Amazon is the leading e-commerce brand of the world with a strong global presence that has been bolstered by the increasing physical footprint of the company worldwide. The company has acquired superb growth in recent years driven by several factors including an increased number of products and sellers on its marketplace, growth in popularity, research and development, pricing, marketing, and several more. The increasing use of smartphones and the internet worldwide has also proved to be a strong driver of demand and sales for the company. Amazon has also built strong resources and capabilities that have helped it strengthen its competitive position and grow its overall competitive advantage in the online retail industry. However, as the company’s vast and global empire continues to find faster growth, the operating expenses of the company also continue to grow fast.
There are several types of operating expenses in Amazon’s business from sourcing to shipping, digital media production as well as technology and human resources related. Here, I will discuss the leading categories of operating expenses of Amazon and how they have grown during the past two years.
COST OF SALES
The first leading category of operating expenses that constituted around 63% of its total operating expenses during 2019 is the ‘cost of sales’. As the number of sellers and products continues to climb every year on Amazon’s online shopping platform, the cost of sales of the company has also continued to climb fast. The first main category of costs included in the cost of sales is the cost Amazon incurs in the purchase of consumer products. Apart from that the company also incurs heavy shipping costs (including inbound and outbound). Other types of costs included in Amazon’s cost of sales include the costs of sortation and operation of delivery centers. Amazon also includes its costs of digital content creation including Amazon Music and Amazon Prime in its cost of sales. Amazon’s total cost of sales in 2019 reached $165.54 billion, rising from $139.16 billion in 2018. The growth in the cost of sales was driven mainly by increased costs related to the purchase of consumer products as well as higher shipping costs compared to the previous year. The cost of sales for Amazon grew by around $26.4 billion from 2018 to 2019.
Shipping Costs of Amazon:
Amazon’s shipping costs are included in its cost of sales. The shipping costs of Amazon drove a large part of the total growth in the cost of sales from 2018 to 2019. Amazon includes the inbound shipping costs or the costs of receiving products from the suppliers in the inventory and they are recognized as cost of sales once the products are sold. The shipping costs including the costs of sortation and transportation as well as the costs of operating the delivery centers reached $37.9 billion in 2019, rising from $27.7 billion in 2018. In the future, despite its growing international network of warehouses and innovative delivery options, the shipping costs of Amazon are expected to grow. It is mainly because the acceptance of Amazon’s shipping offers continues to grow among customers. Amazon Prime is among the leading drivers of demand and customer loyalty for Amazon. Within a single year, its shipping costs have grown by more than $10 billion. Moreover, for customer retention and to grow customer loyalty, the company continues to adopt more costly methods of shipping and reduce the shipping rates. Now, same-day and next-day delivery options are available with a large range of products sold on Amazon in the large cities. However, in the future Amazon will also try to cut down its shipping costs by bargaining for lower prices with suppliers, improved optimization of its fulfillment network, and achieving higher sales.
Amazon’s fulfillment costs are its second-largest operating expenses. Within a year (2018 to 2019), its fulfillment costs grew by around 18% or more than $6 billion. These costs include the costs Amazon incurs for the staffing of its North America and International fulfillment centers, physical stores, and customer service centers as well as the payment processing costs. Amazon also includes the AWS payment processing and related transaction costs in its fulfillment costs. However, the other costs related to AWS are included within Technology and content expenses (Amazon’s version of research and development expenses). Amazon’s fulfillment costs grew by 18% from 2018 to 2019 and they were 14.3% of Amazon’s net sales in the latest fiscal year. In the previous fiscal year (2018), Amazon’s fulfillment costs grew 35% compared to 2017 and they were 14.6% of the company’s net sales. The fulfillment costs of Amazon were $34 billion in 2018 and rose to $40.2 billion in 2019.
Technology and Content Expenses:
The technology and content expenses of Amazon are its third-largest category of operating expenses. Amazon notes its research and development expenses in its Form 10K as Technology and Content Expenses. Apart from the payroll and related expenses for the Amazon employees involved in ‘research and development’, the technology and content expenses of Amazon also include the infrastructure costs.
The infrastructure costs of Amazon include servers, networking equipment, and data center-related depreciation and amortization, rent, utilities, and other expenses necessary to support AWS and other businesses. Overall, the technology and content expenses of Amazon including the infrastructure costs reflect the investments that the company makes to offer its customers a wider variety of products and services. The e-commerce and the cloud industry are marked by a very high degree of competition and rapid innovation. Customer experience is also of utmost importance in these industries. It is why Amazon must continue to invest in research and development to improve process efficiency and customer experience while also operating at an ever-increasing scale.
As the company continues to grow its employee base and add more technological infrastructure, the technology and content related expenses of Amazon are expected to continue to rise. During 2019, the technology and content expenses of Amazon grew mainly because of higher spending on the payroll and related expenses of the technical teams involved in R&D as well as higher infrastructure costs. In 2020, Amazon expects the growth rate of technology and content expenses to slow down because of the useful life of its servers and the resulting reduction in infrastructure costs.
The Marketing expenses of Amazon are also a significant category of operating expenses. During 2019, the marketing expenses of Amazon were around 7% of its operating expenses, having risen to $18.9 billion from $13.8 billion in 2018.
The marketing costs of Amazon include the advertising expenses as well as payroll and related expenses for the employees involved in marketing and sales activities including sales commissions related to AWS. The e-commerce brand uses a large number of channels for traffic acquisition including sponsored search, social media promotions, online advertising as well as many other channels including third party customer referrals and television advertising. The marketing costs of Amazon are largely variable based on growth in sales and change in advertising rates on various channels. The marketing costs can change based on the change in competition for the sources of traffic acquisition Amazon utilizes as well as to the extent that Amazon’s mix of traffic acquisition channels changes.
Amazon’s Prime memberships and its shipping options are also an effective marketing tool for the company. However, Amazon does not include the Prime and shipping related expenses in marketing costs.
In 2019, when Amazon’s marketing expenses reached $18.9 billion, these costs represented around 7% of its net sales and grew by 37% compared to the previous fiscal.
General and Administrative Expenses
The last important category of operating expenses for Amazon is the General and Administrative expenses. In 2019, the general and administrative expenses of Amazon grew to $5.2 billion from $4.34 billion in 2018. Overall, the G&A expenses of Amazon grew by 20% in 2019 compared to the previous fiscal. The G&A expenses were only 1.9% of the company’s net sales in both 2018 and 2019.
Amazon’s Operating Expenses (2018–2019) in $ billions
Operating expenses — — — — — — 2018 — — — — — 2019
Cost of Sales — — — — — — — — — $139.16 — — — — $165.54
Fulfillment — — — — — — — — — — $34 — — — — — — $40.23
Technology and content — — — — — $28.8 — — — — — $35.9
Marketing — — — — — — — — — — $13.8 — — — — — -$18.9
G&A — — — — — — — — — — — — -$4.34 — — — — — -$5.2
Other — — — — — — — — — — — — -$0.3 — — — — — — $0.2
Total — — — — — — — — — — — — — $220.5 — — — — -$265.9
Before we conclude
Amazon’s business model has some outstanding and unique advantages and compared to even the nearest competitor in the United States (Walmart), the e-commerce giant has achieved a significant edge. Amazon founder himself is the richest man on the planet. However, running Amazon’s large and global business empire also gives rise to heavy expenses. From the cost of acquiring goods to technology-related costs, shipping, and marketing, several types of expenses constitute a large portion of the company’s net revenue. Overall, the operating expenses of Amazon constituted around 95% of its net revenue in 2019. To find continuous growth and retain its growth momentum, Amazon will continue to invest in research and development and marketing while also growing its range of Amazon brand products sold on the platform. In the future, this might lead to further growth in operating income as a percentage of net sales for the platform. For 2019, its operating income was $14.54 billion compared to $12.42 billion in 2018. It is less than Walmart’s operating income for the same fiscal. However, given its current growth rate and extraordinary capabilities, Amazon could find its operating income above Walmart’s in just some years.
Other sources: Amazon Annual report 2019. (ir.aboutamazon.com/)