Three Surprises From COVID-impacted Amazon Earnings Release for Q2 2020

Three Surprises From COVID-impacted Amazon Earnings Release for Q2 2020

It’s the moment we’ve all been waiting for – Amazon earnings for COVID impacted Q2 2020.

Since the COVID-19 pandemic began, many of us are shopping on Amazon more than ever. My Amazon Echo pings all day with deliveries for my family of five. My kids open the front door several times per day just to see if any cereal or batteries or Legos have arrived. I’ve seen more Amazon delivery trucks on the streets than ever before, and you have to sell your firstborn child in Seattle to get an Amazon Fresh delivery appointment.

In Q1, we know Amazon saw such a demand spike that they had to focus entirely on essential goods and restrict everything else. But how much volume? And at what cost? Read on for three things that surprised me about Amazon’s Q2 2020 earnings release.

Link to the earnings call transcript (registration required) and link to Amazon’s press release about it.

1. Amazon’s inventory strategy is scarily lean

Amazon earnings release reveal that revenue came in at $88.9B, +40% Y/Y (vs +26% the previous quarter), and +18% Q/Q. Categories like fashion and electronics likely saw softer sales, dampening the overall growth rate. However, some categories saw huge spikes. Throughout the end of Q1 and much of Q2, Amazon struggled operationally.

According to Brian Olsavsky, Amazon’s CFO, “Online grocery sales tripled year-over-year.”

What’s incredible is that an additional 14 points of sales growth (vs. previous quarter’s run rate) created that much disruption at Amazon. They continued to miss and delay Prime shipping promises and restrict inbound and outbound shipments.

This doesn’t seem like so much extra growth. Could your organization manage an extra 14 points of growth without too much disruption?

The level of disruption made me realize how thin they keep their inventory (typically 2-3 weeks of cover, and often less for tail assortment.) When coronavirus hit, their lean strategy backfired. Not that anyone planed for a global pandemic. However, it shines a spotlight on how lean they run.

WHAT THIS MEANS FOR MANUFACTURERS

Amazon’s lean inventory strategy, and how sensitive their network is to fluctuations in demand underscores the importance of having a hybrid selling strategy, or multiple ways to sell goods on Amazon. At the onset of the pandemic, many of our clients rushed to get a 3P account set up, dropship capabilities, etc. Better to be prepared for future demand fluctuations and have your hybrid strategy ready-to-go.

Also, Amazon’s going to run out of space (for real) in Q4. This comment from Brian O. was shocking:

“Now as we move into Q3, we’re starting to – we need to build the inventory more for Q4, and we’ve run out of space. So we’ve got our hands full on that challenge, but we’ve got a really good team that’s been working very hard probably since late February on this issue.”

Well I’m glad you have a team working on it, Amazon. Manufacturers: better get your goods in now!

2. Where did all of that profit come from? If we believe Amazon’s position, their normal corporate marketing ad spend must be *huge* during non-COVID times.

Amazon earnings release show that net income came in at $5.2B, up 107% Y/Y. Earnings per Share increased 94% Y/Y to $10.30. Even looking at Net Income as a % of Sales, they improved 76% Y/Y to 5.9%. They made more overall profit (which makes sense, because they had more sales), but also a higher profit margin. Yet, they spent over $4B on COVID-related expenses, such as protective equipment, cleaning, safety protocols, additional family care benefits, and a $500M employee thank you bonus, among other things.

I was convinced all the low-profit grocery sales and increased cost of doing business would severely negatively impact profit. Heck, the analysts expected Earnings per Share to be $1.46. However, Amazon earnings show they managed to deliver 7x those expectations! How did they do this?

Apparently, I’m not the only one with this question. Analyst Mark Mahaney of RBC asked,

“…these profit levels are super high now. Is Jeff aware of how profitable the company is becoming? Is he happy about it?”

Sigh. Finance humor.

Osalvsky says it came from a 1/3 reduction in Marketing expenditures. Amazon must have previously spent a LOT on marketing for this to drive EPS up 7x analyst projections.

WHAT THIS MEANS FOR MANUFACTURERS

I guess the great vendor profit claw-back I predicted is not coming after all. Manufacturers, you are safe…for now. You may want to bring up Amazon’s stellar profit performance in your next vendor negotiation. Do they really need that extra 50 bps of co-op improvement?

3. Amazon continues to invest, while other retailers scramble to keep pace

Amazon is continuing to build fulfillment centers. They’re listening to and learning from us using our Alexa. They’re moving forward with international expansion. Their competitive advantage is that it’s always Day One. According to Jeff Bezos in the Amazon earnings press release,

“Lastly, even in this unpredictable time, we injected significant money into the economy this quarter, investing over $9 billion in capital projects, including fulfillment, transportation, and AWS.” 

No one asked Amazon anything about their foray into healthcare, and Amazon didn’t mention it. Amazon has quietly been acquiring all kinds of voice-enabled health technology companies (check out their Alexa Fund). They’ve launched a healthcare system for their employees. They’re doing their own COVID testing. They have like a million Healthcare experiments running, and likely COVID-19 is accelerating the customer need and general interest in all of these. Do you wonder why they’re keeping that under the radar for now?

WHAT THIS MEANS FOR MANUFACTURERS

Amazon will win by continuing to invest while others cannot. This is also how you, brand manufacturers and sellers, will win. Keep focused on your long-term initiatives. Stay strategic. Keep your head up. Finding ways to thrive, versus just survive, will put you ahead of your competitors as we adjust to the New Normal.

Also, the current coronavirus pandemic is crowding out any news about Amazon’s expansion activities. Keep reading, stay curious, and continue to dig. You definitely don’t want Amazon to surprise you!


Andrea K. Leigh Ideoclick

About the author: Andrea K. Leigh is both an e-Commerce strategy enthusiast and expert. She works with suppliers on e-Commerce strategy and execution, and writes, speaks, and teaches on commerce-related topics. She is the VP of Strategy and Insights for Ideoclick, an e-Commerce managed services agency that empowers manufacturers to take charge: e-Commerce without compromise. A 10-year former senior exec at Amazon, she worked on the launch and management of automated pricing, the Prime program, Amazon Fresh, and even Harry Potter book launches.

Ops Compliance Dashboard + New Product Launch Ad Spend Guidance

7.1.20 – Hello from Ideoclick

Operational Compliance Dashboard
For many brands, the cost and complexity of selling on Amazon is squeezing margins even tighter than usual. Today we’ve officially announced the availability of our Operational Compliance Dashboard which helps Amazon Vendor Central clients alleviate non-compliance charges to reduce some of the affiliated costs. If you are not already familiar with our operational compliance services, feel free to connect with your client success team to learn more.

OC Dashboard - CB Overview 2

This view of Ideoclick’s Operational Compliance Dashboard displays the type of Amazon Vendor Central chargebacks and the top affiliated purchase orders, fulfillment centers, and ASINs.

businessman-holding-money-in-his-hands-PQRBNZW

New Product Launch on Amazon – How to Determine the Duration of Ad Spend Boost
Ideoclick Marketing Director David Quesenberry outlined some guidelines to help determine the necessary length of time for increased product launch ad spend in this recent article.  

Thank you,  Your Ideoclick Team

Amazon New Product Launch Ad Spend

Amazon New Product Launch Ad Spend

How to Determine the Duration of Ad Spend Boost

When you launch a new product on Amazon, how long must you boost ad spend before organic search begins to take hold? Unfortunately, there is no direct recipe or formula to calculate the necessary length of time for aggressive new product launch ad spend. However, we have some consideration guidelines that can help you determine when you might begin letting your foot off the gas. 

It is important to note that for these suggestions to apply, we are first assuming that you are launching an item with all the winning attributes: it has proper R&D behind it, is produced well, offered at a compelling market price, is an e-commerce aligned product, is desired or needed in the market, and is supported with Amazon-optimized content and images. 

A necessary premise exists here as well, and that is: you understand to launch a product on Amazon, you should budget and plan for a healthy ad spend. This is the stage in which you are building awareness and traffic on Amazon and should plan for sub-optimal ROAS. 

The first element to consider is your existing brand equity. When launching a product with existing strong awareness in your brand and category – for example, you’re launching a product update or variation – then it’s safe to figure that organic search of your new product will take hold faster than an item in a new category or lesser-known brand.  

It’s All About the Amazon Relevancy Score 

When planning for your new product launch ad campaign, the intensity of the program will affect the amount of increased spend-time required. Are you willing to direct traffic to Amazon from other channels? To run a 25% off coupon? To shift ad dollars from other platforms? The more you front-load your campaign with these efforts, intensify the ad-spend and ultimately build the new product’s Amazon Relevancy Score, the quicker your success will be. However, even new products with the best brand equity, strong social presence and robust plans for directing traffic to Amazon will still require a minimum of two months before desired organic results are achieved. 

Next, consider the competitive dynamics. The initial spend to dominate search rankings in a highly specific or niche category will look very different than the spend required in a highly competitive and saturated category. We recommend ample competitive research and set your expectations on timing accordingly.  

Determining Performance Metrics 

When assessing the results of your new product launch campaign, isolate performance metrics from other variables. Understanding the difference between category share and share of search results on Amazon is critical. On Amazon, there are unique ways consumers find your products – unlike typical store categories – so setting realistic expectations to see share of search improvement over category dominance could very likely translate to a winning scenario for your new product. Simply put, your product must be discoverable on Amazon to get sales, so you should not take pressure off your campaign until your product is landing on page one of relevant search results. The ideal goal is to appear in the top 10 search results; top three is better yet.  

Additionally, new product launch ad campaigns require careful monitoring and maintenance. It is not a “one and done” endeavor. Competitors will change their strategies, which will affect your item’s search results. Consumer online shopping behaviors are also changing more quickly and drastically now, with brand loyalty being increasingly up for grabs. Success in new product launch advertising on Amazon depends on strategy in planning, measuring, and adjusting. If all adjustments are made and desired success is still not achieved, you may need to perform a gap analysis to address potential problematic attributes of the product. 

We have multiple proven tips and best practices for new product launch advertising on Amazon, including up-front gap analysis, competitive review, HERO product or brand leverage, and off-channel presence. Contact us to learn more about how our e-Commerce optimization platform works to craft an effective Amazon new product launch plan.