Strategy Amazon is investing heavily in Prime overseas – but it has little to show for it so far (AMZN)

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Major investments in international markets ate away at much of the e-commerce giant’s revenue growth. While North America reported positive operating income for the quarter, Amazon’s international segment delivered losses of $724 million for Q2

Amazon Retail Revenue play

Amazon Retail Revenue

(BI Intelligence)
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Amazon reported its Q2 2017 results last week, with revenue increasing 25% year-over-year (YoY) to $38 billion, while profits fell 77% YoY to $197 million.

As usual, major investments in international markets ate away at much of the e-commerce giant’s revenue growth. While its North America and AWS segments each reported positive operating income for the quarter, Amazon’s international segment delivered losses of $724 million for Q2. The continuing losses overseas point to an increasingly vital issue for Amazon: Will these investments allow it to replicate its success in the North American market?

Amazon is investing heavily overseas to add more international Prime members, something it has struggled with so far. While Amazon didn’t break out specific numbers for each area, CFO Brian Olsavsky noted that the high spending overseas has been going into Prime benefits like Prime Video, Prime Now one- and two-hour delivery, AmazonFresh, and expanding its supply chain and fulfillment networks to offer more products and deliver them faster. However, Prime adoption is still low outside of the US — Morgan Stanley estimated that US residents made up 70% of Prime subscribers last year. Amazon’s continued spending shows that it is confident Prime will eventually unlock foreign markets like it has in the US.

Amazon still faces crucial challenges, though, in bringing Prime benefits to markets like India, China, and Southeast Asia:

  • To make Prime as enticing in these markets as it has been in the US, Amazon needs to build up its sourcing, supply chain, and fulfillment operations in these countries to execute fast delivery on an enormous assortment of items, Kevin Quigg, chief strategist at asset manager ACSI Funds, which counts Amazon as the top holding in its flagship fund, told BI Intelligence. For example, Amazon reported earlier this year that the number of items eligible for Prime delivery in India was at 2 million, a far cry from the 40 million items eligible for Prime delivery in the US.
  • Building out that network will be costly and time-consuming, and further complicated by outdated transportation infrastructure in places like India and Southeast Asia. However, Amazon doesn’t need to equal its US product assortment and delivery speeds to gain traction in these markets — it just needs to offer faster delivery on more items than its local competitors, Quigg pointed out.
  • Amazon will also need to put more effort into marketing its value proposition to catch up to bigger players like Flipkart in India or Alibaba in China, Luigi Ferguson, AVP of owned media at marketing intelligence firm Ansira, told BI Intelligence.
  • In addition, taking on other e-commerce heavyweights like Alibaba and JD.com will force Amazon to further differentiate its shopping experience, according to Ferguson. That will require leveraging data and speed to constantly improve its apps and online portals to ensure that customers can easily find the products, pricing, and delivery options they want, he said.

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