January 29, 2010, 12:00 AM

Amazon boosts margins with a little help from its e-retailer friends

Not only did Amazon.com increase North American sales by 36% in the fourth quarter, it also improved its gross margin by 211 basis points to 23.6%. More sales by other merchants on Amazon.com helped improve those margins, Amazon says.

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Online retailers could be forgiven for wondering if Amazon.com Inc. lives in some sort of parallel universe. The No. 1 online retailer not only increased its North American sales by 36% in the fourth quarter, it also improved its gross margin by 211 basis points during that period to 23.6%. How does it grow both profit margins and sales when retailers are slashing prices to gain share during a recession?

Extracting lower prices from suppliers is one way, chief financial officer Thomas J. Szkutak told analysts yesterday. And another, he said, is the growth in third-party sales, that is, sales by other retailers selling through the Amazon.com platform.

The number of merchants selling on Amazon rose to 1.9 million in the fourth quarter, up 24% from a year earlier, and they accounted for 28% of unit sales vs. 27% in Q4 of 2008.

The profit margin on the commission Amazon charges third-party sellers, roughly 15% though it varies by product category, is high because Amazon does not have to buy or stock the inventory sold. Whereas the profit margin on items Amazon sells itself might be around 10%, it’s roughly 85% on the revenue Amazon derives from sales by other merchants, says Scot Wingo, president and CEO of ChannelAdvisor Corp., which facilitates third-party sales through marketplaces like Amazon and eBay. “You blend just a point or two more of that 85% margin business with that 10% and it moves the needle-quickly,” Wingo says.

Amazon expects still more growth in the current quarter. The e-retailer is projecting sales of between $6.45 billion and $7 billion in the first quarter of 2010, which would represent growth of 32-43% over last year.

Analysts, who gushed over the strong fourth quarter, are bullish over Amazon’s prospects for 2010. Deutsche Bank analysts project accelerated growth in both revenues and profits for Amazon this year, driven by growth in its core business and from its Kindle e-book reader and digital book sales.

They observed in a note to investors that Amazon’s low prices drive increased unit volume, which result in economies of scale, allowing the e-retailer to reduce prices further and drive more growth. “Amazon may look to further reduce gross margins in the next few years (implying lower prices) provided that unit volumes ramp to drive economies of scale against the cost structure,” wrote Deutsche Bank analysts Jeetil Patel, Herman Leung and Matt Chesler.

Other highlights from Amazon’s Q4 and full-year 2009 report released yesterday include:

  • The number of customers who have purchased from Amazon in the past year increased 19% to 105 million worldwide.
  • Purchases per customer increased 15% and price per unit was flat year over year, or down 1-2% excluding Amazon’s acquisition of online shoe and apparel retailer Zappos, according to analyst James Mitchell of Goldman Sachs.
  • Zappos, which Amazon began including in its results Nov. 1, contributed $200 million of the fourth quarter North American revenue of $4.96 billion. Global Q4 revenue was $9.52 billion, up 42%, or 37% when excluding the impact of fluctuations in currency exchange rates. Sales outside of North America represented 48% of the total.
  • Amazon says there are now millions of users of its Kindle, but declined to be more specific.
  • The e-retailer expects to spend $100 million this year as it begins moving into its new offices in Seattle, culminating a multiyear project.

     

 

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