CFDs are a leveraged product and can result in losses that exceed deposits. Please ensure you fully understand how CFDs work and what their risks are, and take care to manage your exposure. CFDs are a leveraged product and can result in losses that exceed deposits. Please ensure you fully understand how CFDs work and what their risks are, and take care to manage your exposure.

Amazon Prime Day: propelling the flywheel

The headlines about the latest Amazon Prime Day centred on the e-commerce giant celebrating another year of record sales and its step toward becoming the first publicly-listed company to be worth $1 trillion. But the bumper sales event is about much more than shifting product.

Amazon Prime
Source: Bloomberg

‘Prime was designed to make your life better every single day,’ – Amazon.

Amazon Prime Day just keeps getting bigger. The e-commerce giant’s flagship sale event has grown exponentially since the first one was launched four years ago, developing as its Prime subscription service has expanded from simply offering free and quick delivery for members to what is now a plethora of services including, but not limited to, music, video and e-books.

Amazon CEO, Jeff Bezos, and his company have been cagey about revealing precise details about the success of Prime Day. But we do know that Amazon sold over 100 million products to over 100 million members during Prime Day 2018, compared to just 34.4 million products during its inaugural event in 2015, when it was thought to have only about half the amount of members as it does now.

This year’s event spanned more countries than ever – 17 in total after the addition of Australia, Singapore, the Netherlands and Luxembourg – and was longer than it has been in previous years, running for 36 hours versus the 30-hour sale in 2017. The company offered 50% more Spotlight Deals, partnered with new exclusive product launches and introduced Whole Foods to its US members following its acquisition of the organic product supermarket chain late last year.

Read more about Amazon’s latest expansion into the prescription market

The most recent Prime Day event was yet again the biggest shopping event in Amazon history, eclipsing anything the company has seen before including other major events like Black Friday and Cyber Monday. The first Prime Day in 2015 is thought to have generated sales of around $900 million, rising to $1.52 billion in 2016 and then to $2.14 billion in 2017. Although there is no doubt this year's event was another record-breaker, estimates are currently wide-ranging. Before Prime Day had got into full swing Coresight Research estimated sales would hit $3.4 billion but some have raised their expectations considerably following the success of the event, with Wedbush Securities forecasting a figure closer to $4.2 billion.

Prime Day also turned out to be a winner for investors as well as customers, with Amazon shares climbing to an all-time high the day after the event on 16 July, pushing its value to $895 billion.

Amazon has carefully nurtured its Prime service in recent years and ensured that each Prime Day event helps fuel the next one to occur the following year: creating a virtuous cycle of events that sees each success spur on the next.

The sales figures are nothing short of impressive, but how it is driving those sales and its underlying strategy is the real story investors should be paying attention to as the race heats up to become the first publicly listed, $1 trillion company.

Is Amazon a necessity for retailers to achieve success?

Small and medium-sized business (SMEs) enjoyed well over $1 billion worth of sales during this year’s Prime Day event, representing another record. The event has become so influential that it creates a halo effect for other retailers, even for those selling through Amazon but not taking part in the sale simply because of the huge surge in traffic. But even those that compete with Amazon, like US rivals including Walmart, eBay and Target, all saw benefits too after they all launched their own sales to try and capitalise on the hype, with the latter reporting its own record-breaking day of sales on the same day.

While those large retailers with the ability to effectively compete online can benefit from Amazon’s annual sales event, those more geared to the high streets and shopping malls, such as department stores, have been the worst-affected by Prime Day in previous years as shoppers are won over by the slew of deals that emerge online, ridding the need to head to the shops.

Read more about how the UK retail sector is performing and what the trading opportunity is

A report by Adobe found that the largest online retailers in the US experienced a significant jump in sales during Prime Day but found smaller retailers who generate less than $5 million of annual revenue that did not take part in the event suffered a drop in sales. At the end of last year there was at least 20,000 SMEs booking over $1 million of annual revenue through Amazon, with thousands selling over $50,000 worth of product during Prime Day alone.

At the bottom line: Amazon wants retailers to regard its platform as important for their business as its Prime service is to its customers. As more retailers attract more buyers, and more buyers attract more sellers, this model has helped Amazon and its flagship sales event grow into what they are today.

Amazon Prime Day: more than just flogging product

‘Bezos and his lieutenants sketched their own virtuous cycle, which they believed powered their business. It went something like this: lower prices led to more customer visits. More customers increased the volume of sales and attracted more commission-paying third-party sellers to the site. That allowed Amazon to get more out of fixed costs like the fulfilment centres and the servers needed to run the website. This greater efficiency then enabled it to lower prices further. Feed any part of this flywheel, they reasoned, and it should accelerate the loop,’ – The Everything Store: Jeff Bezos and the Age of Amazon, by Brad Stone.

This ‘flywheel’ (another term for a virtuous cycle) is being forever propelled by Amazon but Prime Day creates the biggest spin each year. The sales event entices more members to subscribe to the Prime service, allows it to sell more of its own products, and attract more advertising from product sellers and partners.

While working to ensure one success only leads to another has its obvious benefits, this also keeps the pressure on Amazon to constantly innovate and improve its overall package to keep injecting energy into the flywheel to avoid any sudden stalls that could threaten to turn the virtuous cycle into a vicious one.

Amazon shares climb to all-time high after Prime Day 2018

Amazon shares hit an all-time high on 17 July, the day after Prime Day, hitting $1843.93 to boast a market cap of $895 billion. Shares have rocketed 74% in the past 12 months as the flywheel keeps spinning, with Amazon having beaten earnings expectations for three consecutive quarters.

The chart below shows the 76% rise in Amazon’s share price over the last 12 months:

While still in second place in the race to become the world’s first $1 trillion publicly-listed company, Amazon is still some way behind Apple, who recently saw its value hit an all-time high of $953 billion, the closest any firm has come to the elusive $1 trillion figure.

Read more on whether the Amazon share price is valued correctly and where it's headed next

Both Alphabet and Microsoft are currently trading at all-time highs, with valuations of $829 billion and $838 billion, respectively, to take the third and fourth spots in the race.

Amazon: reserving its flagship sales event for Prime subscribers

Prime is at the heart of Amazon’s consumer facing strategy. Its aim is to make Prime such a valuable service that people regard it as vital, more like a service fee that goes alongside your phone bill on your bank statement rather than a luxury that sits next to your Netflix and Spotify subscriptions. And that is the other point of Prime. The services and benefits available to Prime members has continued to grow, and so has the price, but the idea is that consumers would rather pay one sum for all their services – their music, delivery fees, video content and so on – rather than sign-up to a string of different companies that provide just one service. Having all of your services with one provider also makes a customer quite sticky: choosing to cancel your music streaming service is much easier than cancelling the subscription that provides a variety of day-to-day services.

Read more about the lessons learnt from Spotify going public

But this has not been easy for Amazon. Its video service has had success in creating big, original, blockbuster content and securing popular programmes like Top Gear to entice new customers, but Netflix’s concentration on TV and film has left Amazon behind. Similarly, Amazon’s music service is no match for Spotify, nor Apple.

Bolting on new services may help drive membership numbers but packaging all of them together means Prime members are paying for the vast array of services whether they use them or not. This does not help from a price point of view as customers have to take all or nothing, but it does mean the service has something to help win over anyone considering signing up.

Although Amazon’s tactic when running other major sales is to open up the event (like Cyber Monday) to everyone while providing advantages to Prime members (like early access to deals or exclusive discounts), the company has chosen to reserve its flagship event for its subscribers.

The reason Amazon is so focused on building its Prime membership numbers is simple. Prime subscribers spend around five times as much on Amazon each year than those not signed up to the service, as they look to order more goods to fully utilise their delivery options, pay to download content to fully enjoy streaming services or jump on discounted Amazon products that encourage them to place more orders, like its virtual speakers that allows people to order using its voice assistant.

Amazon goes all out to encourage customers to sign up for its service ahead of Prime Day, and more people join Prime during the event than at any other time, as they look to gain entry to the swathe of deals on offer. In 2013 there was just 18 million people signed up to Amazon Prime, now there are over 107 million.

To sway people umming and ahing as to whether to sign up ahead of Prime Day, Amazon started offering members deals as early as 11 days before the main event this year, adding new deals daily in the hope of attracting as wide an audience as possible. Not only does this lock in more customers for Prime Day, but it gets customers to pay what is essentially an entry fee that, because of the cost and benefits, encourages them to spend more than they would have. And when the event is finished, Amazon has pools of new customers that have signed up for the next 12 months (it pushes for annual payments). And what will be happening when those new members that signed up to enjoy Prime Day 2018 see their subscriptions come up for renewal in July 2019? Prime Day 2019 of course.

Amazon devices are best sellers on Prime Day

The millions of third-party sellers and retailers selling through Amazon may see a welcome bump in sales as a result of Prime Day but the best-selling products are the e-commerce giant’s own products. Having equipped its smart TV plug-in with its virtual assistant, Amazon’s Fire TV Stick with its Alexa Voice Remote was the best-selling product globally at this year’s event.

But leveraging its position to sell more of its own products is not aimed at shifting stuff like AmazonBasics blenders or toiletry bags, but its Alexa-powered smart devices like its Echo and Echo Spot smart speakers or Fire tablets. Prime Day 2018 saw Amazon roll-out the ‘biggest deals yet on Alexa-enabled products’, slashing prices on this much-desired tech to give people little reason to pass up the opportunity of getting their hands on the latest gear at a bargain price. The price of the Echo Show, its top-end smart speaker equipped with a screen, was cut by a third, resulting in record sales.

Overall, Prime Day 2018 was the best event on record for its Fire TV devices, Kindle e-readers and its devices for children, including its kid-friendly Echo Dot and tablets. It gave access to discounts on Amazon devices to its US members 12 hours before launching the main event, which saw its Ring Video Doorbell Pro sell out, record sales of the Amazon Cloud Cam and a six-fold increase in sales of its Toshiba-powered Fire TVs.

It is undeniable that there are now millions more Amazon products in homes around the world today than there were just two weeks ago – some reports suggest almost half of all Amazon shoppers will have an Alexa-connected device following Prime Day 2018. That could represent a major capture for Amazon in a market where no one has yet emerged dominant. Those that have purchased smart speakers or other Alexa devices during Prime Day no longer need look at the swathe of rival smart devices on the market from rivals like Microsoft, Apple, Alphabet and Samsung.

Read the guide to smart speakers and virtual assistants

Alexa and voice-controlled assistants are becoming more popular but are still fairly new technology. Amazon knows that if it really wants to maximise the impact of its virtual assistant and smart hardware that it has to do more than just sell units, it needs to help normalise using your voice to order products, turn on the lights or switch off the TV. The company got users to use its new services through incentive, offering them additional discounts on Prime Day deals if they ordered through Alexa (with an even larger discount for first-time users), or through new features like its augmented reality service or camera product search tool.

Alexa and this aggressive marketing strategy is another almighty catalyst for the flywheel. All of the Alexa devices encourage consumers to engage more with Amazon. Smart TVs and tablets help drive Amazon’s online content and its smart speakers make ordering from Amazon even easier than before, and all of them provide a rich flow of invaluable data for Amazon to utilise. Think of these devices as mini Amazon kiosks placed around your home and you can see what Amazon’s vision is: a house kitted out with Amazon’s smart devices means people interact with Alexa for almost everything. When using their tablets, watching TV, listening to music or reading a book. When you stare into your Amazon TV, you’re also staring into Amazon’s shop window.

The effect of this strategy, according to some reports, is astounding. Having already proven it can squeeze more value out of subscribers some estimates suggest those that have an Echo device installed spend as much as $400 more per year than regular Prime members.

Amazon shows off its online content and special experiences

Amazon also uses Prime Day to showcase its digital offering to members and what it has to offer in terms of video content, music, e-books and audiobooks. Millions of members streamed ‘Unboxing Prime Day’ events in the run-up to the event, demonstrating the quality of its video content with the likes of an exclusive concert featuring stars including Ariana Grande.

Twitch Prime, which provides members with online games and in-game video content, hosted a showdown that saw DJ deadmau5 take on professional gamers from the around the world, as well as the release of new games every day ahead of the main event.

Read more about Amazon’s purchase of gamer video site Twitch

Believe it or not there are some services that are not covered by Prime membership, and subscribers have to cough up more if they want to fully access some apps like Audible or Kindle Unlimited. But the sales event is the perfect time to squeeze out even more from its members, offering free trial periods and discounting access to both services to get people to try them out.

Amazon takes Prime Day offline as it introduces Whole Foods

The acquisition of Whole Foods last year allowed Amazon to add another dimension to Prime Day 2018. Although it has rolled-out a physical store network, with the likes of its fully automated Amazon Go outlets, the vast network of Whole Foods stores across North America (and a handful centred in London) allowed Amazon to start fully implementing its bricks-and-mortar strategy.

Prime has become Whole Foods’ loyalty programme and offering discounts on food such as popular items on the Whole Foods Market will go a long way to convincing US consumers that a Prime subscription can be a real asset. It represents one of Amazon’s biggest moves yet to lower the cost of everyday life for consumers.

Read more on Tesco, Sainsbury’s and Asda taking action as Amazon threat looms

It offered vouchers to US customers that shopped at Whole Foods ahead of the event to encourage them to sign up to use it during Prime Day. Again, to maximise marketing of Prime Day and introduce consumers to the coupling of Amazon and Whole Foods, deals started being rolled-out at the organic product supermarket chain a week before the main event. 

But the most important element that the addition of Whole Foods provides is the ability for Amazon to target products – food or not – at consumers both offline and online, featuring items that have proven popular online in Whole Foods stores, for example.

Amazon’s sales momentum helps drives advertising business

The loop of momentum that Amazon is riding also spurs on the other side of the business. Although renowned for e-commerce, at the heart of Amazon is AWS, the leading cloud-computing company in the world, ahead of major internet rivals like Microsoft Azure and Google Cloud. The unit accounts for just 10% of Amazon’s total net sales but generated $4.33 billion of operating profit last year, compared to Amazon’s overall operating profit of $4.10 billion. Quite simply, AWS is the biggest profit driver for Amazon.

Whereas the likes of Google can leverage the data it accumulates from its search engine, Amazon’s e-commerce platform gives it the ability (which is nowhere near its full potential) to watch the world’s shopping trends to give it a powerful tool for its advertising business. Amazon’s data capabilities will only grow as more of its devices enter our homes, and the richness of data it will be able to collect could prove a powerful tool for its advertising business as these smart-connected devices in our homes gather not just our buying habits but everything from what we eat to how we sleep.

CPC Strategy, a company who provide online search optimisation solutions to retail businesses, reported strong growth for Amazon’s ad business during the second quarter (Q2) of 2018, before Prime Day 2018. Spending by companies advertising on Amazon in Q2 2018 was three times as high as a year earlier, driving similar increases to the amount of clicks and traffic generated for sellers.

Companies are investing more marketing dollars into Amazon than ever before, according to CPC, and this is down to more effective results from the likes of Sponsored Product ads. It is thought the growth in returns that advertisers are getting from advertising on Amazon is outpacing the amount they are spending, reinforcing the idea that Amazon is giving businesses more bang for their buck, which again fuels the flywheel by encouraging them to spend more marketing on its platform.

While Amazon has been tight-lipped on how this side of the business performed over Prime Day, it is almost certain that companies would have ramped up their spending on advertising to fully capitalise on the event.

Checkout error: Prime Day does have its hiccups

It wasn’t all plain sailing on Prime Day. Even Amazon struggles to cope with the surge in demand, despite all its experience and following similar outages in prior events Amazon’s website couldn’t keep up with traffic in the hours leading up to the event. Reports suggest the US was most-affected but there were issues elsewhere including in Canada, Mexico, Russia, Africa, Asia and Europe.

Amazon recognised the problem within hours of Prime Day getting underway but declined to disclose what the exact issue was. CNBC, citing internal documents it had seen, reported the issue was to do with Amazon’s failure to secure enough servers to handle to traffic to the site, prompting it to shut off international traffic to its US site and scale down its front page. This was, according to CNBC, partly because Amazon had to start connecting additional servers manually to resolve the problem as a result of a possible failure with its auto-scaling feature that is meant to automatically spot changing trends in traffic and adjust the firm’s server capacity accordingly.

The website outage seems to have been largely resolved within a timely manner but it does show that Amazon has its flaws and demonstrates the importance and responsibilities of AWS. While it is not the first Prime Day to suffer from technical glitches, the latest one could take the shine of AWS’s reputation, but it is unlikely to have a long-term impact on the business. This will also have other short-term implications for Amazon, as things like this will hurt measures like its online conversion rates as people back out of buying or constantly refresh their pages because of the outage.

Amazon’s success will only draw more attention from the taxman and regulators

Customers have received their packages, retailers have booked record sales, advertisers have got better value for money and Amazon has reaped the rewards from its flagship sales event. But there will be some that may feel empty-handed, like the taxman.

While many of the world’s biggest companies come under fire for not paying their way in terms of taxes, governments and regulators in multiple jurisdictions have lambasted Amazon’s tax arrangements. US President Donald Trump picked a fight with Amazon earlier this year after claiming it was short-changing the US Postal Service and hitting out that The Washington Post, which is owned by Bezos, had ‘gone crazy against me’.

Trump is believed to hold the opinion that Amazon is not beneficial to smaller retailers and wants to dilute its dominance to give other US retailers a better chance online. There are already reports that the US Supreme Court is looking at introducing new rules that would empower US states to collect a tax on the sales of online retailers. If implemented, it is expected that Amazon’s fulfilment centres (distribution centres) that are located in practically all states would be classed as physical outlets that can be taxed - meaning the potential impact on Amazon’s US operations would be significant.

In addition, the EU said in March that it was considering taxing tech companies by up to 3% if they made money from collecting or using customer data or from digital advertising in the bloc, regardless of where they are based. While the EU wants firms like Google, Facebook and Amazon to pay more tax, this move was more prompted by the growing trade tensions between the US and EU. Many of the digital giants operating in Europe were founded in the US.

Following the introduction of General Data Protection Regulation (GDPR), regulators will also be keeping an eye on how companies like Amazon collect, store and use the growing amounts of data they collect on their customers.

Read more on the effect of GDPR and how big tech companies are responding

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