Amazon (AMZN, Financial) recorded $35.418 billion in sales from international markets in 2015, nearly 33% of its overall revenue. Sales growth from overseas markets registered 6%, 12% and 14% for the last three years, but that is overshadowed by the above 23% growth rate the retailer registered in the domestic market.
To make things worse, Amazon’s international operations are not profitable.
But the company keeps expanding inside and outside the U.S., and Amazon must be hoping to turn around its bottom line in at least a few of the markets in which it is present – and India could be one of them soon.
The state of Amazon retail
Margins are typically thin in the retail industry, and there are several reasons why it has to be so. For example, Walmart’s (WMT, Financial) operating margin has been historically around the 5% to 6% level, Costco’s (COST, Financial) margins hover around 3%, and Target (TGT, Financial) brings in about 6% to 7%. It’s a competitive industry, and the best to way to lose the retail game is by pricing yourself out of the competition.
With that amount of pressure on pricing, volume is the only way to balance it out, and that’s exactly what Amazon is moving toward. The more the sales volume, the better the odds of something actually filtering down to the bottom line.
Amazon has kept its North America retail margins on the rise as the sales volume continues to move up, and that’s the strategy in which the company has believed since Jeff Bezos entered the online retail arena more than 15 years ago.
Amazon has operations in 12 countries – Australia, Brazil, the U.S., Canada, the U.K., France, Spain, Italy, Netherlands, China, India and Japan. Since Amazon doesn't break out individual numbers, it's a little hard to figure out sales in individual countries.
Of those 12 countries China could have offered the most growth potential, but that country is a hostile environment for any international company. With the government spearheading the “protect homegrown companies at all costs” movement and Alibaba being the retail marketplace darling, it’s not really a huge surprise that Amazon is sitting with a 1.1% market share despite being in the country for more than 10 years.
As such, any growth in that country is only a bonus and not a core factor for Amazon’s future.
The real growth markets
Europe, North America and India are where Amazon’s real market growth is, and the company is working double time to increase its sales as quickly as possible in those markets. As we discussed earlier, Amazon needs to hit a critical volume/market share from a particular country to turn that into a profitable one. And that brings us to the next biggest potential market where things are heating up for Amazon.
Amazon India registered a significant jump in sales for the year ended in March 2015, from 169 crore rupees a year earlier to 1,022 crore rupees or $152 million. Though a figure like that looks like small change when you consider its $100 billion-plus overall sales, it must be noted that it was a sixfold increase in sales in one year. Moreover, this kind of rapid growth has happened despite Amazon India being in a three-way fight to the top with local players Flipkart and Snapdeal giving Amazon a hard run for its money.
With India’s ecommerce market expected to grow to $106 billion by March 2020 from the current $26 billion, Amazon has a huge potential market that can easily become its second largest after North America. With Internet usage and online transactions growing steadily in the country, Amazon’s growth in India will play a huge role in its international profitability.
In addition, Amazon recently opened up its Prime memberships to the Indian subcontinent and is already planning online and televised promotional content around the launch.
With retail profitability finally showing up in Amazon’s bottom line over the past few quarters, the expected spurt in volume growth is exactly what the company needs to become consistently profitable even without the help of its Amazon Web Services cloud business.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
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