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Analysis: Amazon’s growth, success will continue to come at expense of bottom line

BY HBSDEALER Staff

Although Amazon's sales advanced by a respectable 23% over the quarter, the pace of growth at the online behemoth remains much slower than it was over most of the prior fiscal year. Some of this is the result of a less favorable exchange rate diluting contributions from the international business. However, some is also down to a more challenging demand environment in North America which has limited spending uplifts on products within Amazon's core territory.

While retail sales growth has slowed, Amazon's retail service revenue — which includes Prime subscription fees – jumped by almost 50% over the prior year. A rise in subscriber numbers in North America and the roll out of Prime to new territories like Mexico have both underpinned this trend.

More modest product sales uplifts combined with high Prime subscription growth has resulted in a significantly narrower gap between shipping costs and shipping revenues; this boosted operating income within North America, albeit only to a small degree.

Unfortunately, such a pattern was not replicated on the international front where an unfavorable exchange rate plus extensive investments in new services and initiatives dramatically increased operating losses.

Ultimately, the rise in international operating losses outweighed gains made closer to home, which resulted in a 6.2% dip in overall group operating income. As disappointing as this is, we do not believe this is a cause for too much concern — if only because the investments Amazon is making will pay dividends over the longer term.

The expansion in India exemplifies the opportunity Amazon has in newer markets. Here, the recent launch of Prime, the development of a Fire Stick optimized to the market, and investment in logistical and selling infrastructure have all helped to make Amazon the fastest growing marketplace in the country. Given the future scale and scope of Indian e-commerce, the investments are prudent and will make an extremely healthy contribution to overall growth in the years ahead.

As Amazon splurges to forge ahead in new markets, greater profit stability in its home market arguably becomes more important. Even though the company's margins remain thin, a firmer grip on fulfillment costs is currently helping to deliver this.

That said, we believe that there are some future risks in North America — most notably from the more aggressive e-commerce push coming from Walmart and, to a lesser extent, other traditional players.

Against this backdrop, it is essential that Amazon maximizes its potential in areas and categories where it is currently underweight. This includes fashion where we are encouraged by the new development of private labels such as Goodthreads and Lark & Ro. Although these are embryonic, they provide Amazon with the building blocks to develop a much more compelling, and slightly higher-margin, fashion proposition which will help it to grab market share profitably. This will be aided by new technology such as the Echo Look, which will help Amazon to sharpen its fashion credentials and services in a way that is challenging for other players to imitate.

As much as we are encouraged by Amazon's drive into categories like fashion and home, we are more hesitant about the Amazon Fresh business. As much as we believe this has solid long-term potential, we think the logistical complexities and the low margin nature of grocery mean that it will be an expensive drag on profits for the foreseeable future.

As other players become more aggressive about e-commerce, we think life will become a little tougher for Amazon. While we do not see any significant material damage to the firm, we do think sales and margin growth could be crimped over the medium term. However, we believe that in the short-term damage will be limited by the fact that Amazon has created a very successful ecosystem of content and technology; this will support Prime subscriptions which, in turn, help make Amazon the destination of choice for buying products.

However, sustaining this into the longer term will require Amazon to maintain its pace of innovation. While current trends suggest Amazon is more than capable of doing this from a technical and creative standpoint, we believe that such action will also constrain profit growth.

As such, while the overall outlook for Amazon is extremely positive, we maintain our view that the company's growth and success will continue to come at the expense of the bottom line.

NEIL SAUNDERS, MANAGING DIRECTOR OF GLOBALDATA RETAIL

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Sherwin-Williams prevails in ad claim dispute

BY HBSDealer Staff

When a paint calls itself "CoverMaxx," does it have to back up that claim with proof? 

The short (and unenforceable) answer from the National Advertising Division, an investigative unit of the advertising industry’s system of self-regulation, is "no." 

The NAD has determined that challenged advertising for Sherwin-Williams Company “CoverMaxx” spray paints did not communicate a message of superior paint coverage requiring substantiation. Further, NAD found that the product name did not require revision.

The advertising at issue was challenged by Rust-Oleum Corporation, the maker of competing spray paint products.

Rust-Oleum challenged express claims that included:

  • “CoverMaxx”
  • “maximum coverage”
  • “Ultimate Coverage” and “ultimate coverage”

NAD also considered whether the advertising at issue implied that Sherwin-Williams’s entire line of Krylon CoverMaxx spray paint provides superior paint coverage compared to leading manufacturers.

The advertiser maintained that the claim “maximum coverage” is puffery and does not convey a comparative message. The challenger argued that the phrase appears adjacent to measurable comparative performance claims and expressly communicates to consumers that the CoverMaxx spray paints provide the best coverage of any spray paint in its class.

In this case, the challenged claim states in its entirety that CoverMaxx Primer “Seals, primes, and protects for maximum coverage.”

Beneath this statement are four bullet points: “Smooths uneven surfaces,” “Increases Paint Adhesion,” “Ensures true paint color is achieved,” and “Features the EZ Touch 360 conical tip.”

NAD determined that “Seals, primes, and protects for maximum coverage” claim and the bullet points are non-comparative statements that describe the purpose and function of the CoverMaxx Primer. NAD determined that “maximum coverage” in this context did not communicate a superiority message requiring substantiation.

The challenger also contended that the CoverMaxx product name should be discontinued as it expressly conveyed the message that the product provides superior spray paint coverage in comparison to leading competitors.

As a general rule, absent extrinsic evidence that consumers have been confused or misled, NAD will not require advertisers to change the name of a product simply because a challenger suspects the name may be misleading.  However, where the product name makes an express claim which conveys a message that is not supported, extrinsic evidence of consumer confusion is not required to recommend a product name change.  NAD noted that the challenger did not provide any reliable extrinsic evidence of consumer confusion. 

Here, the challenger cited a recent decision, reached by NAD and affirmed by the National Advertising Review Board, regarding Rust-Oleum 2X Ultra Cover spray paint.  Both NAD and NARB determined that the product name conveyed a message that the product delivers twice the coverage of other spray paint brands, an express performance claim.

Unlike Rust-Oleum’s 2x Ultra Cover product name, NAD found that the CoverMaxx name was vague and did not convey a clear, specific and measurable message about product performance.

NAD next considered whether the “ultimate coverage” claim communicated a comparative message that CoverMaxx is superior to competing spray paints and found that the claim, in the context in which it appeared, was puffery.

Sherwin-Williams, in its advertiser’s statement, said that “as a long-time supporter of the self-regulatory process,” the company “thanks NAD for its thorough and careful review.”

The NAD is administered by the Council of Better Business Bureaus. A recommendation by NAD to modify or discontinue a claim is not a finding of wrongdoing and an advertiser's voluntary discontinuance or modification of claims should not be construed as an admission of impropriety. It is the policy of NAD not to endorse any company, product, or service. Decisions finding that advertising claims have been substantiated should not be construed as endorsements.

 

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HBSDealer Stock Watch: LL and HBP take a double-digit hit

BY HBSDEALER Staff

LL and HBP dropped 13.76% and 10.16%, respectively, on Tuesday after releasing their earnings.

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