Amazon Briefing: 3 things to watch out for ahead of Amazon’s earnings
This is the latest installment of the Amazon Briefing, a weekly Modern Retail+ column about the ever-changing Amazon ecosystem. More from the series →
Amazon has had a strong start to 2024 so far.
Last quarter, the e-commerce giant reported more than $143 billion in revenue in the first three months of the year, up 13% from the prior year. The company also reported that profit more than tripled, surpassing $10 billion. More recently, Amazon reached $2 trillion in market value for the first time in June. All told, Amazon has set the bar high for itself as it prepares to report second-quarter earnings after the market closes on August 1.
Analysts and industry insiders will be watching for a few key factors. For one, spending is in focus as Amazon continues to make costly investments in artificial intelligence and splashy deals with the NBA to boost its advertising business. Analysts will also be attuned to Amazon’s core retail business, especially after the retailer announced it was opening a discount store that would compete with Temu and Shein.
Keep reading to find out what to expect from the Everything Store’s upcoming earnings.
The rise of China-linked e-commerce competition
Amazon still dominates online shopping, but the e-commerce giant faces growing competition from the likes of China-backed discount shopping sites including Temu and Shein. Analysts will be watching for signs that Amazon is making moves to defend its turf from such competitors.
The surging popularity of sites like Temu and Shein is due largely in part to their ability to offer rock-bottom prices. That’s appealing to price-conscious shoppers in the U.S. looking for relief from persistent inflation.
Temu and Shein are able to offer American consumers steep bargains thanks to a trade rule known as the de minimis exception, which allows imports valued under $800 to enter the U.S. duty-free. As a result, number of de minimis imports has surged. The U.S. is currently processing 4 million de minimis shipments per day, up from 2.8 million per day compared to last year, according to the U.S. Customs and Border Protection.
Nearly a third of de minimis shipments into the U.S. were ordered from Shein, which started selling in the U.S. in 2017, and Temu, which started in 2022, according to a congressional report.
In the face of Temu and Shein’s growing prominence, Amazon has continued to spotlight its ultra-fast delivery speeds. Earlier this week, Amazon announced that it had delivered more than 5 billion items worldwide the same or next day — more than 30% compared to last year, and a new record for the online retailer. Shipments from Temu and Shein, while more affordable for U.S. consumers to buy, tend to take longer to arrive since the products are shipped from China.
Amazon is aware of the threat that Temu and Shein pose. The retailer is reportedly launching an online storefront focused on shipping inexpensive clothing and home goods directly from warehouses in China in an apparent bid to protect market share from Temu and Shein, per The Information. The discount offering would take advantage of the same de minimis loophole used by Temu and Shein, The Information also reported. The news of Amazon’s planned bargain store sparked outrage among the company’s third-party sellers, who account for more than 60% of goods sold on the site, and who are already feeling squeezed by the platform’s rising fees, Modern Retail reported.
Amazon has also sharply lowered its seller fees on apparel products, ostensibly to compete with fast-fashion retailer Shein.
Such moves are “obviously in response to the success that these competitors are having, and that opens the door for them to talk about them as competition much more directly,” according to Jason Goldberg, chief commerce strategy officer at Publicis Group. “Whether or not Amazon’s losing sales to these inexpensive models, Amazon still wants those sales.”
During the previous earnings season, retailers such as Etsy and eBay, which also reported earnings this week ahead of Amazon, more explicitly disclosed how they’re staying competitive against Chinese-backed platforms, often by highlighting their competitors’ shortcomings when it comes to certain retail fundamentals, such product quality and curation. It remains to be seen whether Amazon will be quite as candid during its second-quarter earnings call.
Still, there are signs that Temu and Shein have taken a bite out of Amazon’s e-commerce growth. Online shopping used to be one of the company’s main growth drivers, but Amazon’s advertising and cloud computing units are its golden goose eggs these days. That said, e-commerce is still the company’s main source of revenue. Amazon is expected to capture about 40% of e-commerce sales in the U.S. this year, according to eMarketer. Still, last quarter, online store sales rose only 7%, less than the previous quarter’s growth, suggesting the main e-commerce business is softening as consumers trade down for cheaper products and necessities.
“What Temu is really doing, and to a certain extent Shein, is they are diminishing Amazon’s growth,” said GlobalData’s Neil Saunders. “They’re not really stealing Amazon’s market share per se because Amazon has got enough growth that it’s still doing very well, but they are taking the edge off of Amazon’s growth, and they’re nibbling at the edges, so to speak.”
Amazon’s costly bet on artificial intelligence
Amazon has made big investments in artificial intelligence products under the leadership of CEO Andy Jassy. Part of Jassy’s push into the AI frenzy has involved aggressive cost-cutting measures and business restructuring to better take advantage of the anticipated demand for AI in the future. Industry insiders are keeping an eye out on how those sales will materialize as Amazon looks to remain competitive against other giants making similar inroads in this space, including Microsoft, Meta and Alphabet.
For example, Amazon released its generative artificial intelligence-powered shopping assistant Rufus to all U.S. customers ahead of Prime Day. While Prime Day sales performance won’t show up in Amazon’s second-quarter earnings, as the period cuts off at the end of June, analysts are watching for color from executives on the shopping assistant’s performance.
As Goldberg put it, “Is it a novelty they try once or something they’re regularly using?” He added that adoption could be tricky as consumers are accustomed to shopping online by typing in keywords rather than conversational phrases. “Regardless of the adoption, I’ll be curious if Amazon makes any claims about efficacy.” Such remarks could include commentary on whether or not Rufus leads to more purchases, he said.
Amazon’s investments in its AI infrastructure could negatively impact operating margins, according to eMarketer retail analyst Sky Canaves. “It’s a big expense they’re significantly investing in,” she said.
Amazon plans to spend more than $100 billion over the next decade on data centers to support its major growth engine Amazon Web Services, surpassing its investments in e-commerce warehouses, per The Wall Street Journal. Its rivals Microsoft and Alphabet are also ramping up data center spending. Amazon is also developing its own chips to power its AI-driven cloud computing business to reduce its reliance on Nvidia’s costly chips.
Amazon’s escalating media ambitions
In addition to artificial intelligence, Amazon has sought to grow its highly lucrative advertising business.
In the first quarter, Amazon’s advertising services grew 24% to more than $11 billion. However, the surge was mostly driven by sponsored product ads rather than its newer services.
“Retail media sales continues to be the fastest-growing and most profitable business at Amazon, but it has slowed its growth in recent quarters,” said Goldberg. “Are they able to stabilize the rate of growth or are they continuing to slow down? Are the Walmarts of the world potentially catching up to them?”
Some of Amazon’s new advertising services include adding commercials to Prime Video, which the company has said it expects to drive further growth.
Amazon has made a concerted push to attract more advertisers to launch streaming TV advertising campaigns — including those that don’t sell on the platform. To do this, Amazon has pitched itself to brands on its trove of first-party data so marketers can more precisely target their ads, a value proposition major streaming companies such as Netflix and Disney can’t offer as well. Amazon shows no sign of slowing down as earlier this month the streamer inked a deal to make it one of three partners of the NBA, which will help it attract new big-name brands to the marketplace.
Emarketer’s Canaves is optimistic that these new offerings are bearing fruit. In speaking with advertisers, she said Amazon’s debut Upfronts pitch to advertisers “made a big splash, drawing a lot of interest” because of Amazon’s targeting capabilities. She added that she expects Amazon’s ad business to “outperform expectations.”
Amazon news to know
- Amazon is investing more heavily in its one-day and two-day delivery networks — especially for more rural geographies.
- U.S. regulators have ruled that Amazon can be held liable for defective products sold by third-party merchants.
- Amazon is suing Nokia claiming the legacy Finnish mobile technology company infringed on its cloud-computing patents.