Amazon Demolishes Q1 Forecasts - Modern Distribution Management

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Amazon Demolishes Q1 Forecasts

Amazon Business Still Under Radar

Amazon’s first-quarter 2018 results were spectacular, even by the company’s impressive historical growth standards: sales grew 43 percent over the 2017 first quarter results to $51 billion. (See detailed 1Q financials here.) Operating income grew 92% to $1.9 billion. This performance will extend Jeff Bezos’ lead as the world’s richest person and Amazon will close in on becoming the world’s first company to achieve a valuation of $1 trillion. By comparison, according to the International Monetary Fund, only 16 of the world’s 192 nations have a GDP over $1 trillion.

If your reaction to that is, “Wow, an operating margin of less than 4 percent isn’t very good,” then you’re missing the point in a big way. Amazon’s amazing and relentless growth allows for a lot of forgiveness in margin performance when it comes to generating a good return on equity. If you don’t believe it, watch what happens to Amazon’s stock today. Hint: it’s going to soar.

Having reviewed Amazon’s earnings press release, investor slide deck and then listened to the company’s earnings call, I can tell you that the company did not say one word about the performance of Amazon Business. While it’s easy to conjecture that they have a strategy to keep the results of this business unit quiet for competitive reasons, what’s more likely is that Amazon doesn’t disclose its performance simply because it’s not material to the company’s overall results – yet.


All Quiet on the AB Front

About two years ago, Amazon announced that Amazon Business had achieved $1 billion in sales from 400,000 customers in its first year. I can’t find subsequent data from the company stating what Amazon Business has done since then, but let’s assume its growth exploded and it’s now on a $10-billion run rate for 2018 – which may be low, for all I know.

If Amazon’s total full-year growth paces its first-quarter 2018 results, it will end the year with about $250 billion in total revenues. Amazon Business’ hypothetical $10-billion segment contribution would be 4 percent of its total sales. That would make it one of the largest distributors in the U.S.; in the context of Amazon’s total sales, it’s a segment that’s too small to report.

It looks like we’ll have to wait a while before we know how Amazon Business is performing unless the company decides to release the information on its own. It’s safest to assume the best (from Amazon’s perspective) or the worst (from its competitors’ point of view) and plan accordingly.

So, what should distributors do in response? My recommendation is to be like Amazon – not so much in terms of matching their capabilities, which no company can do – but in terms of matching their obsession with meeting customer needs. (For a deeper strategic evaluation of Amazon Business, download MDM’s special report: Your Amazon Business Playbook)

I spoke with an industry analyst a couple of days ago who has had some exposure to Amazon’s senior leadership. He commented that Amazon does very little competitive analysis. But they are absolutely obsessed with the “customer experience.” They know exactly what it’s like for customers to buy from them. They constantly work to improve this experience so that customers increasingly prefer the company to alternative sellers over time.

How well do you understand what it’s like to buy from your company? I worked for a great distribution company president one time who used to show up unannounced at branches. On one memorable visit, he waited with a group of customers until the branch manager showed up 20 minutes late to open the doors. Pretty soon, the whole network knew the story and we didn’t have branches opening late very often after that.

How often do you buy on your own website? I once interviewed for a VP Marketing job at a large distribution company. As I sat with the senior executive team, I told them I had ordered from their website a week before. “How did you like the experience?” the CEO asked.

“It was great,” I answered. “You sell batteries in packages of six but they’re priced each. So I bought nine to see what would happen.”

“And?” the CEO asked.

“They broke the ship-pack and shipped me nine,” I answered.

The VP of Operations frowned. “They’re not supposed to break ship-packs,” he complained. “Screws up our inventory.”

The CEO shook his head. “They did the right thing,” he said.

I got the job and I think one of the reasons was that the CEO knew I cared about what it was like to be a customer. This sounds obvious but it’s important: If you’re not a customer of your own business, then you don’t know what it’s like to be a customer of your business. No amount of reports or data can replace the experience of being your own customer. Amazon knows this and they use this input to improve – constantly and obsessively – the customer experience.

None of us can know how Amazon Business is performing until the company tells us. But there’s no excuse not to know how your own company is performing – not in spreadsheets but where it really matters – at the point where the company connects to customers.

That’s something you can emulate about Amazon today to build value quickly.


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