Scale means a lot when it comes to increasing sales while lowering costs in retail, and Amazon.com Inc. seems to have hit the right formula for making scale work to its long-term advantage. While continuing to cut costs as it increases sales with offers like free shipping, Amazon reports first quarter sales up 28%, to $1.08 billion from $847 million a year ago, resulting in a huge expansion of its Q1 operating income to $39.2 million from $1.7 million, and a sharply narrowed net loss, to $10.1 million from $23.1 million.
With overall costs declining and efficiency rising, Amazon is showing the kind of clout in the online world that Wal-Mart Stores Inc. shows in the brick-and-mortar world, says Jim Okamura, a retail analyst with J.C. Williams Group in Chicago. "They more than anyone else can continue free shipping, and that`s putting a greater barrier between them and their competitors," he says. "And they continue sticking to their strategy of passing along savings to consumers, as Wal-Mart has been doing. You can`t argue with that success formula."
"Amazon is acting much more like a mature company than a startup," adds Neil Stern, a partner with Chicago retail consultants McMillan/Doolittle.
Amazon says it expects to continue offering free shipping, which it now grants for orders of $25 or more, even though its loss from shipping operations expanded to $27 million in Q1 from $1 million a year ago.
"We continue to measure our shipping results relative to their overall effect on our overall financial results, with the viewpoint that shipping promotions are an effective marketing tool," Amazon says. "We intend to continue offering our customers free shipping alternatives, which will reduce shipping revenue as a percentage of sales and negatively affect gross margins." It adds that it`s also offering free shipping in its international operations, representing its U.K., German, French and Japanese web sites, where Q1 sales are up 68% over last year to $379 million from $226 million. Amazon’s North American sales grew 13% to $705 million in the first quarter.
While Amazon reports that the quarter represented its first non-holiday quarter with sales over $1 billion, it expects similar results in the current quarter, with expected sales of $1 billion to $1.05 billion.