Amazon reported higher revenue and profit for Q3, surpassing Wall Street expectations, attributed to increased frequency of low-cost item purchases. While losing market share in clothing to competitors like Shein and Temu, Amazon benefits from everyday product sales. CEO Andy Jassy noted a shift towards cheaper essentials. To mitigate average selling price pressures, Amazon leverages its extensive local warehouse network for rapid shipping, while facing competition from Walmart and Target in the essential goods space.
Amazon reported that customers are shopping more frequently and adding affordable items at checkout, following the announcement of its third-quarter revenue and profit that surpassed Wall Street expectations.
The e-commerce giant has experienced a decline in its clothing market share as Shein and Temu have rapidly expanded internationally with dresses priced at $12 and gadgets for $10. However, Amazon’s wide range of everyday products, like dish soap and dental floss, continues to support its business.
‘The strong sales figures from everyday consumer goods indicate that customers are increasingly turning to us for their daily needs,’ said Brian Olsavsky, Amazon’s Chief Financial Officer. ‘We see that when customers purchase these types of items from us, their baskets are larger, they shop more often, and they spend more on Amazon.’
In August, Amazon’s CEO, Andy Jassy, noted that average selling prices were decreasing as customers shifted toward cheaper and more essential items, while sales of higher-priced goods, such as computers and electronics, are growing ‘more slowly’ than in a strong economy.
John Belton, portfolio manager at Gabelli Funds, which owns Amazon shares, predicted increased pressure on Amazon’s selling prices in the fourth quarter due to the company’s product mix.
THE LOCAL WAREHOUSE STRATEGY
To mitigate the impact of declining average selling prices, Amazon is leveraging its extensive network of local warehouses that enable rapid product shipping.
‘It’s fairly easy to decide to supply lower average selling price goods, but far more challenging to afford to provide them,’ Jassy stated on Thursday.
‘One reason we’ve been so focused on service costs over recent years is that when we manage to reduce our service cost, it paves the way for a broader range of items, especially lower-priced goods that we can provide economically,’ he added.
Shein is also striving to expand its offerings in everyday consumer products. Earlier this year, it began courting skincare and personal hygiene brands like Colgate-Palmolive to sell more recognized brands on its platform. In 2023, it launched a third-party marketplace to broaden its product range to include beauty, personal care items, household goods, and furniture.
However, experts including Gil Luria, head of technology research at D.A. Davidson, believe that companies like Shein may struggle to venture into essential consumer products.
Shein and Temu specialize in providing dresses, accessories, and gadgets ‘for which the consumer is less time-sensitive,’ Luria explained.
‘They’re not in the U.S., so they can’t quickly supply me with toothpaste,’ he added, noting that any marketplace shipping essential goods from China is likely to be small-scale.
Amazon is also facing competition from its domestic rivals.
Walmart, the world’s largest supermarket chain, along with the smaller retailer Target, has both lowered prices on essential items in a race to attract inflation-conscious consumers.
Walmart is expected to report a 4% increase in its third-quarter revenue on November 19, according to analysts surveyed by LSEG, a pace of growth slightly lower than that of the second quarter.
On Thursday, Amazon reported a 7% increase in retail sales for the third quarter, up from a 5% increase in the previous quarter.
The operating margin for Amazon’s international businesses rose from 0.9% in the second quarter to 3.6% in the third quarter, while the North American margin increased from 5.6% in the last quarter to 5.9%.