As the coronavirus pandemic has raged around the world, it’s become normal to hear of brands issuing profit warnings and revealing that their sales forecasts have been thrown out the window due to worldwide lockdown orders. From British Airways and Virgin Atlantic, to Burger King and Apple, almost every well-known name has been hit hard by store closures and dramatic shifts in consumer behaviour. Amazon is bucking that trend.
Just weeks after it confirmed that it had recruited 80,000 new employees since 16 March, and was creating 100,000 new jobs in total to help it deal with changes caused by coronavirus, it has released its first earnings report of the year. The figures cover the period January-March 2020 and seriously buck the trend which has become the norm elsewhere in the business landscape.
The eagerly awaited earnings report painted a picture of a thriving company despite the disruption and rapid changes necessitated by the spread of COVID-19. According to the official figures, Amazon’s overall revenue for Q1 of 2020 was $75.5 billion, with a net income of $2.5 billion. A comparison with the same period last year shows just how marked a step forward this is – in 2019, the Q1 earnings report confirmed $59.7 billion in revenue.
The revenue forecasts prior to the report being released had called for Amazon to pull in $73.61 billion, meaning it exceeded analyst expectations very comfortably. One thing to note is that despite the increase in revenue as projected, profit is down. Expectations were that earnings per share would top $6.25 – this target wasn’t hit, with actual earnings per share of $5.01. Both the expected earnings and the actual earnings were below those recorded for Q1 2019.
The marketplace also indicated that it expected to maintain or grow revenue in Q2, noting that its forecasts ranged from $75 – $81 billion over the next three months.
Advertising a major source of growth
It’s been clear for a while now that Amazon has been eating into both Google and Facebook’s market share. According to a 2020 research report conducted by Feedvisor, Amazon is at the “epicentre” of the marketplace economy. Its analysis found that 73% of brands now do some form of Amazon advertising, compared with 57% last year.
An impressive 83% of brands also say they see a strong return on Amazon with a minimum of 4x ROI – something which undoubtedly has helped the platform to grow its revenue from advertising. Forbes reports that 59% of brands see the best return on media spend from Amazon too, compared with just 22% for Google and 17% for paid social (including Facebook). The net effect of these figures is brands are increasingly realising that Amazon is a profitable sales channel; Forbes says the number of brands now spending more than $40,000 a month on Amazon has increased by more than a third in the last year.
Clearly Amazon is getting it right when it comes to connecting brands with shoppers via ads. Its earnings report confirms this with the ‘other’ category on the balance sheet (which covers ads) generating $3.9 billion in revenue in Q1, an increase of 44%. We had an early indicator that growth was coming in Q4 of 2019 with Amazon CFO Brian Olsavsky revealing that the ads business was using machine learning to increase relevancy.
Advertising and COVID-19
As the COVID-19 pandemic has decimated economies around the world, marketing and advertising has been impacted. With many businesses forced to close and industries such as travel grinding to a halt, it stands to reason that advertising will also have dropped.
Facebook and Google, which have traditionally dominated the online advertising space, have seen their income from advertising fall in the first quarter of the year. The New York Times predicted things would get tough for the two digital giants in April as advertisers in key sectors grappled with coronavirus orders, writing, “Google’s and Facebook’s advertising businesses, which have roughly tripled in combined size over the last five years, may be headed for a rare stumble as the coronavirus pushes the global economy into a tailspin.
“Once-abundant travel and entertainment ads have all but disappeared from Google search. The prices for Facebook advertisements are at record lows. And Wall Street analysts are estimating that annual revenues will decline for the first time in the history of the two companies.”
Facebook confirmed that while use of its free services had increased, its ads business had faltered. In a statement, it explained
“We have received questions about revenue, so want to provide some context here too: Much of the increased traffic is happening on our messaging services, but we’ve also seen more people using our feed and stories products to get updates from their family and friends. At the same time, our business is being adversely affected like so many others around the world. We don’t monetize many of the services where we’re seeing increased engagement, and we’ve seen a weakening in our ads business in countries taking aggressive actions to reduce the spread of COVID-19.”
According to The Drum, Facebook ad revenue declined in March, with Facebook itself adding that demand was flat compared with the same period last year.
Over at Google, loss of ad revenue was said to be “sudden and significant”, though it did post a 13% growth overall year-on-year. The chief executive of Google explained, “Q1 was in many ways the tale of two quarters for our advertising business, the first two months of the quarter were strong. In March, we experienced a significant and sudden slow down in our advertising revenues.
“The timing of the slowdown, correlated to the locations and sectors impacted by the virus and related shut down orders. As the impact of Covid-19 came into view, we delayed some ad launches and prioritised supporting our customers, as many adjusted their strategies.”
Olsavsky says Amazon has fared better than its rivals due to its non-reliance on ad revenue from those sectors hit the hardest by coronavirus. It’s significant too that the closure of physical stores has played to Amazon’s strengths, with more people shopping online. The CFO recognised this in Amazon earning’s call, noting that although it recorded a drop off in ad spend towards the end of March, it wasn’t
“…as noticeable as maybe some others are seeing, and probably offset a bit by the continued strong traffic we have to the site. So it’s a bit of a mixed bag. A large portion of our advertising relates to Amazon sales, not things like travel and auto off-site, which may have been disproportionately impacted at least early on here in the COVID-19 crisis. I think our advertising will prove to be very efficient as well. It can be directly measured so even as people are cutting back, perhaps on advertising, or their costs, I think this will be one area that will prove its value. It has in the past.”