Amazon Primes the Third-Party Pump -- Heard on the Street
18 October 2020 - 12:59AM
Dow Jones News
By Dan Gallagher
With so much going its way already, one might wonder why
Amazon.com keeps bothering with Prime Day. The answer is that it
seems to have become a profitable endeavor.
That isn't so apparent on the face of it. Amazon has long used
major events to boost sales at the expense of the bottom line. And
Prime Day is replete with cut-rate deals for Prime members that
hardly seem profitable on their own. For instance, the latest
two-day affair that ended Oct. 14 featured price reductions of
nearly 25% on the mega-popular AirPods from Apple Inc. -- which
rarely, if ever, makes such cuts on its own.
Indeed, Amazon's North American and International retail
segments showed a combined operating loss for the quarter including
Prime Day for the first three years after Amazon created the
pseudo-holiday in 2015, even as other quarters were generally
profitable.
That has changed as the company's third-party business has
grown. Amazon recognizes only a portion of the revenue generated by
sales of its third-party merchants. But the margins on such revenue
are higher than on its own retail sales, as Amazon isn't bearing
the cost of purchasing the goods itself. And the recent Prime Day
seems to have been a big one for the third-party business. Amazon
said Prime Day sales from third-party merchants surpassed the $3.5
billion mark -- up nearly 60% from last year's event.
That still doesn't spell out the revenue Amazon will recognize
on those sales. A more accurate read on the effect of Prime Day
will likely come with the company's third-quarter results,
scheduled for Oct. 29. Those results will include a projection for
operating earnings for the fourth quarter that includes this year's
Prime Day.
Analysts are already forecasting a new revenue record of $5.9
billion, leading to a companywide operating margin of 5.3%. That
would be the highest operating margin Amazon has reported for its
fourth quarter since 2004, according to data from S&P Global
Market Intelligence.
Prime Day does carry some other risks for Amazon. The company
shifted the date this year from its usual place in July, due to
more pressing demands early in the pandemic. That could have the
effect of pulling forward some holiday-related sales.
Also, the downside to Amazon flexing its muscles now is that its
Prime program and third-party business are now under scrutiny from
lawmakers. A report from the Democratic staff of the House
Antitrust Subcommittee released earlier this month included several
bits of testimony from Amazon's third-party sellers who were
critical of the company's market power. It even included a quote
from a 2018 Morgan Stanley analyst report, describing the Prime
program as Amazon "fortifying an impenetrable moat around its
customers." At least Prime Day is no longer a loss leader.
Write to Dan Gallagher at dan.gallagher@wsj.com
(END) Dow Jones Newswires
October 17, 2020 09:44 ET (13:44 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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