As demand jumps – Amazon investors told to ‘take a seat’

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Amazon delivery worker in mask and gloves

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Amazon sales surged in the first three months of the year, as the coronavirus lockdown boosted demand for the firm’s groceries, online marketplace, and cloud computing services.

Sales in the quarter jumped 26% year-on-year and the firm said they could rise another 28% in the next.

But the demand has strained the internet giant.

It said it would spend roughly $4bn (£3.2bn) on coronavirus measures through June.

Those costs reflect increased worker pay, purchases of masks and other protective gear, expenses related to cleaning, and less efficient warehouses, as the firm implements social distancing measures.

“The current crisis is demonstrating the adaptability and durability of Amazon’s business as never before, but it’s also the hardest time we’ve ever faced,” said Amazon boss Jeff Bezos.

“If you’re a shareowner in Amazon, you may want to take a seat because we’re not thinking small,” he said.

“I’m confident that our long term-oriented shareowners will understand and embrace our approach.”

Amazon, with its dominance in e-commerce, video streaming, and cloud computing services, plus its acquisition of the Whole Foods supermarket chain, is well poised to benefit from the changes to consumer habits forced by the pandemic.

The online giant reported gains across the company. The e-commerce business rose 24%, while sales at its cloud computing division, Amazon Web Services – a significant profit driver – jumped 33%. Even its advertising unit fared well. And at Whole Foods, which Amazon purchased in 2017, sales climbed about 8%.

That performance presents a sharp contrast to many other companies, which are reeling amid forced closures and plunging consumer spending as economists forecast the world’s sharpest slowdown since the 1930s.

“It shouldn’t come as a shock to anyone,” said Forrester Research retail analyst Sucharita Kodali. “A lot of physical stores around the world were closed and that drives a lot of people online and they are a huge beneficiary of online.”

From a customer perspective, Ms. Kodali said Amazon’s performance has been somewhat lacking, with slower shipping times and many items out of stock. Its brand has also taken a beating, as workers around the world complain of inadequate safety precautions.

Despite those issues, Ms. Kodali said she expected the firm to maintain its advantage over the long term, as rivals suffering losses due to closures are prevented from making investments that would help them compete.

“All signs point toward Amazon continuing to win – not because of anything that Amazon has done, but because of what the others can’t do,” she said.

Increased costs

Amazon has scrambled to adjust its operations in reaction to the coronavirus risks. The company has hired 175,000 people in its fulfillment and delivery network and nearly doubled the Whole Foods stores that offer pick-up services.

On Thursday, the firm said it had purchased 100 million face masks and 31,000 thermometers, which it is using for daily temperature checks.

But the firm’s expenses have shot up, with shipping costs alone surging 49% to nearly $11bn.

This weighed on the firm’s profits, which fell 29% from a year earlier to $2.5bn, lower than analysts had expected.

Shares, which have surged more than 30% this year, slumped in after-hours trade.

But the firm will be able to benefit long term from shifts happening now, like increased online grocery shopping, said Andrew Lipsman, principal analyst at eMarketer,

“It would be very short-term thinking to just look at what happens in this quarter alone,” he said.

Despite the economic weakness, Amazon’s sales are relatively “immunized” from declines, for now, he added.

“If we come out of this in a deep recession and people can get back to normal in terms of bricks and mortar buying, then that’s when Amazon like everyone else, will take a hit,” he said.

Credit: BBC News – Business

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