2016, Amazon’s complete 1P+3P business will likely surpass Walmart (ex-groceries).   This illustrates the powerful flywheel that Prime, 1P and 3P have created for Amazon.

Amazon 2016…

If we take Amazon’s 1P (20%) and 3P (41%) growth rates and give them a bit of a haircut, we believe that Amazon could achieve $270-300b in 2016 in total GMV  (1P:$107b, 3P:$200b), essentially adding $100b in incremental global GMV y/y (or about $50b in the US). That’s a tremendous amount of GMV to pull out of the market and unless something slows down Amazon, it will put considerable pressure on other offline and online retailers.

We expect some retailers will thrive as they continue to grow in specific categories and “turn the corner” on in-store experiences and exceeding consumer expectations.  Walmart, for instance, has been very vocal about its plan to invest aggressively in e-commerce, and we expect it has the financial, logistics, and technical capacity to put up a strong fight.  But we also expect that as Amazon “absorbs” the next $100b in share, a lot of retailers will lose share as a consequence — some will cease to exist entirely.

 

Amazon Q4 Results dashboard

Now that we’ve had a chance to reflect on the amazing $200b business Amazon has built over the last 20 years, let’s get back to our usual deep dive into the results.  First, here is the Q4 15 Results Tracker where we look at the most important metrics.  Remember that comScore reported Holiday came in ~14% and e-commerce is growing 15% as you look at these metrics.

amzn_q415_results_tracker

Amazon Q4 15 Growth Cube

Another way to ‘visualize’ Amazon’s growth is to peel the onion on the category and geographical sides of the business.  We do that in what I call the Amazon growth cube:

amzn_q415_growth_cube

Highlights for sellers from Q4

  • Amazon overall grew 26%, almost 2X the growth rate of e-commerce, quite impressive at their scale.
  • The real standout was EGM which grew 29% all-in, 28% in the US and 31% non-domestically.  Eagle-eyed readers will note that the 28% is a step down from Q3’s 31%.  Amazon explained on the call that this was due to the unusual activity in July 2015 from Prime Day that created a blip in EGM in Q315.  In 2016, if we have Prime Day, that will be normalized and if we don’t it will create a y/y growth headwind for EGM.
  • Active buyers was over 300m for the first time ever at 304m and grew a steady 13% – quite impressive given Amazon’s existing far reach.
  • Units/customer accelerated to 12% y/y growth up from Q3’s 11% y/y growth rate, which is an indication that Prime is working and buyer frequency (items purchased/buyer) is increasing.
  • EGM was 79% of Amazon’s business in Q4, a new high water mark.
  • Amazon indicated on the conference call that in India in Q4 15 they did more GMV than all of 2014, which suggests > 4X growth in that region.
  • Amazon indicated that Prime subscriptions grew > 50% y/y, with Intl growing faster than US (47%).
  • Amazon also said that FBA usage was on fire with 50% of 3P units shipping through FBA, or 1b units in 2015.
  • Another impressive fact from the Q was that paid units grew 26% y/y.  Recall from eBay’s results that they saw paid units (items sold) decline, so that seems to have been isolated and not a broadly-felt impact.

Amazon 1P vs. 3P

At the top of the post we talked about the 1P and 3P parts of Amazon.  This picture does a great job of illustrating the power of this one-two punch that Amazon packs:

amzn_q415_1p_3p_stack

Here you can see that Amazon grew ~$20b in combined GMV in Q4 2015 compared to 2014.  That’s an entire eBay’s Q4 they ‘added’ y/y.  Or if you look at the Internet Retailer 500 2014, Staples was the #2 online retailer with just over $10b, so Amazon grew 2 Staples (entire year GMV) in Q4 14 vs. Q4 15.  No matter how you slice it, Amazon soaked up gigantic chunks of GMV in Q4 2015.

One argument we hear literally hundreds of times a day at ChannelAdvisor is that Amazon only has 3P so they can see what products do well and add them to 1P.  If that were true, you would think that Amazon’s 1P would be growing 2X of 3P.  But the exact opposite is true as this chart illustrates:

amzn_q415_1p_v_3p

 

Why is 3P growing faster than 1P?  The simple reason is that 3P is much more profitable for Amazon and with FBA, they get the best of both worlds: Prime-eligible great customer experience plus strong profitability.

Amazon vs. eBay

Since both eBay and Amazon have reported we can update our regular tracker with the GMV from each company.   Here you can visually see the ‘Amazon added an eBay’ dynamic in action:

amzn_q415_ebay_v_amzn

What should Amazon sellers do?

In conclusion, the headlines you may have seen of Amazon’s terrible Q4 are really off base when it comes to what matters to everyone in the e-commerce ecosystem.  Amazon’s business is alive and well and the part of Amazon that 3P sellers rely on and offline+online retailers compete with continued to grow north of 2X the pace of e-commerce, even at a scale of $200b.

Finally, looking to 2016, Amazon’s guidance for Q1 2016 implies 17-28% y/y growth (22% at the midpoint) which is a broad band, but historically Amazon has come in towards the high-end, so it looks like Amazon will continue to run the table in 2016.

This blog was written by Scot Wingo, Executive Chairman, ChannelAdvisor.

 

 

 

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