Amazon’s pursuit of innovation pays off

Listen to this article

00:00
00:00

It has been innovation-as-usual so far this year for Amazon, the world’s largest online retailer.

In January, it launched a US website, Endless.com, selling shoes and handbags. In March, it linked its Unbox digital video downloads with TiVo, the television-on-
demand service, creating a more accessible pathway to consumers for the digital download service launched last year.

It also unveiled a subscription service on its online grocery store, allowing customers to schedule monthly deliveries of a year’s worth of Kellogg’s breakfast cereal or nappies, and get an extra 15 per cent off.

Along the way, the company has dabbled in beta versions of a new online “collaborative tagging” project and a fantasy league for films.

This week, this relentless pursuit of the new appeared to pay off, as Amazon’s share price gained more than 40 per cent in two days and hit its highest levels since April 2000.

The dramatic price movement, after strong first-quarter results, was supported by a rush of short covering in the comparatively thin market of regularly traded shares. But behind the shift in sentiment was a sharp improvement in its operating margin, as operating income grew faster than sales, which at $3bn cover everything from sex toys to garden furniture. 

“This is a stock that is highly attuned to the direction, or the perceived direction, of operating margins,” says Mark Mahaney, an analyst at Citigroup.

This touches on what has been the central question about Amazon for the past few years – whether its spending under Jeff Bezos, its founder and chief executive, is leading to better returns for investors.

“The real question is what do you think the long-term margins of this business are?” says Mr Mahaney. “Do you believe in the Bezos view that Amazon is a retail business that can sustain dramatically higher margins than traditional retailers, or not?”

The believers see a pursuit of innovation that has helped Amazon pioneer online shopping improvements, such as customer reviews, lists and tagging, and its strength in providing an online market for small third-party merchants.

That expertise, combined with initiatives such as free shipping that have pushed up sales volumes across the company’s categories, played its part in the improved first-quarter margins.

During the quarter, Amazon’s international business, which accounts for 45 per cent of its revenues, benefited from the growth in more profitable third-party business, with the expansion of its merchants@Amazon arm in the UK and Germany.

Amazon’s web services division also launched a UK website for Marks and Spencer, joining similar sites that it runs in the US for Target, which vies with Walmart.com as Amazon’s main retail competitor.

Amazon’s rate of spending on new software developers and scientists slowed during the quarter – after spiking last year as it prepared to launch its digital video service. The company says it will continue to increase spending, but at a lower overall rate.

It is also continuing to seek to make money out of both its digital and its physical infrastructure.

As for the constant dabbling in new digital projects, Robert Peck, analyst at Bear Stearns wrote this week that Amazon’s continued focus on these issues “still begs the question of where the company is ultimately heading – is it going to be more a portal-like platform or a pure shopping destination with more integrated user experience?”

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't copy articles from FT.com and redistribute by email or post to the web.