Amazon Spends Big To Deepen Its Customer Relationships

James L. McQuivey
Vice President, Principal Analyst
October 28, 2016

Wall Street followers found much to be concerned about in Amazon's quarterly earnings. Shipping costs went up 43%, operating costs are up 29% overall and the company's operating margin fell to a ghastly 1.8% (down from 4.2% the quarter previous). In light of all this, the stock is down 6% in after-hours trading.

Which makes the stock a buy, in my book. (Disclosure: I'm not a financial analyst, I'm a consumer market analyst, so don't take my investment advice. Oh, and I don't own any Amazon stock outside of mutual funds.)

Amazon's margin went down precisely because the right costs went up. Amazon continues to add millions of Prime customers and investing in those customers costs money. Specifically, Amazon has opened 23 warehouses since July. Those warehouses will be in position in the crucial holiday rush to ensure not just two-day delivery, but one-day delivery more and more. And in some cities, one-hour delivery.

As the Wall Street Journal quoted Amazon CFO Brian Olsavsky: “We acknowledge that’s expensive,[but] customers love it.”

There's the rub. Not for Amazon and its profit margins, but for every other retail concern on the planet. Amazon sets a completely different bar and then exceeds it, time and time again. The result is a passionate base of customers with whom Amazon now has daily interactions. People who sign up for three or more Amazon services (Prime, etc.) are the Web's best possible cusotmers. They spend more, they have robust digital lives, and Amazon — with its estimated 7 million Amazon Echo owners, including those who just took delivery of the new Echo Dot six packs that started shipping last week — has them neatly connected to the company, probably for life. My recent report, Amazon Makes Digital Relationships Pay, And So Should You shows this in crystal clarity.

Yes, Amazon's also investing in India, which is an expensive, lengthy strategic choice. And it's investing in more video content — much of it award-winning and audience pleasing, that rare combination media people live for. In the end, all of these costs will deliver revenue to Amazon for years to come. At some point, Wall Street will then expect the company to rest and reap some windfall. Don't count on it. I expect that the company will find new ways to obsess over customers then, too.

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