Analysis: Amazon plenty of firepower, time to invest in reinvigorating growth

Amazon has kicked off its fiscal year with a solid set of results, which signal its continued market share advance into both the product and services sectors.

However, there is no disguising the slower pace at which the company is moving forward. A year ago, Amazon grew its product sales by over a third; today, that growth rate has come down to a relatively meager 8.5%. The days of stellar uplifts have long since disappeared and it is clear that Amazon is now in a different era – one characterized by more modest gains.

On one level, this slowdown is unsurprising. Prior year comparatives are tough, Amazon is a more mature business, and a lot of the easy wins have already been made. These dynamics, coupled with a less spendthrift consumer over the early part of 2019, were always bound to reduce growth.

However, there are also other forces at play in the form of increased competition. Inspired, or perhaps threatened, by Amazon, other retailers have been actively upping their game in e-commerce. Mass merchants like Target and Walmart have doubled down on improving their online offer and range of services, including in collection and delivery. Our data clearly show that both players, and others, have increased their share of shoppers over the past three months – and about 72% of these additional consumers are also regular customers of Amazon.   

While this should not be taken to mean that Amazon is losing all of their spending, it is clearly losing a share of wallet among some segments of the population. As much as this is offset by gains elsewhere, it is extremely unhelpful to growth. In our view the trend is only likely to accelerate going forward and it will put Amazon under more competitive pressure that it has been before. For a long time, Amazon was the only real player in the game, now it is having to share the field with an increasing lineup of formidable rivals.

In a perverse way this is advantageous to Amazon as it puts an end to the lie that the company is somehow a monopoly or that it is immune from competitive forces. It clearly isn’t and in order to bring growth rates back it will need to innovate, invest and change, just like any other retailer in the market.

Fortunately, Amazon has several levers it can pull to achieve this. One of them is in simplifying and streamlining the online shopping experience, an area where it still gets relatively low ratings because of the sheer amount of choice available on its site. Another is in putting more effort into categories where it has relatively low penetration, such as furniture and beauty. Another is in enhancing the Prime ecosystem so that it attracts and locks in more customers.

Another area that still needs work is Whole Foods. Physical growth this quarter, which is predominantly composed of the grocery division, was a paltry 1%. This underlines the fact Amazon is losing share in food, mostly thanks to deficiencies at Whole Foods. That said, it is clear to us that Amazon is redoubling its efforts by investing more in price, refurbishing stores, and launching new products such as Amazon meal kits in Whole Foods stores. These things will help to move the dial, even if only slowly.

As much as the top line performance matters, Amazon’s shallower growth is coinciding with a period of improving profits. As the company takes advantage of its scale and invests in efficiencies it is boosting margins and the bottom line. This quarter net income grew by a stellar 119%. Ultimately, this gives Amazon plenty of firepower and time to invest in reinvigorating growth.