Even though India imposed lockdown only in the last week of March, the country had the “biggest impact internationally” on Amazon in Q1 2020, chief financial officer Brian Olsavsky said during an investors’ call. In India, the company is “in a bit of a holding pattern except for grocery”, he said. At the time of Amazon’s earnings call, e-commerce services in India were restricted to deliver only essential goods (grocery, pharmaceuticals etc.), and while they are now allowed to deliver non-essentials in certain areas, restrictions continue.
How Amazon reacted to meet a spike in demand of essentials: Starting in early March, Amazon experienced a surge in demand, particularly for household staples and other essential products around health, personal care, groceries and even home office supplies. There was lower demand for items such as apparel, shoes, and wireless products.
The demand spike posted “major challenges” in Amazon’s operations network, Olsavsky said. While Amazon is generally prepared to service demand spikes for foreseeable events such as the holiday season, “the COVID crisis allowed for no such preparation”. Amazon started doing temperature checks across its operations network, and “established rigorous safety and cleaning protocols, including maintaining six foot social distancing, procuring 100 million masks, tens of millions of gloves and wipes and other cleaning supplies,” he added. Amazon also hired an additional 175,000 new employees to meet the demand spike, temporarily raised wages and overtime premiums, and allowed employees to take unpaid time off at their discretion.
Amazon then reacted by taking steps to dampen demand for non-essential products, including reducing marketing costs on them. Its network “pivoted to shipping priority products within one to four days and extending promises on non-priority items”, and according to Olsavsky, the company increased its grocery delivery capacity by more than 60%. “A lot of our focus is on working around the clock and offering as much delivery as possible,” Olsavsky said.
Amazon said that even though it could meet the spike in demand for essential goods due to the Amazon Logistics (AMZL) network among other things, the bigger challenge was getting things in and out of its warehouses. However, this presented MFN (merchant fulfilled network) sellers on the platform an opportunity to ship directly to customers since their goods don’t have to go through Amazon’s warehouses.
In France particularly, where Amazon’s operations were restricted, it did not impact its Q1 revenue because its warehouses in the country were shut. However, Amazon was still able to service customers in France via Amazon’s selling partners who can ship directly to customers and through its Global Fulfilment Services.
Amazon will spend all of its Q2 earnings on COVID-expenses: While Amazon reported net sales of $75.5 billion, up 26% from last year, its operating income fell down to about $4 billion versus $4.4 billion in the same quarter a year ago. Amazon claims this was largely because it invested more than $600 million in COVID related costs in Q1. Amazon also incurred a cost of $400 million related to “increased reserves for doubtful accounts”, but at the same time, saw a drop in travel, entertainment and meeting costs. Going forward, Amazon expects to make $4 billion in operating profits in Q2, but CEO Jeff Bezos said that the company might have to spend the entirety of that $4 billion, and perhaps a bit more, on COVID-related expenses.
Amazon is developing COVID-testing capabilities. But why? There was an interesting cost that the company incurred in the quarter — it spent “hundreds of millions of dollars to develop COVID-19 testing capabilities”. When an investor asked why Amazon did not outsource this project, Olsavsky said that “testing will be about $300 million in Q2 if we’re successful”. “It’s not readily available on the scale that we needed to test our scale of employees”, Olsavksy claimed.
When asked if Amazon was seeing this as a potential business opportunity in the future, Olsavsky did not confirm or deny the speculation. “I don’t know”, he said, but then hinted: “Our main concern is getting testing in the hands of our employees and then potentially as we have excess capacity, perhaps we can help in other areas”.
Ad-revenue was a mixed bag: Even though Amazon’s other revenue (which primarily includes ad-revenue) grew 44% year-on-year to around $4 billion, the company saw pullback from advertisers and some downward pressure on price in March. But advertising growth rate remained consistent, and Olsavsky said that a large portion of Amazon’s advertising relates to Amazon sales, not things like travel and auto which “may have been disproportionately impacted at least early on here in the COVID crisis”.
For the first time, Prime Video viewers nearly doubled in March, Olsavksy said. A strategic decision Amazon took to capitalise on lockdowns, and closing down of film theatres, was to launch Prime Video Cinema in the US, UK and Germany. Amazon also made a lot of kids and family content available free to watch on Prime Video, Olsavksy said. Users with Prime subscription have availed several shopping benefits from the service, and often have “larger basket sizes”.
AWS has created a data lake to allow healthcare workers, researchers, scientists and public health officials to understand and fight the coronavirus. Several AWS products are being used by governments in their response to the crisis, and are there for customers who are seeing their own demand spikes, companies enabling video conferencing, remote learning and online health service.
User habits on Alexa: Lockdowns around the world has led to people listening to more music, asking questions, particularly questions related to COVID and issues around it on Alexa. “We’re seeing a lot more on the communication side using people using Alexa calling and drop in,” Olsavsky said.
Whole Foods: At its Whole Foods stores, Amazon added plexiglass barriers between cashiers and customers, and reserved special hours for senior customers to shop. It also expanded in store pickup at Whole Foods stores from 80 stores to more than 150 stores. More than half of units sold at Amazon’s stores came from third-party sellers. Growth of Amazon’s physical stores increased year-over-year at about 8%, predominantly due to Whole Foods’ in-store shopping.