Amazon’s Revenue and Earnings Drop as Supply Chain Issues Continue To Slow Down Online Sales [Amazon Q3 Earnings Report]
The global supply chain crisis continues to be a thorn in the side of ecommerce businesses, and Amazon is no exception. The e-tail giant’s Q3 earnings report reveals how much all these supply chain disruptions have impacted its retail business and third-party seller ecosystem.
Related: Amazon Q2 Earnings: What Sellers Need to Know
Amazon Missed Both Top and Bottom Line Predictions for Q3
Amazon closed Q3 with dismal results, falling short of Wall Street estimates in terms of both revenue and profits. The biggest culprits are the raging supply chain crisis and the soaring sea freight costs that show no signs of slowing down. Another big factor is that customers are quickly becoming freer to shop in physical stores again as pandemic restrictions ease up. Its Q3 2021 figures are:
- Revenue: $110.8 billion vs. $111.81 billion expected, $96.15 billion Y/Y
- Earnings per share: $6.12 vs. $8.96 expected, $12.37 Y/Y
Not only that, Amazon’s financial guidance for Q4 2021 could put a lot of investors on edge, with CEO Andy Jassy expecting the company to incur “several billion dollars of additional costs” in Amazon’s consumer business to compensate for the major supply chain disruptions, labor shortage, and sky-high freight and shipping costs. Jassy justifies these expected costs as expensive in the short term, but reflects Amazon’s prioritization of customers and partners. CFO Brian Olsavsky also said Amazon expects to incur around $4 billion in costs related to labor and inflation, as well as productivity headwinds in warehouses.
A noteworthy coincidence to Amazon Web Services Founder (AWS) Andy Jassy succeeding Jeff Bezos as CEO just this year is that Amazon’s net service sales surpassed its net retail sales for the first time ever this quarter. Net product sales are at $54.9 billion, while net service sales, which includes AWS, advertising, third-party seller services, and Prime subscriptions, total $55.9 billion. CNBC also observes that Amazon would have recorded a loss for Q3 without the revenue growth in AWS which surpassed estimates and jumped 39%.
| Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020 | Q1 2021 | Q2 2021 | Q3 2021 | |
|---|---|---|---|---|---|---|---|
| Net Sales | $75.45B | $88.91B | $96.15B | $125.55B | $108.5B | $113.08B | $110.8B |
| Year-Over-Year Growth (exclusing F/X) | 27% | 41% | 36% | 42% | 41% | 24% | 15% |
| Net Retail Sales (North America) | $46.1B | $55.4B | $59.37B | $75.35B | $64.37B | $67.55B | $65.56B |
| Year-Over-Year Growth (excluding F/X) | 29% | 44%% | 39% | 40% | 39% | 21% | 10% |
| Net Retail Sales (International) | $19.1B | $22.67B | $25.17B | $37.47B | $30.65B | $30.7B | $29.15B |
| Year-Over-Year Growth (excluding F/X) | 20% | 41% | 33% | 50% | 50% | 26% | 15% |
The Q3 earnings report comes just as the entire ecommerce industry is gearing up for a huge holiday peak season.
Amazon’s New Product Liability Insurance Policies Could Be Good for Sellers In the Long Run
A key highlight for Amazon during Q3 of 2021 is its introduction (or rather, re-introduction, as these policies have actually been in place for a while) of product liability insurance requirements for third-party sellers on the marketplace.
The earnings report claims that Amazon is, as of writing, the first and only ecommerce marketplace that protects customers in third-party product liability cases.
For sellers, this means that Amazon will shoulder customer claims of up to $1,000 as long as they work with an insurance provider under Amazon Insurance Accelerator or with policy providers that comply with Amazon's requirements. In other words, Amazon is seeking to impose a long-standing rule that third-party sellers must secure product liability insurance over the items they sell on the platform, supposedly in the interest of consumers.
Amazon Has Doubled Its Fulfillment Network During the Pandemic
Amazon has begun operations at its ‘state-of-the-art’ Northern Kentucky air cargo hub, which will serve as the company’s primary hub for air cargo and will more than likely enable Amazon to ship millions of customer packages weekly without relying on staple logistics providers like FedEx and UPS.
Reinvesting previous earnings cycles into its core businesses is obviously nothing new for Amazon, but its recent investments in its fulfillment network amid the global supply chain crunch has roughly doubled its whole logistics infrastructure.
According to CNBC, Amazon has grown in shipping capacity by over 50% year over year. Much of this is Amazon trying to be a seller, a marketplace, and a logistics company all at once, despite facing constant antitrust pressure from regulators. On the flip side, some local governments have incentivized Amazon in the form of tax breaks to expand its fulfillment networks in certain areas in order to generate jobs and get local economies back up and running coming out of the pandemic.
As of writing, Amazon’s fulfillment network consists of over 400,000 drivers, 40,000 trucks, and a fleet of over 70 cargo airplanes.
Sellers could end up relying more on Amazon down the road if prices are competitive enough. Even ecommerce sellers who are not actually selling on Amazon have had some of their orders fulfilled by Amazon and delivered in Amazon boxes—to the surprise and confusion of customers.
Amazon’s Advertising Revenue Growth Slowed Down
The company’s ‘Other‘ business metric, which includes for the most part its sales in advertising services, was up 50% year-over-year, which is still a huge increase, but not as astronomical as the over 80% increase from Q2 2020 and Q2 2021.
| Q2 2020 | Q3 2020 | Q4 2020 | Q1 2021 | Q2 2021 | Q3 2021 | |
|---|---|---|---|---|---|---|
| Net Sales (Other) | $4.2B | $5.4B | $7.95B | $6.9B | $7.9B | $8.09B |
| Year-Over-Year Growth | 41% | 49% | 64% | 73% | 83% | 49% |
During the Q3 earnings call, Amazon CFO Brian Olsavsky says the company is still seeing strong growth in ad revenue, but points out the Prime Day is what drives a lot of the ad spend from sellers. Recall that Prime Day was rescheduled to June (Q2) this year, which seems to have worked out for Amazon as it was considered the biggest iteration yet.
Third-Party Sellers Take Up More of Amazon's Consumer Business
Amazon's Small Business Empowerment Report revealed that third-party sellers now account for 60% of Amazon’s overall retail sales, with sales from third-party seller services, which includes commissions, related fulfillment and shipping fees, and other seller services, is up 19% year-over-year.
Incidentally, Amazon unveiled a slew of new seller tools to highlight its investments in small and medium businesses using Amazon's store. During the annual Amazon Accelerate conference, Amazon announced Product Opportunity Explorer, which is its version of Jungle Scout and Helium 10’s product research tools that’s based on real customer search data instead of keyword estimates.
A couple other new features include Local Selling, which allows sellers to provide in-store pickup and fast delivery to nearby customers, and Global Selling, which promises to make it easier for US sellers to offer their products through Amazon abroad.
The earnings report also highlighted the Black Business Accelerator Connect tailored to help African American entrepreneurs succeed on the platform, as well as Amazon Community Lending, a service wherein US-based sellers can access short-term loans of up to $100,000.
Final Thoughts
A full breakdown of Amazon’s Q3 earnings report can be found on their website. With dismal results for Q3, Amazon shoring up its logistics capability and third-party seller ecosystem could be a no-brainer at this point, especially as the whole of ecommerce comes out of the pandemic surge.
Its Q4 earnings report might reveal how well these investments paid off for Amazon and how much it will have benefited ecommerce sellers.
