A Deeper Look Into Amazon’s Q4 Results: 4 Key Themes for Brands
Amazon reported its fourth quarter 2021 financial results last week, with its better-than-expected profits garnering a positive reaction from the media and Wall Street (despite sales growth decelerating versus prior quarters). As the dust settles, we’re pulling out four key themes that matter most to brands …
1 - Sales growth in the retail business continues to slow as Amazon moves further away from pandemic-driven activity
While Amazon’s retail business is still growing year-over-year, the growth has been decelerating over the last few quarters as the company laps record-level growth and adoption in ecommerce that was brought on by the COVID-19 pandemic. The year-over-year comparison was especially tough this quarter as Amazon did not hold Prime Day in the fourth quarter, as it did in 2020.
Excluding AWS and Other revenue, the business grew 6%, with the Advertising business being the relative bright spot (32% growth). Physical Stores (primarily Whole Foods) and Subscription Services (Prime memberships and the like) posted growth in the mid-teens, and the 3P business saw growth of 11%.
On a two-year basis, the total business grew 25% in 4Q21, which was consistent with Q3. This suggests the underlying fundamentals of the business are still strong after stripping out the COVID-19 variability.
Bottom line for brands: A deceleration in year-over-year growth rates for Amazon and your other key ecommerce accounts is natural as you lap pandemic-driven growth rates. While tough comparables and an enormous base of business is resulting in a slowdown in year-over-year growth for Amazon, the underlying business remains strong and the outlook remains positive.
2 - Management shared optimism on an improving supply chain environment
Amazon faced a number of constraints across the supply chain during the fourth quarter, with labor being the most significant. The company hired a net 140,000 new employees in the quarter, missing its goal of 150,000. New hires totaled 273,000 in the second half of 2021, significantly lower than the 400,000+ of the same time period in 2020.
Due to the limited access to labor, Amazon incurred over $4 billion in costs in labor-related inflationary pressures and less efficient operations. The $4 billion also includes some inflationary pressures on external transportation.
As we move through the first quarter, management shared that the COVID-19 Omicron variant is the key labor challenge right now. Otherwise, the company expects labor and broader supply chain constraints to improve throughout the year, and does not expect major product availability issues in the first quarter.
Bottom line for brands: While broad supply chain challenges still linger today, Amazon and brands are likely to feel more relief compared to 2H21 as we move through the first quarter and rest of the year.
3 - Profit came in well above Wall Street’s expectations and management’s guidance
Amazon offset its slowing sales growth by delivering better-than-expected earnings, which helped to fuel the positive reaction post-earnings. We see a few important, big picture dynamics to unpack here.
First, moderating sales growth paired with outperformance on profit is illustrative of Amazon becoming a more mature company compared to the high-growth profile the company has been able to hold on to for so long. In the past, this high-growth profile allowed Amazon to focus on the top line and invest heavily into the business, as profit pressures from Wall Street were less severe. This was a bit unique for Amazon and served as a competitive advantage compared to its more mature, publicly traded competitors like Walmart, which has had to more carefully balance its margin performance. As we see Amazon becoming a more mature company in the eyes of Wall Street, that competitive advantage likely becomes more muted over time.
However, it’s interesting to note that the earnings beat was primarily driven by stronger-than-expected growth in Amazon’s AWS cloud business (nearly 40% growth), along with a profit gain on its Rivian investment, an electric vehicle company. While Amazon may be becoming more profit-focused, it has the ability to rely on high-margin business units (namely AWS and Advertising) outside of its core retail operations. This allows Amazon to hold on to that competitive advantage to a certain extent versus its competitors who are more narrowly focused on retail. This also helps explain why so many of Amazon’s competitors are working fast and furious to launch high-margin advertising businesses of their own.
Bottom line for brands: Amazon likely maintains a high-level focus on profit, which brands can feel in a number of ways. For 1P vendors, this often includes item-level profitability implications, increased funding asks, and more. 3P brands tend to be relatively immune from real-time profit pushes from Amazon. Brands can also expect Amazon and other retailers to continue to encourage greater advertising spend to help drive their margin gains.
4 - Amazon Advertising is seen as a bright spot in the quarter and for the future
Amazon grew its Advertising business 32% in Q4. This was a significant deceleration versus 3Q21, but growth rates were challenged by the Prime Day shift outside of the fourth quarter this year. And still, this represents one of Amazon’s fastest-growing business units, along with AWS.
This was the first quarter the company broke out Advertising revenue into its own segment, suggesting the business has grown in enough size and importance to be a meaningful part of the overall business now. Revenue was close to $10 billion for the quarter and the business received a lot of attention on the Q4 conference call, with management reiterating a focus on expanding and improving its advertising offering, particularly around tool usability and better analytics and measurement for advertisers.
Bottom line for brands: Amazon remains focused on building a more powerful advertising platform, which brands will benefit from. Although competition heats up across the retail media space, Amazon’s significant head start and continued investment likely means it will remain one of the top platforms brands will turn to with their retail media dollars.
WRITTEN BY CLAIRE MCBRIDEClaire McBride leads Research, Insights and Education for Netrush. Claire’s entire career has been centered in the consumer and retail space, spending the last five years helping brands grow and optimize their ecommerce businesses through written research, events, share group discussions and one-on-one consulting.
