October 22, 2010, 3:49 PM

What Amazon’s strong growth means for competitors

Aggressive sales are a wake-up call to other e-retailers.

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Amazon.com Inc.’s third quarter financial results announced yesterday show the No. 1 e-retailer continues to grow much faster than the e-commerce market, which has been growing at around 10%. And Amazon once again left in the dust one of its principal competitors, eBay Inc., which reported 3.3% growth in merchandise sales during the quarter.

By contrast, Amazon.com’s global net sales grew a whopping 39% to $7.56 billion during the quarter, up from $5.45 billion last year. For the nine months ending Sept. 30, net sales stood at $21.26 billion, a nearly 42% increase from the same point last year, when net sales were $14.99 billion.

“It’s a very impressive growth rate when you think about e-commerce overall,” says Scot Wingo, of Channel Advisor Corp., a company that assists e-retailers selling in online marketplaces.

He says Amazon’s growth means competitors will have to find ways to raise their game, and points to the launch of ShopRunner earlier this month as an example. ShopRunner is a shipping alliance among more than a dozen e-retailers that offers a shipping program similar to Amazon Prime for products bought at participating e-retailer sites. Wingo expects to see other challenges emerge from the likes of Google, Wal-mart and Buy.com. “You are going to become irrelevant if you are growing at 3% when Amazon is growing at 40%. And if Amazon wins and everyone starts searches at Amazon, it’s bad for everyone else,” he says.  

Wingo says drivers of Amazon’s sales growth include Amazon Prime, Fulfillment by Amazon and its marketplace that allows other retailers to sell on Amazon.com. Amazon did not provide details on these initiatives in its third quarter earnings report and a follow-up conference call with stock analysts, but did indicate it was pleased with how Fulfillment by Amazon was growing.

“We are seeing very good traction with Fulfillment by Amazon, which is also why we are adding capacity for it,” said Amazon chief financial officer Tom Szkutak during the call with analysts yesterday.

Amazon previously announced it was building 13 new distribution centers this year, bringing its total to 52 worldwide. Fulfillment by Amazon is a program where Amazon’s marketplace sellers can have Amazon stock and ship their products from Amazon’s distribution centers. For e-retailers, participation in the program means their products are eligible for free shipping to Amazon Prime customers, making their products more attractive to those consumers. Amazon does not disclose how many Prime members it has or their shopping behavior, but analysts estimate the program has anywhere from three to five million members and say these customers are among Amazon’s highest-frequency, highest-value buyers.

The cost of building the new distribution centers also impacted the company’s Q3 financials, but shows that Amazon is planning for long-term growth, analysts say. Operating expenses were up 40% during the quarter from Q3 2009. “They are taking a bullish view of their business going forward, investing in growth and building out fulfillment capabilities for categories outside of books, music and video. It has a near-term impact on margins, so it is critical for them to use the capacity efficiently and profitably,” says Colin Sebastian, an analyst for Lazard Capital Markets.

Amazon.com’s sales of electronics and general merchandise in North America leapt 80% during the third quarter from the same time last year and garnered $2.33 billion in sales for the web retailer. Sales in the catch-all category exceeded Amazon’s sales of media products—books, music and video—which netted $1.59 billion in sales during the quarter and grew 13% from last year. Across all categories, North American sales grew 45% during the quarter.  

Part of that growth comes from figuring in sales from online shoe retailer Zappos.com, which Amazon bought late last year. Amazon did not disclose Zappos’ sales for the quarter, but Sebastian estimates that it added $350 million to Amazon’s sales total.

“Zappos is probably one the larger variables in the category’s growth, but bigger picture, sales in apparel, toys and computers are also strong,” Sebastian says. Amazon, the No. 1 e-retailer in Internet Retailer’s Top 500 Guide bought Zappos last year in a deal valued at nearly $850 million.

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