Amazon profit issue

| September 12, 2018

You are a Marketing Manager, seeing a profit issue that can impact the business, you write a memo communicating with the company’s executives in a 300-400 words memo.

State the problem (15 points). Begin your memo with a statement of the main profit issue. Your problem statement should not be an exhaustive list of everything that is wrong. Rather, it should be the central issues around which all else are organized.

Analyze the problem (15 points). This is where you identify relevant facts from the case and apply a conceptual model to diagnose the problem. Analyze the problem you identified (and not some other problem). Organize the facts into a coherent whole as if you were presenting evidence to persuade a skeptic. Clearly state any assumptions that you’ve made. Provide evidence from the case to support your analysis: use quotes, numbers, and facts from the case or other sources. Analyze the problem using a conceptual model from the readings or lectures. Apply the conceptual model fully and explicitly. Cite your sources.

Draw a conclusion and provide specific recommendations for action (16 points). Provide the results of your analysis. What are your main conclusions? What should be done next? Some cases call for a specific decision or specific actions that need to be taken, while others do not. However, most cases at least call for an explanation of “what you would have done” in the situation. Provide specific recommendations that logically follow from your analysis of your problem statement.

Reference Page (2 points)

Guideline – see attached publication below or pick one on your own about the profit issue at Amazon.

Amazon’s Profit Jumps, but Sales Growth Disappoints

By Laura Stevens Feb. 2, 2017, Wall Street Journal

Amazon.com Inc.’s AMZN -0.08% revenue growth and investments have for years come at the expense of profit. Now, the retail giant appears to have exhibited more discipline to preserve its bottom line.

The Seattle-based retail giant on Thursday said fourth-quarter profit jumped 55% to $749 million, topping the company’s own guidance. On the other hand, revenue increased 22% to $43.7 billion, hitting the midpoint of Amazon’s target, and below analysts’ expectations.

“There’s always a number of things that can impact customer spending, both positively and negatively during any quarter,” said CFO Brian Olsavsky on a conference call. “What we do, is continue to focus on the things we can directly control: for us that’s price, selection, customer experience. And on those dimensions we felt we made great progress.”

Many retailers resorted to heavy promotions during the critical holiday season last year. As a result, traditional brick-and-mortar chains ranging from Target Corp. TGT -1.84% to Macy’s Inc. have warned on profits and reported disappointing sales.

Amazon said promotions—which Mr. Olsavsky called “a cost of doing business”—weren’t a major factor in fourth-quarter revenue.

Amazon’s stronger margins likely reflect more discipline in spending and fewer promotions at the expense of profit, as well as a larger percentage of sales stemming from its third-party sellers, analysts said. Those sales are nearly pure profit margin because Amazon doesn’t have to buy and hold the product itself. It also gets paid for items that sellers ship in for Amazon to fulfill.

The company has “plenty of runway to continue with the present investment cycle,” said Charlie O’Shea, lead retail analyst at Moody’s Investors Service.

Amazon’s stock was trading down more than 4% after-hours Thursday on disappointing fourth-quarter revenue and softer-than-expected guidance for the first quarter.

Amazon often has bucked retail trends by dominating online sales. It commanded an estimated 42% of total holiday online spending growth last year, according to Slice Intelligence, which analyzes customer receipts. Apple Inc. was second, accounting for 5% of holiday e-commerce growth.

Growth and investments have been Amazon’s priorities since it was a startup. In his first letter to shareholders in 1997, Chief Executive Jeff Bezos declared that his strategy for creating shareholder value prioritized customer and revenue growth “because we believe that scale is central to achieving the potential of our business model.”

But the Amazon’s streak of seven profitable quarters—with a big jump in the most recent period— may come under pressure as the company enters a heavier period of investment.

Last month, Amazon pledged to create 100,000 full-time jobs in the U.S. by mid-2018—a tip of the hat to President Donald Trump’s employment drive. That would require building many more warehouses, some of which have been planned or announced.

Moreover, the retail giant has started laying the groundwork for its own shipping business to add more delivery capacity for the holidays, with the grander ambition of one day hauling and delivering packages for itself, other retailers and consumers, according to people familiar with the matter.

Amazon this week announced it is building its first air cargo hub in Kentucky, a $1.5 billion project. It also recently made its debut in the ocean-freight sector, handling shipment of goods to its U.S. warehouses from Chinese merchants selling on its site. It is taking on a role it previously left to global freight-transportation companies.

Those investments come in addition to Amazon’s branching out into industries other than retail, including web services, smart-home devices and music and video content. It recently became the first tech company to receive an Academy Award nomination for Best Picture.

Amazon is reaping the rewards of one project it has plowed money into: Prime, its $99 annual membership program that includes perks such as free, two-day shipping, and music and video content.

Mr. Olsavsky, noting the tens of millions of customers who joined Prime last year, said, “We’re pleased with the results we’re seeing.”

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BUSINESS NEWS (Links to an external site.)Links to an external site.

FEBRUARY 1, 2018 / 1:11 PM / 6 MONTHS AGO

Amazon posts largest profit in its history on sales, tax boost

Jeffrey Dastin (Links to an external site.)Links to an external site., Aishwarya Venugopal (Links to an external site.)Links to an external site.

(Reuters) – Amazon.com Inc on Thursday reported a profit near $2 billion, the largest in its history, as the online retailer drew millions of new customers to its Prime fast-shipping club for the holiday season and as changes to U.S. tax law added to its bottom line.

Shares rose more than 6 percent in extended trading, after previously closing down 4 percent on the Nasdaq.

Seattle-based Amazon is using fast shipping, television shows exclusive to its website and forays into new technology, such as its voice-controlled Alexa devices, to attract high-spending Prime members. Amazon said price cuts at Whole Foods Market, which it acquired for $13.7 billion last year, are helping it win grocery sales, too.

The world’s largest online retailer said net income more than doubled to $1.86 billion, or $3.75 per share in the fourth quarter ended Dec. 31. Its profit received a provisional $789 million boost from the U.S. Republican tax bill passed in December. Analysts on average were expecting just $1.85 per share, according to Thomson Reuters I/B/E/S. (tmsnrt.rs/24gibla (Links to an external site.)Links to an external site.)

“This was another blow-out quarter for Amazon,” said GBH Insights analyst Daniel Ives. “The retail strength was eye-popping as the company had a banner holiday season and looked to capture roughly 50 percent of all e-commerce holiday season sales.”

As expected, the period running from before the U.S. Thanksgiving holiday through New Years was Amazon’s biggest-ever by revenue. Sales rose 38 percent to $60.5 billion in the quarter, beating estimates.

The company’s fast delivery, like its two-hour Prime Now service, has helped win over holiday shoppers eager to avoid the crowds of big box retailers. Prime saw more than 4 million sign-ups in one week alone last quarter, and revenue from subscription fees grew 49 percent to $3.2 billion, Amazon said.

That figure is expected to rise this quarter in part because the company recently raised the fee for month-to-month Prime plans, affecting some 30 percent of subscribers, according to analysts at Cowen & Co. Some 60 million, or close to half of all U.S. households, are estimated to have Prime subscriptions.

Advertising and other revenue rose 62 percent to $1.74 billion.

Brian Olsavsky, Amazon’s chief financial officer, said on a call with analysts that advertising was “a key contributor” to the company’s growing profit margin. Alphabet Inc’s Google on Thursday reported ad revenue of $27.2 billion by comparison.

Perhaps the surprise star of the past quarter was Amazon’s voice aide Alexa, embedded in the company’s Echo speakers and Fire TV players, as well as some cars and house gadgets. Millions of Amazon customers ordered goods by voice with Alexa in the past year, said Olsavsky on a separate call with reporters.

“Our 2017 projections for Alexa were very optimistic, and we far exceeded them,” added Jeff Bezos, Amazon’s founder and chief executive, in a statement. “We don’t see positive surprises of this magnitude very often — expect us to double down.”

HEAVY SPENDING

Amazon’s stock has outperformed the S&P 500, rising almost 50 percent since the start of the fourth quarter to Thursday’s close, compared with the S&P’s 12 percent rise.

Its shares trade at a premium to those of many peers. The stock’s price-to-earnings ratio is nearly 12 times that of cloud computing rival Microsoft Corp, for instance.

Amazon Web Services (AWS), which is dueling with Microsoft to handle data and computing for large enterprises, saw its profit margin expand from the third quarter.

This was a “sign of platform strength despite increasing competition,” said Baird Equity Research analyst Colin Sebastian in a research note.

AWS posted a 45 percent rise in sales to $5.1 billion.

Amazon said it expects operating profit in the current quarter of between $300 million and $1 billion. Analysts were expecting $1.5 billion, according to analytics firm FactSet.

Olsavsky, Amazon’s CFO, told reporters, “We’re still in heavy investment mode.”

The company has become notorious for running on a low profit margin. Yet its big bets on new services and entry into new industries have reaped shareholders rewards over the past decade, including its founder Bezos, now the richest man in the world.

Amazon continues to spend on a wide array of areas. It is expanding its retail footprint outside the United States, particularly in India, and almost doubled its international operating loss to $919 million in the fourth quarter. Amazon’s global headcount is up 66 percent from a year ago at 566,000 full-time and part-time employees, thanks to a hiring spree and an influx of workers from Whole Foods Market.

And earlier this week, it announced a partnership with JPMorgan Chase & Co and Berkshire Hathaway Inc to determine how to cut health costs for hundreds of thousands of their employees.

The company said it plans to spend more on video content this year as well, with a prequel television series to “The Lord of the Rings” in the works. Analysts estimate Amazon spent $4.5 billion or more in 2017.

“Revenue and margins vastly exceeded expectations, and cost control was impressive, so that’s what people are focused on,” said Wedbush Securities analyst Michael Pachter, adding, “It’s clear that they will spend a lot more in 2018.”

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