The Daily: Amazon morphs into more than just an online retail giant

On today’s podcast episode, we discuss what’s fueling Amazons online shopping revenue, how much its advertising business is contributing to its total revenue, and how significant its cloud business has become. Tune in to the discussion with Senior Director of Podcasts and host Marcus Johnson, Senior Director of Briefings Jeremy Goldman, and Analyst Rachel Wolff.

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Episode Transcript:

Marcus Johnson (00:00):

If you would like to, you can partner with eMarketer on data-driven marketing materials. Why? I'll explain. Our custom reports give eMarketer Media Solutions clients the opportunity to generate new category insights through original surveys and analysis. That's why. If you'd like to learn more, you can head to emarketer.com/advertise, it's all there.

Rachel Wolff (00:22):

For Amazon, the reason that they're going all in on delivery speed is because they have these ambitions to be a bigger player in the grocery space, for example. And that's something that requires speed, and that's why it's so notable that they're seeing all this growth in their essentials business because these are things that people order regularly.

Marcus Johnson (00:45):

Hey gang, it's Monday, November 18th. Rachel, Jeremy and listeners, welcome to Behind the Numbers Daily, an eMarketer podcast. I'm Marcus, today I'm joined by two folks. We have with us our analyst who writes for our retail and e-commerce briefing based in New York. It's Rachel Wolf.

Rachel Wolff (01:02):

Thanks for having me back.

Marcus Johnson (01:03):

Of course, of course. We're also joined alongside her today, both in the studio, by our senior director of everything briefings, who also resides in New York City. It's Jeremy Goldman.

Jeremy Goldman (01:14):

Pleasure to be with you, as always.

Marcus Johnson (01:16):

Hello fella. We start with the fact of the day. The foreign-born share of the US population, those not born in America but living here, is the same today as it was in 1910 over 100 years ago. So according to the US Census Bureau, 15.6% of the US population was born outside of the country. That's almost exactly the same share of folks, 15%, who were born outside the country in 1910. So what happened in between? From 1910 to 1970, the foreign born share fell from 15% to 5, and then from 1970 onwards it started to climb going from 5% back to the 15.6% it's at today. So why did this happen? Why did it go up over the last 50 years? Significantly influenced by the 1965 Immigration and Nationality Act, which prioritized family reunification, skilled labor, and a more diverse pool of applicants. And America's strong labor market continues to attract immigrants with wages as much as 10 times higher than those in Latin American countries, which is the primary source of new arrivals to the country. That was an article from Dorothy Neufeld in Visual Capitalist. Staggering to see 114 years, still the same share as it once was. Anyway, today's real topic, Amazon becomes more dynamic than ever before.

(02:55):

All right folks, today we're talking about Amazon. We'll look at all the various different parts of their business. We'll touch on the cloud bit, the retail bit, the advertising bits, some other bits as well. But let's start with top line, Amazon made $159 billion in Q3. That's about as much money as AT&T's market cap. They made that in three months, July, August and September. To get there, it grew 11% in the quarter, a few points below last Q3. Online store sales, Amazon's largest line item accounts for about 39% of its money, grew just over 7%. Rachel has put together a pie chart for us of reasons, three max, why Amazon was able to grow online store sales, its biggest slice of its money. Why it was able to grow at 7% in the quarter.

Rachel Wolff (03:51):

So for me the biggest slice of the pie, and we're talking two thirds here, is Prime Day. It was a Prime Day quarter, they had a record Prime Day. These kinds of sales are resonating really strongly with price conscious consumers, many of whom are specifically waiting for these July sales to start spending, and it's driving every part of their business. It's driving Prime subscriptions, which they said accelerated in the months leading up to the sale. It's also driving ad revenues as sellers try to get in front of shoppers. And Amazon has been able to dominate in that way because of Prime Day.

Marcus Johnson (04:27):

Mm-hmm. Yeah. Prime Day, I think you might've written about this. One of you did. Prime Day, which was mid-July, so Q3, saw a record over $14 billion in sales, up 11% year-on-year according to Adobe Analytics. But Rachel, you made this point in the piece, it's not just Prime Day that's fueled sales this year. I mean Prime Day is in Q3, so that helps Q3's numbers. But you were saying that so far this year Amazon has held at least 10 separate sales events, some for Prime members only and others open to all shoppers. I had no idea it was that many. But they're starting to notice, or have been for years now, that you put an event in there, the sales spike. And it seems like they're doing that throughout the year now, not just in July, and obviously the one in October, which is a couple of years old.

Rachel Wolff (05:12):

Yeah, they've taken a really interesting tactic with the sales. They're not just going for these big tent pole events like the October sale or the July sale, but they're also going after niches like beauty. They've had two separate beauty sales this year. They've had a sort of back to school sale, they've had an electronic sale. So all of these sales are helping to establish Amazon as the place to go if you're looking for a deal on any category, more or less.

Marcus Johnson (05:39):

Mm-hmm.

Rachel Wolff (05:39):

And that's really resonating given that people are trying to watch how much they spend.

Marcus Johnson (05:44):

Yeah.

Jeremy Goldman (05:44):

It's true. By the way, it's such a good point where you're creating category awareness to some degree when you're doing that. You're also making competitors, just from a competition standpoint, you're forcing their hand. Like their strategy is reactive to you instead of the other way around, and I think that's really valuable to them as a company.

Marcus Johnson (06:04):

Yeah.

Rachel Wolff (06:04):

But it's an interesting question as to whether having so many sales actually cannibalizes some spending from some of the event. So I saw after Amazon's beauty sale, a lot of brands were saying that they just didn't feel like they wanted to put the resources behind it because they had just spent a lot on promoting their Prime Day.

Marcus Johnson (06:22):

Yeah.

Rachel Wolff (06:22):

So I think it's also a question for Amazon of how do you refine the strategy going forward so that maybe you don't have back to back sales events.

Marcus Johnson (06:30):

Yeah. So before we get to the final third of the pie, the reason why Amazon was able to do so well on online store sales... I think you noted this, that their October Prime Big Deals Days, most of the shoppers on that day, I think three quarters, they're shopping not for the holidays. They're shopping just to get ordinary for themselves goods. Some, 25%, are buying holiday things, but most people aren't. A lot of people see that, or it seems like Amazon was hoping that would be they're going to kick off to the holiday sales, and it hasn't quite been. Do you think Amazon puts in another shopping holiday somewhere, November 1st perhaps, to try to make that the very, very beginning of the true holiday sales period?

Rachel Wolff (07:13):

I don't think that they need to necessarily, because people now are expecting an October sale. And they can capture some of that spending earlier on in the season, or they can wait until Black Friday and Cyber Monday where they're also going to have huge sales and they know that people are going to be shopping during those days.

Marcus Johnson (07:29):

Yeah.

Rachel Wolff (07:30):

It's possible that they might, I think given the complaints around the beauty sale for example, they might want to have a little bit of a gap between some of their events.

Marcus Johnson (07:39):

Yeah.

Jeremy Goldman (07:39):

Yeah.

Marcus Johnson (07:40):

Let's move to that final third then, Rachel. You said two thirds was Prime Day boost to Q3, but what was the final third?

Rachel Wolff (07:46):

So I've split this up in two ways. So 1/6 I guess we're talking here is delivery speed. And we talk about this quarter after quarter with Amazon, but they just keep making improvements, they keep making more items available for same or next day delivery, and it's really paying off for them. Their everyday essentials business, so we're talking health, personal care, beauty, plus non-perishable grocery items, that's growing 50% faster than the rest of its retail business. And that's because of the improvements that it's made in delivery speed, because it's just more convenient now to order these items online from Amazon than it is to go into a pharmacy and be confronted with a locked case and wait hours for somebody to try and unlock it. You can get it in two hours from Amazon.

Marcus Johnson (08:34):

Yeah. And the final 1/6?

Rachel Wolff (08:36):

The final 1/6 kind of relates to what we were talking about with sales, but they've made a big push for value. So in addition to the sales, they've been adding more Prime benefits, they now have a fuel benefit. So our back of the envelope math says that could result in almost $68 in savings a year, which is roughly half the cost of a Prime membership. So that's a huge benefit.

Marcus Johnson (08:57):

Mm-hmm.

Jeremy Goldman (08:58):

And then also that winds up fueling, no pun... Maybe subconsciously pun meant.

Marcus Johnson (09:04):

Well played.

Jeremy Goldman (09:04):

But it's the kind of thing that then let's just say empowers their advertising engine to grow is getting more and more Prime members. So it's a nice little virtuous cycle that they've got going on.

Marcus Johnson (09:19):

Yeah. To go back to the speed for a second, the delivery speed, it's interesting because people if you look at the consumer surveys, they're saying, "I don't need the thing faster, necessarily". People will say, "I'll take a discount and get the thing in a few days", because outside of the holiday period, and sometimes even then, people don't need the thing yesterday or in two seconds. They're happy to say, "Look, if you take 2%, 5%, whatever off the top, I can wait a week for the thing". But it doesn't seem as though Amazon is responding to that. And I wonder if it's a bit kind of like, was it Henry Ford who said, "If I asked consumer what they wanted, they would've said a faster horse", as opposed to the car that he developed. And Steve Jobs saying, "People don't don't know what they want until you show them". Is it kind seem a bit like Amazon isn't really paying attention to the consumer in that regard, and they're saying, "Look, people are obsessed with convenience and we're just going to get them the things as fast as possible because that's going to be what drives sales the most"?

Rachel Wolff (10:15):

I think that's part of it, yet there is a difference between what people say and what people actually want.

Marcus Johnson (10:20):

Mm-hmm.

Rachel Wolff (10:21):

But I think for Amazon, the reason that they're going all in on delivery speed is because they have these ambitions to be a bigger player in the grocery space, for example.

Marcus Johnson (10:21):

Good point.

Rachel Wolff (10:29):

And that's something that requires speed.

Marcus Johnson (10:29):

Yep.

Rachel Wolff (10:32):

And that's why it's so notable that they're seeing all this growth in their essentials business, because these are things that people order regularly. And if they want convenience, then Amazon is the one that's able to provide it to them.

Marcus Johnson (10:44):

Yeah. All right. So at this point, Rachel, what do you think is the biggest threat to Amazon's online shopping business?

Rachel Wolff (10:52):

So I think there are two threats. One, I'm just going to talk about briefly, and that's the regulatory threat. There is still an FTC antitrust suit that the company has failed to get thrown out, and that could have a pretty severe impact on the way that they're able to operate. Particularly if they have to open up their marketplace to allow sellers to use alternate fulfillment options, or give them more freedom to adjust prices on other marketplaces.

Jeremy Goldman (11:18):

I think it's worth mentioning that even though we're expecting a more free market, let's say kind of a less regulatory environment over the next four years, doesn't mean necessarily that every company... Like there are some that are going to be reined in, and obviously there are a number of different things that are weighing against the prospects of Amazon not being curtailed in some fashion. In part, not necessarily thinking that the Trump administration is going to be the most pro-Amazon, even if it is very pro-business.

Marcus Johnson (11:54):

Yeah. Yep.

Rachel Wolff (11:55):

So the other big threat that I see is Temu. And Temu is doing fantastically well with consumers, again, just because people love cheap stuff. And in Temu's case, they are willing to a certain extent to forgo faster shipping if it means paying $2 for a t-shirt and things like that. But the other threat is really to Amazon's sellers. So Temu is wooing Amazon sellers with the promise of lower seller fees, but in order to do that these merchants have to promise to price their products up to 15% less than on Amazon. So if you can buy the same product for 15% less on Temu, then that's a huge threat to Amazon, not only in terms of how much money it can make from seller fees, but also its appeal overall to shoppers.

Marcus Johnson (12:45):

Yeah, yeah. A platform coming with its own set of conditions. So 7% growth in the quarter for online store sales from Amazon, it's the same as they had in Q3 in 2023. So keeping up that growth. As I said, it's 40% of Amazon's business basically is online store sales. The next biggest slice is third party seller services, about 24% of the pie, that grew 10% which is pretty decent. Then you go down to AWS, it's a 17% slice of the business. Quick honorary mention for Amazon's impressive cloud business. Now accounting for, as I mentioned, 17% of Amazon's total revenue, is growing faster and faster each of the last six straight quarters. So from 12% to 13 to 17, it's just kept growing faster and faster and reaching 19% this quarter. So incredibly impressive. And then you get to advertising services, Jeremy, which is now 9% of Amazon's business. It grew ad revenue 19% in Q3, it's down from 26% same period a year ago, but still impressive. You have a pie chart for us of reasons, three max, why Amazon was able to grow that ad revenue 19% in the quarter.

Jeremy Goldman (13:58):

Okay. So I would really say that, and again this might be a little bit boring, but two thirds of it is the compelling necessity of retail media. The need for... We were just talking about the third party sellers. A lot of them feel that in order to build and establish a name for themselves on Amazon, you really have to double down on this type of spend. They also did well, it should be noted, of course like you had another Prime Day. Another Prime... What was this one? Prime Big Deal?

Rachel Wolff (14:29):

Prime Big Deals-

Jeremy Goldman (14:30):

Big Deals?

Rachel Wolff (14:31):

Big Deal Days.

Jeremy Goldman (14:32):

Yeah. And they didn't have any problems with their advertising portal like they have had in previous quarters and previous events. So obviously these are major moments for advertisers to say, "We can get a little bit of mind share with the consumer and we can spend more on supporting our brand". And then the hope is that you can pull back that spend if you're a third party seller. And whether or not you actually can, that's another story. But I think really retail media has been the ongoing engine that keeps on giving.

Marcus Johnson (15:05):

And I mean more broadly retail media is growing at such an incredible pace. I think it's, off the top of my head, over 20% growth on $55 billion this year alone. So yeah, Amazon, the biggest beneficiary of that space and the growth that we're seeing from that. That's two thirds. What does the rest of the pie look like?

Jeremy Goldman (15:25):

I would actually probably say I'm going to do a 23% share to their rising strength in video ads tied to Prime video and the advertising supported tier. I think first off, looking ahead, that has a lot of fertile room to grow, especially given the fact that Amazon just more or less announced last week that they were shuttering Freevee, which is a big deal because to them you could say that's not that many viewers, but it's actually one of the biggest services of its kind in the US. And it had had a number of different issues, but still all of those Freevee people now using Prime Video means that that's going to be great for them in quarters ahead. You're going to be able to convert some of those people over to a true Prime membership, which is going to be great for the e-commerce business. So ultimately, why does this matter? Well, you can sell to a lot of different people and non-endemic advertisers who were not selling directly with Amazon, but who believe that they can get mind share and effective CPMs. Amazon's launch of Prime Video has lowered CPMs for the whole industry for all these other players because Amazon wants to make... Basically, they would like to hook you ideally if you're an advertiser, and then get you to spend more in years to come.

Marcus Johnson (16:51):

Your colleague, our colleague, Daniel Konstantinovic writing the Amazon plan to increase Prime Video ad loads next year as well. So definitely something to pay close attention to going forward. What does that leave us with? 10?

Jeremy Goldman (17:02):

It leaves us with 10%. Yeah. I don't have Excel handy, but I think it's 10% left.

Marcus Johnson (17:02):

Excel flex.

Jeremy Goldman (17:10):

Two other things I want to shout out that I'll kind of put in the same bucket, which is AI innovation and ad format innovation. They're leaning hard into new ad formats, new ways that you can create and stand up interesting creative. And yes, this is something that all the other major big tech players are doing, but I think they're all really trying and Amazon's done a good job at making it more seamless to put up an ad if you're a new buyer. Finding new different formats that they can experiment with. And the proof is in the pudding in terms of they're getting more and more upfront commitments to advertising, both within the Prime Video within the digital video ecosystem, but also these major buys. Because there are some I/O related deals that still get done that are not programmatic, and you want to ideally sell a whole lot of that space on your site as well as off of it. And that innovation is allowing them to not just sell more now, but really in the quarters ahead.

Marcus Johnson (18:16):

Mm-hmm. Yeah. Amazon's advertising line item, as I mentioned now, accounts for 9% of its revenue. Put another way, that's about as much money as Amazon makes from brick and mortar sales and its subscription business as well, which is mostly Prime. But yeah, it's more than those two.

Jeremy Goldman (18:31):

And also think about the margins, right? I mean brick and mortar, that's a whole lot more of a headache associated with that.

Marcus Johnson (18:40):

Yeah, absolutely. Grade time. Rachel, we'll start with you. What grade would you give Amazon for their Q3 performance?

Rachel Wolff (18:48):

I would give them an A+. It was a strong quarter.

Marcus Johnson (18:50):

Whoa.

Rachel Wolff (18:51):

They pretty much fired on all cylinders.

Marcus Johnson (18:53):

Okay. Jeremy?

Jeremy Goldman (18:56):

I'd say probably A-.

Marcus Johnson (18:57):

Ooh.

Jeremy Goldman (18:58):

I don't know if I can be the A+, it's like we need room for improvement Rachel.

Marcus Johnson (18:58):

There is none, says Rachel.

Jeremy Goldman (19:03):

Like do you think that they could... But I definitely see where you're coming from, because I mean they're hitting... Obviously it's very difficult to grow at the clip that they're growing, considering how big they are at this point. Right?

Marcus Johnson (19:03):

Yeah.

Jeremy Goldman (19:16):

So I think you have to factor that in as well, for sure.

Marcus Johnson (19:20):

Yeah. $159 billion made in the quarter. All right. That gives us a consensus. A for Amazon for their Q3. We'll see what Q4 looks like down the road. That's all we've got time for today's episode. Thank you so much to my guests. Thank you to Rachel.

Rachel Wolff (19:36):

Thanks for having me.

Marcus Johnson (19:37):

Yes indeed. Thank you to Jeremy.

Jeremy Goldman (19:38):

This was fun. Thank you.

Marcus Johnson (19:40):

Absolutely. Thank you to Victoria who edits the show. Stuart runs the team. Sophie does our social media. Thanks to everyone for listening in. We of course hope to see you tomorrow if you have time to hang out with us for the Behind the Numbers Daily, an eMarketer podcast.