In its Q3 earnings reported on 26 October, Amazon disclosed that it had achieved an operating margin of 7.8% – up from 2% a year ago, and the highest since it reached a record high of 8.2% in Q1 2021. Operating income also increased to $11.2bn in Q3, up 343% year-over-year.
With these results, the e-commerce giant has bucked the trend of the wider retail market which weakened during the third quarter.
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These sizeable operating margins are due in large part to Amazon CEO Andrew Jassy’s ruthless cost-cutting exercise, which has taken the form of extensive layoffs across advertising, human resources, gaming, stores, tech, devices and Amazon Web Services – the company’s cloud computing division. Since November 2022, the job cuts have impacted over 27,000 employees. Another round of layoffs was announced only a few days ago, affecting employees in its music division.
GlobalData’s job analytics also reveal that Amazon has been taking a slower approach to hiring and rehiring, with just 76,693 jobs posted this year to date compared to 188,348 in 2022.
Other cost optimisations have also been achieved in logistics.
CFO Brian Olsavsky said on the Q3 earnings call that in North America, a continued strategy of “regionalisation” in the company’s sprawling distribution network has allowed it to “[reduce] the number of linehaul lanes”, “[increase] volume within existing linehaul lanes”, and “[add] more direct fulfilment centres to delivery station connections”. The company has also “[optimised] inventory placement”, and has benefited from lower inflation in linehaul, ocean and rail shipping rates.
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By GlobalDataHistorically, Amazon has been comfortable with negative operating margins, focussing on scaling, market growth and maintaining a healthy revenue/burn rate ratio. However, rising inflation, higher rates, and less bullish investors has prompted greater financial prudence. Indeed, some iteration of the word “optimise” or “optimisation” was used 22 times in the Q3 earnings call, reflecting this new profit-focused strategy.
Beyond these cost optimisations, a 12.6% year-over-year increase in net sales and a 6.5% growth in product sales have also contributed to an uplift in operating income.
Business analytics and intelligence firm GlobalData commented: “Amazon’s own product sales grew by 6.5% this quarter, which is a modest bump on last quarter’s 4.3% increase. Prime Day proved to be extremely valuable, and the flagship event helped to stimulate some demand from consumers who were eager to snag a bargain and get things they needed at discounted prices.”
“While other retailers have jumped on Amazon’s bandwagon, Prime Day remains the most attractive game in town during the period because of the breadth of offers and deals available – something that has become very important to the cost-conscious consumer.”
GlobalData also says that it believes the impact of low-price platforms like Temu and Shein on Amazon to be negligible: “From our customer tracking we still see the overlap as slight and the propositions as being very distinct. Amazon has much higher trust levels, a much more balanced range including higherend brands, and offers incomparably better delivery options and speeds.”
“In short, Amazon has built strong points of competitive difference and continues to invest heavily to ensure it maintains these for customers. The low-price platforms are much more of a squeeze on traditional retailers in the fast-fashion and value spaces than on Amazon.”
The words “generative AI” also featured 30 times in the earnings call. Olsavsky said that the company is using gen AI to forecast inventory and to design optimal last-mile transportation routes for drivers to employ, while also improving product recommendations for customers. Amazon sellers can also benefit from AI-assisted product listings.
Looking to the future, GlobalData believes that Q4 is also likely to look rosy for the retail giant: “From our data, Prime Big Deal Days in October was another successful event. We also think Amazon will remain a major destination over the holidays both because of its value for money position but also because of its convenience.”
“There may be some downside pressure from a more considered shopper and more modest holiday budgets, and this is partly reflected in the forecasts, but Amazon should be largely capable of powering through any major obstacles and remain one of the winners compared to wider market performance.”
“Longer term, there are plenty of initiatives Amazon needs to work on, including cracking grocery, but getting these right will provide some upside as the company moves into 2024 and beyond.”
Our signals coverage is powered by GlobalData’s Thematic Engine, which tags millions of data items across six alternative datasets — patents, jobs, deals, company filings, social media mentions and news — to themes, sectors and companies. These signals enhance our predictive capabilities, helping us to identify the most disruptive threats across each of the sectors we cover and the companies best placed to succeed.
