April 27, 2018

By: Meaghan Werle

 

Following its biggest-ever holiday season, Amazon continues to record impressive growth. First-quarter sales were up a whopping 43% to USD51 billion, and operating income increased 92%, surpassing analysts’ expectations.North America revenue growth was primarily driven by the Prime flywheel. With nearly half of U.S. households now belonging to Prime – and more than 100 million paid Prime members globally – Amazon’s initiatives in Q1 2018 reflect the retailer’s quest to deepen its relationship with this expanded membership base. To drive this momentum, Amazon focused investments on three key areas – Prime grocery benefits, fulfillment, and devices – in the first quarter of 2018.

Prime grocery benefits

Amazon continues to add value to Prime with new grocery-centric perks, most notably introducing free two-hour delivery from Whole Foods through Prime Now in February. Since its launch, the retailer has rapidly rolled out the offer, which is now in 10 U.S. markets. As explained by CFO Brian Olsavsky in Amazon’s earnings call, Amazon will “use the 10 cities as a test and see how customers respond” before announcing further expansion plans. This service is the first official indication of how Amazon will more deeply incorporate Whole Foods within its online grocery offer, calling into question the future of AmazonFresh, as well as Whole Foods’ relationship with Instacart.

That said, Prime is also positioning as Whole Foods Market’s loyalty program as Amazon gets closer to recognizing Prime members at Whole Foods’ point of sale. The retailer has announced the shutdown of accounts at WholeFoodsMarket.com on May 1, 2018, suggesting a new offer with Amazon is on its way.  For now, Prime Rewards cardholders can receive 5% cash back on Whole Foods purchases, instantly increasing the value proposition of Amazon’s credit card for Prime members.

In other grocery news, Amazon quietly changed Prime Pantry’s pricing model with a new program that allows members to pay an additional monthly fee of USD4.99 to receive free shipping on orders of USD40 or more. More importantly, however, is that this benefit is free to AmazonFresh customers, indicating greater consolidation between Amazon’s various grocery channels for Prime members.

New fulfillment services

Amazon continues to innovate on how it gets goods to shoppers, expanding Amazon Key in-home delivery nationwide. Its next iteration of this service is already available, with in-car delivery now compatible with select Chevrolet, Buick, GM, Cadillac, and Volvo models.

In addition to the elevated convenience of unattended delivery, this initiative plays into Amazon’s online grocery offer, as it is well-suited for perishable items. Amazon’s acquisition of Ring, a home security company, certainly will help build shopper trust in this technology and drive adoption of these new services.

On the logistics side, Amazon “continues to operate with [a] combination of external partners and internal capability,” according to Olsavsky. However, the retailer believes Amazon Logistics is a core competency it needs to have in order to support increased demand during the holiday season, as well as its growing grocery operations.

The launch of its International Shopping Experience will also put pressure on Amazon’s North America fulfillment centers as it opens access to Amazon.com to more shoppers worldwide. As Amazon builds out its shipping network to support this growth, it is looking to monetize extra capacity with a new delivery service for businesses called “Shipping with Amazon.” Starting with third-party sellers on its own platforms, this opens up a new revenue stream for Amazon, which will pick up products from other business’ warehouses and transport them to its own fulfillment centers.

Device engagement

The retailer launched Echo Spot in Canada, bringing the compatibility of screen and voice to this market. Amazon also announced a new agreement with Best Buy in which the latter will be an exclusive merchant of Fire TV Edition smart TVs in stores, online, and as a third-party seller on Amazon’s site. This partnership gives shoppers a new, in-person touchpoint to interact with Amazon’s devices before buying while extending Amazon brand visibility in the brick-and-mortar space.  

In Q1 2018, Amazon also enhanced Alexa’s skills and capabilities to make interactions with the voice assistant more engaging and personalized. One particular segment the retailer is going after is children, with the new Echo Dot Kids Edition, tailored to this specific audience. While the family-friendly features of this device are designed to give parents more control over their child’s interactions with Alexa, this is a strategic move for Amazon in that it gets children acquainted with voice technology at a young age.

More broadly, Alexa is becoming increasingly reactive, with new features such as “follow up” mode and “brief” mode to better attune her answers to the conversation at hand. Users now also have the opportunity to easily program their own Alexa skills with Alexa Skill Blueprints, customizing her responses for their own needs and preferences.

Looking ahead

Going forward, Amazon announced that it will be raising Prime’s price in the U.S. from USD99 to USD119, due to the added benefits the program is delivering, including renewed streaming rights for NFL’s Thursday Night Football. As Prime membership growth rates slow in the U.S., the retailer must attract underpenetrated demographics – such as lower-income shoppers – with this price tag. This tension will certainly challenge the retailer to further promote its lower-cost Prime options and think through new ways to hook nonmembers into its ecosystem.

For additional implications and predictions on what’s next, check back at KRiQ.com in the coming days for Kantar Consulting’s in-depth analysis of Amazon’s first quarter results.