Jason & Scot Show Episode 206 Amazon Q4 2019 Earnings Deep Dive

A weekly podcast with the latest e-commerce news and events. Episode 206 is a deep dive into Amazons Q4 2019 earnings report.


Amazon released their Q4 2020 earnings on Thursday Jan 30th.  In a holiday quarter that has proved to be challenging for many retailers, Amazon soundly beat analyst expectations, and raised their governance for Q1 2020, driving their stock up.  Amazon’s market cap is currently larger than the next six largest retailers combined, and their competitive advantage may be even greater.

In this weeks episode we do a deep dive into all the details of the earning report. We look at top line results, AWS, ads, physical retail, and Logistics. We break down what it all means, and leave you with our conclusions.

Don’t forget to like our facebook page, and if you enjoyed this episode please write us a review on itunes.

Episode 206 of the Jason & Scot show was recorded on Friday, January 31st, 2020.

Google Automated Transcription of the show


[0:24] Welcome to the Jason and Scot show this is episode 206 being recorded on Friday January 31st 2020 I’m your host Jason retailgeek Goldberg and as usual I’m here with your co-host Scot Wingo.

[0:38] Hey Jason and welcome back Jason Scott show listeners
it’s exciting times in the world of retail and e-commerce Amazon reported their fourth quarter results back from 2018 feels like a
a year ago even though we’re still in January of 2020 and they were so impressive and important to I think everyone in the ecosystem not only retail but e-commerce and shipping that were really going to focus to do it
dive in this episode
on really understanding and unpacking these results probably in a deeper way than we’ve ever done so look forward to taking you on that journey and love any feedback you have on that before we do that Jason you in a couple short weeks are going to be representing the podcast sadly I can’t make it
but you will be in each OS tell us about that.

[1:27] Yeah I’m very mixed feelings I’m super excited to go to Palm Springs Palm Desert area in February which is a much warmer than it is in Chicago as you.
You may know and we have a bunch of I think pretty interesting guests lined up for podcast so so stay tuned for that but of course it’s always sad
to be an industry event without you and I always feel like I’m cheating when I record a.
Show without you but obviously there is a segment of fans who feel those are the best shows in their favorites.

[2:00] Yeah your mom and it’s pretty much pretty much it.

[2:04] I’m pretty sure she’s not in that segment.

[2:06] Boom Cooper I look forward to seeing who you can rope into doing some interviews those are always really good but that is coming up in let’s talk about Amazon.

[2:23] News new your margin is their opportunity.

[2:33] So
we’re kind of mixing it up as I mentioned at the top of the show this was such a big quarter that we think it’s really important to spend a fair amount of time on it so so we’re going to break this into three parts so we’re gonna talk about the setup going into kind of holiday and what we learned before Amazon announced
I’m going to go through the highlights of the results there we can spend the bulk of the show on an analysis really kind of picking apart what’s this mean for the industry
so Jason want to take us through the setup going into Amazon’s.

[3:05] Yeah so obviously Q4 is a super important quarter for all of retail and it’s been a little checkered coming into this Amazon announcement so MasterCard which
has a panel of all people that shop with a MasterCard had reported that retail sales for the quarter were decent I think they said
total sales were up three point five percent which is average to good.
Growth rate for total retail and they said e-commerce was up 18% and so that,
in and of itself didn’t seem so surprising but then individual retailer started reporting.

[3:51] And the folks that you you might have expected to be distressed we’re generally more distressed than expected in the people that you might have expected to do well also seemed down so it’s been this odd thing where MasterCard said hey overall
it was kind of an average quarter and then the overwhelming majority of people that were reporting
we’re reporting a pretty disappointing quarter so you know that that created extra anticipation coming into.
The two biggest retailers which were Amazon last night and then Walmart is on a really goofy fiscal year and so they won’t be reporting toll February 18th,
if I have it my memory serves but so.
You know you wouldn’t expect JCPenney’s to kill it but they were down like 7.5% Cole’s was down which has off-price retailer had traditionally
been more resilient bunch of the apparel companies were down Macy’s was down L Brands was down even some like value stores like five below
which is in that dollar category those guys were down and Target was up but they were way below their guidance.

[5:06] In general you know reading into this quarter it’s felt like a pretty depressing quarter we’ve also seen a lot of evidence that the quarter was way more promotional
in any quarter ever which means profits are likely going to be down and we’ve heard anecdotally from a bunch of these retailers that manufacturers,
have way more inventory than they usually have this time of year and so there’s a lot of distress inventory that manufacturers are trying to
pump through the retail Channel right now so all sort of bad indications leading up to
Amazon’s announcement last night so Scott can you tell us how that what what how it transpired.

[5:48] Yeah I would say that it was Wall Street was was
extremely surprised pleasantly surprised in the world of public companies you have this kind of you know what what’s the current period expectation and then what’s the forward period expectation so the current period and this conversation of fourth quarter of 2019
the forward quarter would be q1 of 2020 so this is what’s called in Wall Street lingo a classic beat so they beat the fourth quarter of 19’s expectations and then they raised the q1 2020 expectations.
When you do that you frequently.
I’m have a pretty immediate and exciting stock action and that was certainly the case here so Amazon stock surged today Friday to 2008
that’s a price not not a year which is a over 7% one day increase if you follow small stocks you know that may not seem like a big deal but this is a trillion dollar stock so 7% is
seventy billion dollars of market cap that was created so I don’t know how that compares this probably like 20 JCPenney’s or something something like.

[6:56] Yeah so I did look at it and it’s fluctuated a little today it actually like as we’re recording this show it’s.
Slightly nominally under a trillion dollars but,
it’s the equivalent of the next six largest retailers in the market so Amazon’s market cap is the same as Walmart plus Home Depot + Costco + lows + CV s + T.J.Maxx.

[7:20] Yeah but even just the 74 billion created today is larger than many individual retailers.

[7:25] Oh yeah the 74 billion today is a larger market cap than TJ Maxx or Target it’s.

[7:32] Wow so you talked about it but that put some work just shy of the trillion dollar Club I think they’re going to get there and we’ll talk about what Wall Street thinks that’s going.
Shoot Em Up There,
but just for folks that are tracking this apple is ahead at one point three five trillion and Microsoft’s 1.3 trillion so Amazon’s flirted with the trillion market cap club and I
you know I think it’s pretty safe to assume here that they’re going to get there pretty quickly and stay there for the rest of 2020
so let’s talk about the highlights that caused this this exciting and peeled onion a bit so you know,
one thing that’s not customary for Amazon is talking about how many prime users they have so in they’re releasing on the call they talked about having a hundred fifty million Prime users and in the fourth quarter they sold more Prime memberships than they ever have before in any other period
that’s pretty material because you would think maybe Prime day would beat fourth quarter but you know that’s not the case so so fourth quarter compared 30.
Prime days in third quarter so so they must have sold more Prime memberships from the holiday sales than they did from Prime day.

[8:39] Last time they announced this it was for the calendar year 2017 they announced it in 2018 and they said they had a hundred million so they have added 50 million Prime subscribers over a two-year period essentially so that’s pretty impressive
from that there’s a line item that counts that revenue and that’s called subscription services that accelerated to 32 percent growth again kind of supporting that,
that that kind of more vague statement that those more sign ups than ever before those pretty material acceleration of that metric and then another nice thing is that’s that’s five billion dollars just for the quarter so that’s essentially.
Customers giving Amazon money in the future for you know fast kind of quote unquote free services that you know helps Amazon’s cash flows which is pretty amazing I don’t think we ever see anything
quite like that it’s kind of like prepaying for products on this you we see subscriptions but you don’t see kind of like almost.
Soccer is a service type prepayment so then.

[9:42] The third party unit share came in at 53 percent of overall units meaning first party was 47% that was steady now what,
what that doesn’t capture is and I’ll talk about this in our deeper analysis is unit volume is not the same as gmv and we’ll talk about,
so the transactional dollars you could have unit volume
kind of flat quarter-on-quarter but you could have a huge surge in the dollar volume because the average order value could go up in three p down in one p there’s a lot of things that can change that.
The revenue from what they call 3rd party seller services this is largely what they charge sellers use FBA That Grew 31 percent year-over-year and surged,
I almost wonder.
If they’re having a problem keeping up with this demand because they’re building out fulfillment capabilities at about a fifteen to twenty percent clip and if the demand for FBA is growing at 30% you know that that’s.
It’s going to be interesting and it will talk about fulfillment side in a second
I talked about this being a beat so Revenue came in 2% above the top line which is a I would say a moderate beat but what really surprised everybody was.
The operating income it came in 34 percent above the high end of where Wall Street would think so
what happened here we’ll talk about this in the gnosis so.

[11:02] Amazon so this was obviously a big question in Amazon said you know it was overall adoption of the Prime platform due to the new prime one day offering
so if you remember in Q2 they started offering one day Prime and this isn’t available on every product they’re working to get it on more and more products all the time but increasingly you will find products that are available to come in one day.
Versus used have to pay a fee for one day delivery anywhere between like three and ten dollars it always varied based on what I saw the.

[11:36] Um inside of that Revenue grew 21% year over year to 87 point four billion paid units grew 22%.
This gets Wall Street really excited because.
Because Amazon has you’ll talk about this the cloud computing which is Amazon web services or AWS the ad business you know those things kind of.
Could be used to prop up growth and The Core Business which is we would think of as retail could be growing slower.
Paid units takes those things out so when paid units accelerates and is growing you know I think you talked about the high-end Mastercard at 18% this is growing faster than kind of what we thought was pretty
you know aggressive number that is a really big signal that something has changed and most Wall Street analysts kind of view that as the signal that prime one day has really been a game changer.

[12:27] Within their North America grew 22% year over year and International Group 15% another thing that’s interesting is North America’s well over two thirds of the business now Internationals about one-third so that’s how you can have you don’t take those numbers and average them North America as growth is able to swap
the growth on International incidentally both those were above wall Street’s expectations and then you know you and I speak a lot and we always hear that Amazon is not profitable.
Well operating income came in at 3.9 billion so that is pretty darn profitable by my calculations
Jason you dug into the cloud computing stuff how did that go.

[13:06] Yeah so first caveat you talked about the the rumor that you know people out the talking point that Amazon is not profitable if they don’t have that talking point they have this talking point that.
Amazon is profitable but exclusively because of AWS which is also annoying and not true
but that being said AWS is a darn good business and so they had another good quarter of growth revenue for the quarter was to nine point nine billion which was up 34% from the corridor
they’re by far the market leader so when you’re the market leader and you’re growing at 34% that’s a pretty good story and it did beat Wall Street expectation.
However it is part it is a clear deceleration of the growth so.
You know from as far back as i q 1 2017.
This this business has been growing 40% or better every single quarter and then Q 2 of this year for the first time at dip below 40 it was 37 percent growth last quarter 35 percent growth
this quarter 34 percent growth so it does feel like.
The law of large numbers is starting to kick in and and this crazy growth rate is slowing down a little bit but like for any business.
This is still great growth in its great growth.

[14:34] On a big number and it is highly profitable business and then the other you know thing to keep in mind about this whole AWS service is.
The bulk of the the Computing world is still not yet on the cloud right so there’s a lot of estimates that you know it’s maybe ten to fifteen percent of all compute is on the cloud right now so the.
Potential future market for these Services is very large and you know it is.
Certainly a challenge for their biggest competitors Google and Microsoft.
Interestingly Microsoft reported today and you know they have a competing product called azure
and as your you know on a much smaller base is growing much faster so they they dramatically beat Wall Street expectations.
Who are Juliana Azure 62 percent growth which also made some news so it’s a pretty competitive.
Hot cycle but Amazon continues to do a lot to maintain their lead and I think they also rolled out something like a hundred new AWS services this quarter.

[15:46] Yeah there’s there’s one argument and this is not our purview so I’m not an expert on this but
that Microsoft’s kind of stuff in The Ballot Box because I think they put Office 365 another cloud computing there’s simply kind of taking the office build it kind of license converting it over to cloud and then kind of counting it in that as your number if I understand right.

[16:07] Yeah I think that is potentially true but I’m not actually sure that is stuffing The Ballot Box because of you you know if you think about they.
Previously they had to sell those customers on office every.
Year and often people didn’t upgrade right and so if they’re successfully able to migrate all you know a big chunk of customers to Assassin model and they’re delivering that from the cloud like
that that actually is indicated of of them growing the business so I you know I’m not sure I would call that super nefarious but for sure it helps to have some super popular products like that to Goose your Cloud business.

[16:45] It’s not a nefarious it’s apples and oranges will agree to disagree.

[16:49] Fair enough okay yeah as as per usual.

[16:51] But you’re on how about the ads business Jason.

[16:58] Yeah so this was another I mean I feel like we shouldn’t be saying another bright spot because they all seemed like bright spots
but so Amazon has this segment of Revenue they call other which is not exclusively but mostly this the advertising business and it was another huge quarter for that the other segment of group 41% to 4.8 billion
so you know they were on a run rate to do 10 billion in 2019
and I think with this number they’re actually going to have an added it up but I think this actually puts them at like 11 or 12 billion for 2019.

[17:41] Are they I think last time I looked they were passing Snapchat and had a bead on Twitter set that kind of.

[17:47] Nope they passed them both.

[17:49] Okay yep so they just have.

[17:51] They’re the third largest digital advertising platform in North America.

[17:56] Yeah those Facebook and Google are so big it’s gonna.

[17:59] Yeah yeah we’ll talk about that a little bit more in the in the analysis but definitely a good quarter for ads and it’s having a ripple effect on the rest of the retail industry.

[18:11] Cope about physical stores.

[18:12] Yeah so this is a new category Amazon had to add after they acquired Whole Foods.
And this is down 1% it’s about the only thing in the whole earnings report that was down and it was down 1% to 4.4 billion it was also down 1% last quarter.
So this is almost exclusively Whole Foods that I think there’s like 80 other stores besides the 500 Whole Food stores.

[18:42] And it is interesting that it’s down again you know normally brick-and-mortar retailers growing at like three or four percent you know Amazon’s doing a bunch of interesting things in the whole food stores and and their stores that cater to a relatively affluent customers.
Which is you know a segment that has been more resilient so you’d you would kind of expect it to be up.
Um and the thing that really kind of skus this number and makes it not all that useful for me is Amazon has aggressively converted those Whole Food stores to home delivery stores so.
You know they launched a delivery service out of Whole Foods and they used to charge per delivery or they would.
Sell a separate membership they did away with all of that and so you now can get free two-hour delivery from a whole food store
and they haven’t disclosed how many customers have are regularly using that service but if you use that service you’re in their e-commerce sales not in there.
They’re physical retail sales because they they.

[19:45] Attributed based on on where the order is collected and those orders are collected on the web so I suspected we knew what the.
The sort of bow purpose and home delivery number was from Whole Foods and added it to this like you know I’m not saying it would be a huge growth but it probably wouldn’t be negative but
as it is you know they’re they’re slightly declining in a market with where other Grocers are slightly growing.

[20:12] Yeah that it’s interesting too because they’ve opened up so many of these kind of little bookstores and four-star stores and all that jazz you think that inorganic growth would help this number so it must.
Either it’s like seriously declining in there having trouble just treading water or to your point there we categorizing it and we there’s a one piece of data we can’t see to really understand what’s going on.

[20:33] Yeah and probably very likely a little of both.

[20:36] Yeah
wrinkle so then that was that captures kind of the highlights of fourth quarter 2019 now let’s look forward again a Wall Street thing is you give guidance so companies give a range of how they think things are going to go.
And they did a beat and raised on guidance so revenue for the first quarter of 2020 was guided to above analysts and.
Amazon says 73 billion at a
a midpoint if they get that would be twenty two percent growth they’re essentially saying look The New Normal is 22 percent growth so buckle up.
So that’s going to be interesting there in Amazon’s historically somewhat conservative so there could almost be I won’t see ya shot that
maybe like 25% I don’t know you get the sense that they are seeing something in the data from prime one day and that is a game changer and really.
Almost changing the business.
But that being said it was a little mixed because margins were muted and guidance and they were very careful to call out exactly why in all.
Pick that apart when we go into the analysis side Wall Street brush that off they effectively said look,
you guys have shown us that this is paying off this investment in prime one day we’re comfortable with you continuing to do that and in Amazon’s got really good about articulating.

[21:59] How much they’re spending where it’s going and what’s really interesting about it is it’s kind of forever dollars which is nice so effectively capex investing into new things that will be used for years and years so.
So then another area of investment that they specifically called out as India there’s a lot of press Jeff Bezos was in India you’ve probably seen the pictures of him wearing
kind of a funky jacket and doing like a lots of fun things in India it’s a huge market for them and announced they’re going to invest a billion dollars,
don’t think they put a time frame on this I kind of mentally.
Wrapped it up to 2020 but it could go beyond that certainly not going to be 1/4 that’s a according to emarketer that’s a two hundred billion dollar a year in five years area that’s growing really rapidly and then Amazon again
kind of in a uncustomary way they.

[22:50] Put out some data around that market they said they have 550,000 sellers now sixty thousand of those export products and then they’ve created 700,000 jobs kind of amongst their three peas in India there there
exclusively third party so they don’t have a first party kind of business and they’ve created those 700,000 jobs since their 2013 launch.
They did announce a huge investment fulfillment centers will talk about in the end
now section and then based on all this data and the results of Q4 analysts nudge their price range is up
between 2275 and 2500 I saw some a little bit higher than that but that seems to be kind of where everyone’s clustering in that that section so again they kind of ended the day at 2008 I think they only have to get up to
2100 to be in the trillion dollar Club so and I’ll start expecting that they will get there and stay there.

[23:44] So those are the results we did the set up heading into this this announcement the highlights now let’s really dig into what
this means and do it dig that deep dive on it I wanted to spend some time talking about this prime one day so so one way to think about Amazon is it’s a capital intensive business because of fulfillment center parts of it.
Unlike eBay so eBay is a pure digital business they don’t have fulfillment centers or delivery trucks or anything like that they may have some office space but other than that it’s pure digital business
and what’s interesting is Amazon has now
kind of shown to Wall Street look we’re gonna go into these invest modes and we’re going to invest heavily against something that we think is going to work but then we’re going to have a harvest mode and that’s what gets Wall Street really excited because when they have these Harvest modes Wall Street is
perpetually surprised where I surprised investment works and then they’re surprised by how much profitability comes out of that Harvest so I would characterize that is what’s going on here so Amazon again started in Q2.
And what they did is they said they announced prime one day they said we’re going to announce 800 million in that quarter and then in Q3 announced about a billion and then in Q4
they’ve now announced that they spent one and a half billion all on prime one day.

[25:03] So you throw all that together and you get about a four to five billion dollar investment in this new initiative that seems
that’s a really big number and it’s very easy to be skeptical on that but now we’re seeing that 22%
paid units number accelerate nicely so
Rin that entering that Harvest mode and what Wall Street analysts are thinking is once we kind of lap Q2 that those investments will taper off
the infrastructure for Prime Monday will have largely been built they’ll still be some more but maybe it’s going to be like 500 million kind of
level of investing and then we’re going to hit this really big Harvest Motes that’s what’s got everyone excited.

[25:43] Where does that dollars goes when we say four to five billion dollars where does it go it’s all in shipping infrastructure
so it’s more fulfillment centers one of the big things about so if you think about this supply chain the end of the supply chain the the start I guess in the supply chain is the Fulfillment center so the products being there for consumers then a then that then you have the consumers
primarily a residence so in the middle the two important pieces where I think the
bulk of investment are going is sortation centers so to be able to ship all this stuff one day you have to sort it into
not only zip codes but zip plus 4 so that you can get it on a truck that’s going to do a very tight route and be super efficient so Amazon’s invested
heavily in that so used to be they didn’t have any like five years ago they had very few sortation centers there were relying on the USPS FedEx and UPS for that function so now they’ve built out that
and then they’ve also built out the trucks I go to work every morning I have about a 30-minute commute and I probably see 30 Amazon Prime trucks on one of the major highways here in this area so.

[26:45] And those are just trucks following you to deliver.

[26:47] Yeah like slow down we’re trying to give you all your packages so you know.
So again this amazing amount of investment and then what’s also interesting is they build these things but then they you know.
They’re going to last for very long time you know fulfillment centers last for presumably 10 plus years they the insides frequently have to be updated but you know the big kind of the pad the walls all that stuff in the sortation centers I think
that technology lasting longer and of course trucks last a relatively long time so so what they’re building is they already had more infrastructure than anyone else and they are just kind of like.
Quadrupling down on that infrastructure so so.
That’s kind of what prime one day means and then you know my other point on it is consumers love it so consumers are buying more and more frequently and signing up for Prime because they love the one
prime one day feature.

[27:46] Yeah and I mean I the way I think about it like that faster delivery service does mean they win more orders against other eCommerce sites so
you know maybe you ordered something from Amazon instead of Walmart because it will arrive faster but also it just entices households to
order more stuff online that they previously might have ordered or purchased in a store and so like it you know they’re not just stealing share from competitors like they’re actually like increasing.
They’re addressable market so.

[28:23] Yeah good point.

[28:26] So that that is very strong the.
Question I get asked a lot about Amazon lately when I visit other retailers is around the ads the.

[28:41] You know as we’ve already highlighted a little and we’ll talk about more Amazon has this Rich echo system and everything feeds on everything else and so you know increasingly Amazon has this great Diversified Revenue.

[28:55] Echo System right and all these different places they make money and you know all the all these Services they make money on that support the retail business like FBA
fulfillment all these new things if you’re a traditional retailer that you know is
just has e-commerce with all those other services it’s really difficult to be profitable.
And so in general when we look at you know a omni-channel retailer that you know they generally have separate accounting for their e-commerce business and that e-commerce business generally isn’t profitable or certainly.
It’s less profitable than their brick-and-mortar business and so you know most retailers are looking for ways,
to improve profitability and then you see wait a minute you know Amazon’s building this huge highly profitable advertising business,
on top of the retail business.
So estimates are right now that that Amazon’s ad business is about 9% of All Digital ads.
And so to put that in perspective Google is currently I’m sorry Facebook is currently at.
22% and Google is it 36 percent so Amazon’s already the second largest Advertiser the forecasts are of course for Amazon to gonna grow much faster than those other so.
So the 20:23 forecast is.

[30:19] Amazon at 14% Facebook at 20% and Google at 31 percent so that you know they’re potentially getting much closer to the size of these other.
Big guys and they have a ton of other revenue streams that these other big guys don’t have in General ad sales is highly profitable because.
The cost of goods sold is almost negligible.
And so if you’re Walmart or Target or any retailer in you’re struggling for profitability on e-commerce and you look at Amazon you go man
I need to get some of that lucrative advertising business to supplement my business as well and so we’ve actually seen a bunch of other retailers.
Invest more effort in their own sight monetization efforts or their own retail media efforts and,
Walmart used to Outsource ad sales to a company called Triad and they fired Triad and and built an internal team
they have now launched a bunch of Their Own Self Service apis so that you can programmatically by ads on Walmart.
Target you know double down on.
They’re their ad sales team and they now call it R and L Kroger bought a division of dum-dum humby and rebranded and they have this hole.
Precision marketing thing but I’ll be honest at the moment.

[31:42] Like obviously none of these these retailers have close to the traffic or eyeballs that Amazon does so they’re you know they’re certainly not getting the same kind of share and at the moment all the dollars that every other retailer is getting in their ad program.

[31:57] Um are what I call Trade dollars which means sort of your the.
Frito-Lay sales team at Walmart and Walmart agrees to buy you know a billion dollars of free delay and Fritos and part of the trade agreement when Walmart agrees to buy all this Fritos is that Frito-Lay will kick in.
Some advertising dollars and historically those dollars might have been used in a store circular or an in cap or some kind of sampling program in the store and increasingly,
those trade dollars are getting used for digital ads on Walmart.com
but those dollars are all being paid by the sales team you know that sells stuff at Walmart and what’s unique about Amazon’s ad sales is
they’re not just getting trade dollars there’s a lot of Chief marketing officers that have a budget to build their brand and they’re deciding to take dollars that they used to invest in Google and Facebook
and put those dollars in into Amazon because there’s a lot of eyeballs there with a lot of high buying intent and so at the moment,
it feels like.
Like a huge Advantage for Amazon that they’re getting these these incremental dollars and other retailers are are trying but really not being successful to sort of follow suit.

[33:17] Yeah it’s interesting I get your point on there being no cost of goods I would say I’ve had more random people that aren’t in our industry
complain about the searchability and findability on Amazon lately and I think it’s the ads kind of you know so I think there is a quote-unquote cost of goods maybe maybe a better call it a cost of
consume user experience or something.
I do worry that it feels like we may have crossed over a point where the ad load is too high and it’s kind of confused the buying experience and then you know there’s been a lot of negative press around counterfeits Bad actors
those folks are going to be very aggressive on the ads because they you know they presumably have
better margins than anyone because they’re selling a product that is counterfeit thus doesn’t have the normal.
Price structure of a real good so it’s gonna be interesting to see is there a point where.
Windows Amazon say hmm your customer experience is suffering from the ad load.

[34:17] Yeah no for sure if you’re a business that just sells ads so you know that’s
almost the exclusive revenue of Google or Facebook you know there’s this,
this like familiar pattern they like create some organic benefit that gets a bunch of eyeballs to come and they trick people in a building an audience there by giving them free eyeballs and then they increasingly take away all the organic visibility and make you pay for visibility right so used to be you could have funny interesting content on Facebook and people would see it
now you know nobody’s going to see anything on Facebook unless you pay an ad for it and that that’s not the world’s greatest customer experience but it
it kind of works if you’re exclusively an ad platform but in Amazon’s case where they’re trying to provide all these other customer benefits you’re exactly right it absolutely
roads the customer experience as more and more of the pixels on the first page of search results are paid for pixels instead of organic pixels and a lot of people point to that as
the most obvious deviation from Amazon’s stated goal of being the most customer-centric company on the planet
is you know when
you asked for Duracell batteries in you use and you get an ad you know that takes up half the screen for for amazonbasics Batteries like you’re clearly not being customer-centric.

[35:40] Yeah yeah it’s gonna be interesting to see and then another interesting thing is whenever I talk to folks and say well we’re a shopping target comes up a lot so I don’t know if there’s something about the Target demographic that really
doesn’t like those those add load but you know in my mind this is like maybe the I don’t know if I’d call it an Achilles heel it’s like a little tiny microscopic.
Spot on a hill.

[36:01] And Mark Lori did an interview at the code Commerce show asked her which would have been like September
and he specifically called it out he’s like look we’re gonna
lean heavily in the ad sales and we want to improve our our site monetization Revenue but we aren’t going to do is compromise the customer experience the way
some other people did and he didn’t he didn’t name them but it was pretty obvious he was talking about Amazon.

[36:26] Some large book stores in Seattle.
One of my favorite topics is gross merchandise value or gmv longtime listeners will be aware of this but bear with me so when Amazon reports their revenue
it includes only their revenue their derivative revenue or their take rate
from the third party sales so if Jason sells $100 Star Wars toy on the third-party Marketplace Amazons
Blended take rate is about 15% so Amazon so while Jason you know sold a hundred dollar widget
and presumably Target and Walmart lost out on that hundred dollar widget Amazon’s revenue is only $15 from that
so so there’s this hidden transactional value in Amazon that makes Amazon actually larger than you would think it is
so let’s do put some numbers on this Amazon’s revenue for 2019 was 280 billion.
Of that 87 billion was in the fourth quarter
I used to have my own analysis of this and thankfully the Wall Street analysts do this now so I’m going to quote Ron Josie who’s an analyst at JMP Securities Amazon now gives you enough data to kind of back into this number where I had to
you some assumptions so the.

[37:45] So when you unpack the gmv fourth quarter total gmv was a hundred and eighty billion so just shy of about 2X and then the annual gmv was 569 billion again compared to revenue of 280 billion
so what happens in there is 28 billion of that 280 is third party that you have to gross it up about.
Eight times to actually get the DMV this is important because I think that’s the Apples to Apples comparison for how Amazon’s doing in our industry
revenues important and.
And whatnot but to really so when Macy’s or Walmart or any other retailer reports Revenue it’s a hundred percent DMV.

[38:26] Asterix and let’s have a Marketplace and they’re going to do the same thing but they don’t have marketplaces that are 53 percent of their business so there there is a little bit of space under that Iceberg but Amazon’s is massive it’s almost twice as large so
so I think that 569 billion number for 2019 is the right number that’s the transactional value that went through
Amazon this excludes AWS excludes ads Etc so Amazon’s impact is twice what you think it is
and that gmv actually grew faster it grew at 26%.
And that’s because I think the physical stores and so that other stuff kind of ways on that growth metric if we if we you and I kind of share a chart I guess I forget which was actually created so we’ll split it split the baby where we show
a lot of people feel like Amazon’s not as big as Walmart
well if you that look at GM V again Amazon’s 2019 gmv 569 billion Walmart
trailing 12 is about five hundred twenty billion so I would argue that Amazon is now ten percent larger than Walmart on an apples-to-apples basis.

[39:31] One more tidbit there and then we’ll dig into the Fulfillment center is first party is growing pretty slow
at about ten percent year-over-year again this is dollars not unit so it’s really interesting because
the doll at the gmv from 3p is going very slow but the units are holding steady and what I think is happening is you have a lot of these kind of Kindle units in Amazon music units just kind of like these
one and two dollar kinds of things whereas in the 3p you’re seeing big screen TVs and really big kind of priced items so so we don’t see it in the unit volume but we are seeing it in the gmv mix
third-party grew gmv grew 26 percent year-over-year in the fourth quarter so.
So you know any thoughts on that Jays agree disagree.

[40:15] Yeah no I generally agree and I think
like not only is that that 3p Marketplace a big deal it’s like a again intrinsically it,
it’s going to be more profitable than a 1p business because
once again you don’t have cost of goods right and so there’s way less risk against your capital and and they never reported profitability separate from their 3p sales if they did.
It’s totally viable that this looks like a Better profitability Business than AWS would and these days they even have a huge accelerator like not only is the
the 3p huge and growing.
A bunch of the services that Amazon is wildly profitable delivering their primarily delivering to 3p sellers so you know
the FBA premium Analytics
like all of the advertising like they’re all tools to help 3p sellers be more successful and they make money on all those services so it’s a.
Um you know even if you took AWS completely out of Amazon they’re you know they’re still is this.
Secret highly profitable business model within the Retail Group segment and it’s the biggest part of the retail sales.

[41:44] Wrinkle about any thoughts on fulfillment.

[41:48] Yeah so in my mind like.
The two overwhelming moats that Amazon has these two huge competitive advantages that are extremely difficult for any retailer to overcome is.
The Prime membership and that whole flywheel and the other is this insurmountable investment they’ve made in fulfillment centers and you talked about this a lot in the
in the prime one-day section
but you know they announced that they’re going to build something like why.
47 new fulfillment centers in.
Again it’s hard to talk about logistics buildings anymore because they have so many different types right like they have these huge cavernous fulfillment centers which are the most expensive thing and as you mentioned
increasingly they have all these these various hubs and sortation centers and delivery stations and things they add on top of that but.
Super oversimplify if we just talked about fulfillment centers Amazon has a hundred and sixty six of those in North America that are operating right now.

[42:58] The next biggest Ecommerce provider if you count super generously you might say Walmart has 20.
So like they’re they’re an order of magnitude fewer fewer centers and then you know Amazon plans to build 47 more which is.
You know more than double what anyone else even has and so you know to me it’s they’ve been taking all the cash.
That they generate from this business and they’ve been making these Investments and as you point out these are investments that are going to pay dividends.
For ten plus years and they make it totally viable for Amazon to increase the quality of their services right
so that you know the most obvious example is they could promise customers much faster deliveries and you know they had.
To make some investments in that they kind of missed their guidance last quarter primarily because of the these unforeseen costs and so I like to talk about you know one day delivery was hard for Amazon and and they gave themselves a cold by doing it but they gave
the all of their competitors the coronavirus because.
Nobody else was in a position to do to do ever anything like one day and you know it’s much more expensive and much more difficult and so you know we’ve seen retards like.

[44:20] Walmart or Target kind of promised one day to match it but there are really only matching it on a tiny percentage of the skews that that Amazon offers so this is a super important super powerful.
Competitive advantage.

[44:37] They do spend an awful lot of money delivering stuff to people so you know a line item they do have in in their earnings report is that that.
Fulfillment costs and it was up 43%.
Year over year so they this quarter they spent twelve point nine billion dollars on delivery it was up huge last quarter to it was up 46% so this is the fastest growing cost they have.
But you know increasingly that that investment is.
In making things more optimal by delivering themselves rather than relying on you ups and u.s. post office.
So you know there was that Morgan Stanley report that came out late last year and it had two pretty impressive factoids in it number one it said.
That Amazon may already be delivering more than fifty percent of its own volume
um so instead of relying on USPS and and UPS more than half the packages they ship you know are now being delivered by their own Amazon Logistics which is.
Part of the only way they could they could do that one day delivery and the Morgan Stanley report says you know you game this out and you forecast by 2022 Amazon will be delivering more Parcels than UPS or FedEx.

[45:56] So this is a you know just another huge huge moat that Amazon has against every other.
Competitor and you know it’s it’s having a material impact now on the traditional carriers like FedEx and UPS.

[46:15] Yet the Fed Ex gave FedEx CEO Fred Smith he’s kind of legendary entrepreneur he’s been at this for like 50 years something like that since he was in his 20s
they had an interview with him and I saw a lot of people kind of online.
Mocking his approach and I think they were misreading it so what he said was effectively my read on it was the they had to pick sides right so they realized the Amazon was going to be a competitor.
They chose to not not kind of continue to do business with competitor but now they’re more aligned with omnichannel retailers and he feels like.

[46:52] That’s going to be a winning strategy and that they will be able to get back on track and become larger than ups and,
better than their he didn’t say it outright is that because UPS has chosen other path of continuing to partner with Amazon at some point Amazon will yank that volume,
in these networks live on volume right because if you can build all this infrastructure you got to keep it busy and utilize and then.
That will allow them to catapult forward there is some evidence to support this I saw a lot of people say oh you know FedEx is going to save them all that’s ridiculous well I think it’s pretty clear.

[47:24] What do you think of which omni-channel guys need FedEx either in a partnership or even,
in an MMA to your point about Walmart having 24 filament centers FedEx could help them keep up with and maybe even pass Amazon’s capabilities I don’t I don’t have that broken down like
like you know
we talked about there with Amazon’s fulfillment centers but you know they have a substantial infrastructure across from fulfillment centers for Tatian centers both in ground and air and then obviously trucks and planes so
I think that’s kind of what he was talking about is really more partnering with a Target and Walmart maybe both of those guys and providing an alternative to Amazon.
If I’m FedEx UPS I kind of personally think that’s the right strategy because you know you partner with Amazon clearly is going to be
race to death I think maybe they’ll give you some volume the least profitable stuff but I just don’t see it as a winning
winning strategy what are your thoughts and I know you you kind of Drew straws and I got FedEx and you got UPS I’d love to hear what you’re thinking what you.

[48:28] So they just just to pile on the FedEx thing like there are some ridiculous things that Fred Smith has said in the past about this base like you know two or three years ago I think he called the notion that Amazon could be a meaningful.
Logistics company Fantastical and I you know I think he’s pretty clearly wrong there but I agree with you you know.
This year their plan to sort of you know move completely away from Amazon like is not a bad move because both.
FedEx and UPS have constrained capacity like they sell all the trips that they can make.
And there are more e-commerce is growing faster than their capacity is growing so when you have a constraint supply of something you want to get the most money you possibly can for that.
And the way you get the most money is not go to the biggest customer that has the most elaborate and negotiates the lowest rates right so FedEx can you know better maximize its capacity by partnering with these people.
That need it more than Amazon needs it so that like that seems like entirely.
Smart strategy on FedEx’s part I would I would say and then there was this little I don’t know how much of it was real versus Tit for Tat but you know there’s this small service that’s.
People talk about but it’s not very large yet and I you’re going to remind me what the vernacular is but vendor fulfilled Prime.

[49:55] Yes seller fulfilled Prime and then in their the seller can choose which.

[49:59] Yeah so in that scenario you don’t put your goods in.

[50:04] In Amazon’s fulfillment Network you keep your goods in your own warehouse and you promised Amazon that you’re going to deliver them within the terms of prime shipping and Amazon has to certify you for this
and around holiday this year they said hey if you want to stay certified for so fulfilled Prime you can’t ship your packages via FedEx.

[50:26] FedEx on time delivery rate is too low
for to meet our high standards and so they turned off at X in the peak of holiday and then they they turned it back on and they alleged that that’s a data-driven decision but it certainly got a lot of Buzz
so slightly contrasting this like UPS has continued to be a big partner
of Amazon’s and you know they are the third largest provider to Amazon so of Amazon’s the biggest second biggest is the post office third-biggest is UPS
and the you know the thing you have to remember about UPS and FedEx is they both built their businesses
primarily to deliver stuff to offices right so you drive a truck to an office and you get to drop off 30 boxes when you drive a truck to a house and only get to drop off one box it’s way less efficient so FedEx and UPS although they’re trying to improve
were built for commercial deliveries not residential deliveries and that’s where the US Post Office really comes in as they’re good at these residential deliveries.

[51:35] And for your point as Amazon builds out more of their own capability that more and more of their likely you know taking the the efficient deliveries themselves that they can make the most money on and giving the the bad deliveries too.
To the their partners and you know their Partners like price their services based on and having them profitable mix and so like that’s another way that.

[51:59] That this whole business probably hurts hurts the UPS is of the world but we are seeing UPS.
Add some interesting e-commerce friendly services so I’ve noticed three big announcements this this month UPS is going to a seven-day-a-week delivery and they’re adding a ton of weekend delivery capacity which again when you were.
Primarily delivering you know contracts to businesses.
Businesses weren’t open on the weekend so weekends weren’t important but now that you’re doing e-commerce the weekends are potentially the most important delivery days.
They are UPS is also making a big investment in rural delivery infrastructure which you know we just mentioned is something Amazon’s are likely to need.
More help with for longer and then they also this week announced this new technology that they’re rolling out that they called Dynamic routes.
And essentially what that means is they’re using AI every morning to decide.
Where that that truck driver goes right so that driver you know in one shift is likely going to stop at a hundred locations to do deliveries.
And in the old world like they you know do ever do the hunt same hundred locations in the same order every day and now that’s going to be.
Sort of optimized using artificial intelligence to save gas and optimize the amount of deliveries they can.

[53:24] So we are seeing them try to do more e-commerce Centric stuff.

[53:30] You know I would point out and argue if you’re Walmart and you get make a huge partnership with FedEx and Amazon is primarily now relying on their own delivery infrastructure.

[53:43] That is still a huge advantage to Amazon because.
By the fact that they own it it’s much easier for them to change and improve their own service so if.
Amazon decides customers really like being able to track the driver and know that the drivers half an hour away from your house
they can do that if Amazon finds out the customers really want a picture of the box when it’s delivered so they can see where in their building it is
that they can do that they can add all kinds of customer-friendly services if Amazon wants that driver to pick up returns they can do that but if you’re
Walmart in you’re paying FedEx to provide all these Services you have a lot less control over sort of Designing and improving your own product so.
Again yet another big big Edge to our friends in Seattle.

[54:34] Two last things on fulfillment here in and we’re spending time on this because we think you’ll see when we do this kind of
put the bow on things why we think this is so important but number one FedEx has a market cap of thirty four point seven billion Walmart is 30
324 so it’s.
It would be a big one but it’s not outside the realm of possibility it’s not like they’re equals UPS is 88 billion so that one’s kind of out of the realm for someone like a Walmart or Target to acquire.

[55:04] And I think that’s kind of where this is going to have to go maybe you know there’s there’s a corporate strategy there’s a whole thing why buy a cow if you just have the milk so maybe there’s no need for them to buy these things but.
And maybe some Walmart I’m okay as long as you’re not doing Amazon I’m okay sharing that infrastructure with Target effectively so that’s gonna be interesting to watch the other thing I wanted to bring up
is the challenge that the carriers have this is the same for UPS FedEx and USPS is residential deliveries they’ve tried for kind of each individually 20-plus years with the smartest route optimization and sortation.
To get the stops per truck up and there have been range bound to between 70 and 80 stops a day
so so that’s kind of the capacity of the system is really driven by how many stops in a residential delivery can a truck make here’s how Amazon solves that,
we mentioned at the top a hundred and fifty Prime subscribers now a hundred million of those are you in the United States there’s something like 200 million households so the way to get the stops for truck up
is if you’re stopping at every other house right because you know I don’t know the data but I imagine you know you could probably.

[56:18] 4X that stops so I bet these Prime trucks are making you know certainly double that if not triple that so they could be making 200 stops
in fact I bet that it has changed the dynamic and it’s really just how much each truck can hold.
Because I think the stops have gone so high because they’ve got the Loyalty program where they’re delivering stuff to every house every other house essentially not every day but it’s enough that it really dramatically solves this this routings.
Stops per truck problem.

[56:49] Yeah all true I will say well you know we talked about there being like a slight negative that other people could attack the one incremental headache that Amazon inherits by having their own Logistics
delivery capability is you know they’re now getting a lot of negative press for like you know having all these.
You know there’s this high pressure on all these drivers to maximize their deliveries and get everywhere as quick as they can and so there’s a bunch of,
Amazon employees and independent contractors working on Amazon’s behalf,
driving unsafely on the roads and you know potentially hitting people and causing accidents and even deaths and I think it was disclosed.
Not too recently that like this happened a while ago but the the first CFO of Amazon apparently was.
Actually killed walking across the street and he was hit,
via Amazon delivery driver so the company literally killed their first CFO.

[57:55] I think that was a woman.

[57:57] It was a woman you’re right.

[57:59] Jennifer something yeah.

[58:00] Yeah it’s super sad story but so they’re going to have to deal with that like I you know I don’t know people remember but in the 90s all the pizza delivery companies used a promise 30-minute deliveries and you know that created the
the same problem and they sort of figured out how to manage it so I kind of suspect Amazon will as well.

[58:18] Cool so we’ve gone through the setup we went through the results and then our analysis now we’re going to conclude by kind of giving you an action item so so we’re trying to say all right we’re going to put ourselves in our listeners shoes
a lot of this may seem a little scary if you’re a retailer even if you’re a brand what do you think about this so
so here’s my take my conclusion is prime one day is a complete Game Changer and it
took his kind of a year to figure this out but it’s really showing up now number one customers love it.
Number two it’s a knockout punch to competitors you talked about it increasing the addressable Market which is great but people are you know competitors already can’t do two day Prime now they’re up against one day Prime
what’s next same day Prime you know I think this infrastructure can largely be used for all that stuff to the number 3 it is effectively.
Kind of already paying for all this shipping and structure so so again I think it’s paying for itself right now and it’s gonna be around for four five to ten years plus

[59:20] Also Amazon it’s offered on a small number of skus so I think there’s going to be two to three years where they’re going to be able to expand the number of skus that are there available in prime one day and then that will
get them 20% plus growth for two or three years long enough to find the next Catalyst for an acceleration maybe that same day Prime maybe they figure out growth
tree Alexa ads they have so many so many irons in the fire they have a really good chance of finding that next big thing so the action item is I think retailers need to really.
Kind of take action on this for this holiday holiday of 2020 we have a lot of time thinking this and really start figuring out.
Can you partner with UPS or FedEx to offer one day and what’s that going to be like and.
How do you build that out because it’s clear consumers love it and it’s clear Amazon has invested massively in this and will continue to do so based on the results
Jason what was your conclusion and action items.

[1:00:17] Yeah so I mean I think at the highest level they’ve they’ve established these two dominant modes Prime and
they’re their fulfillment capability and I think this point no retailer strategy should try to be to catch up with him and go head-to-head with him on either of those two things I think just the idea of trying to be in everything store and ship
hundreds of millions of products and the in the same day to any us consumer in competition with Amazon is a lost cause at this point and so you know if you’re a retailer you need to think about the white space
that that Amazon’s decisions has created for you right and so you know that you’ve got to think about.

[1:01:02] Products and services that benefit from the fact that you have this brick-and-mortar footprint right and I see
Target in particular doing a really good job of leveraging the store I know I talk about grocery a lot but groceries a perfect example
you know groceries never you know bananas are never going to live in all these giant fulfillment centers and get delivered through the sort ations a center and all that to the consumer there
probably always going to get delivered from a store or micro fulfillment center so you know if I’m
Walmart in particular but any big retailer you know groceries one of the categories I want to try to win from Walmart I really want to think about
services that customers want that might make the Fulfillment centers obsolete right so
you know what’s not very good if you’re if you own 200 fulfillment centers that have billions of dollars of inventory in it is if consumers stop buying
off-the-rack products and start ordering products that have to be made to order or personalized to order suddenly all that fulfillment infrastructure isn’t so valuable so if I’m any other retailer
I might be winning in a personalized products if a lot of these products shift to Auto fulfillment
the ability to ship really fast and quickly may not be quite so important so if I’m another retailer I’m leaning into that
and you know for sure I’m doing things like.

[1:02:29] Thinking about using my customer base to design my own products and sell stuff that Amazon can’t sell because you know competing with Amazon by selling other people’s stuff I think is just going to be.
Increasingly unviable for almost anyone and that’s my shtick.

[1:02:51] I totally agree.

[1:02:52] Awesome well it has happened again we’ve gotten slightly over our allotted time but I feel like this is a.
Particularly important event in our year and it’s well worth the time that listeners spent sort of get their arms around
all the various things that are going on in Amazon and as usual if you have any questions or comments.
Hit us up on Twitter or visit our Facebook page and you know it’s time to get some fresh five star reviews so I know I say this every time.
But seriously it’ll take you ten seconds jump over to iTunes and give us that that five-star review because we need we need some 20/20 reviews not those those older views from those of you that have been with us for a long time so appreciate you doing that.

[1:03:42] Except when we hope you enjoyed this new kind of format for an Amazon quarterly result where we do have a little bit deeper and if you have any feedback positive or negative we’d love to hear.

[1:03:53] And until next time happy commercing.

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