With so much going on already, one might wonder why Amazon.com AMZN -1.98%
continues to bother with Prime Day. The answer is that it seems to have turned into a profitable business.
It is not so obvious at first glance. Amazon AMZN -1.98%
has long used major events to increase sales at the expense of the bottom line. And Prime Day is full of discounted rate offers for Prime members that hardly seem profitable on their own. For example, the latest two-day deal that ended on Oct. 14 featured price cuts of nearly 25% on Apple’s mega-popular AirPods. Inc.
“Who rarely, if ever, makes such cuts on his own.
Indeed, Amazon’s North American and international retail segments posted a combined operating loss for the quarter, including Prime Day, for the first three years after Amazon created the pseudo-vacation in 2015, even though the other quarters were generally profitable.
This changed as the company’s third-party activities grew. Amazon recognizes only a portion of the revenue generated from the sales of its third-party merchants. But the margins on this income are higher than on its own retail sales, as Amazon does not bear the cost of purchasing the products itself. And the recent Prime Day seems to have been significant for third-party companies. Amazon said Prime Day sales from third-party merchants topped the $ 3.5 billion mark, nearly 60% from last year’s event.
It still doesn’t specify what revenue Amazon will recognize from those sales. A more precise reading of the effect of Prime Day will likely come with the company’s third quarter results, slated for October 29. These results will include a projection of operating income for the fourth quarter which includes this year’s Prime Day.
Analysts are already forecasting a new record revenue of $ 5.9 billion, leading to an operating margin of 5.3% company-wide. According to data from S&P Global Market Intelligence, this would be the highest operating margin Amazon has published for its fourth quarter since 2004.
Prime Day carries other risks for Amazon. The company changed the date this year from its usual place in July, due to more pressing demands at the start of the pandemic. This could have the effect of increasing some vacation-related sales.
Also, the downside that Amazon is now showing strength is that its Prime program and third-party activities are now closely watched by lawmakers. A report by Democratic staff of the House antitrust subcommittee released earlier this month included several testimonies from third-party Amazon sellers who criticized the company’s market power. It even included a quote from a 2018 Morgan Stanley analyst report, describing the Prime program as Amazon “fortifying an impenetrable divide around its customers.” At least Prime Day is no longer a loss leader.
Write to Dan Gallagher at email@example.com
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