On Monday Amazon.com, the largest US online retailer, reported financial results for the second quarter of 2006. The results included a 58% drop in profit,despite a 22% rise in revenue. Net sales also increased to $2.14 billion, up from $1.75 billion a year earlier.
Amazon, whose $8.5 billion in 2005 sales accounted for 9.6% of the US Department of Commerce’s (Doc) estimate of total US retail e-commerce sales, is experiencing slowdown in sales growth. The DoC has yet to issue its second quarter 2006 retail e-commerce sales estimate, but eMarketer forecasts that sales growth will be very close to the 22% year-on-year increase announced by Amazon.
Amazon CEO Jeff Bezos said programs like Amazon Prime, which gives subscribers unlimited two-day shipping for a fee of $79 a year, contributed to sales growth because customers tend to make more purchases across a greater number of product categories.
Amazon is also fueling growth by aggressively investing in content and technology. The company is hiring new computer scientists and software engineers and pouring resources into its A9.com search division, seller platforms and digital initiatives such as its Search Inside the Book technology and new innovations like Amazon Pages and Amazon Upgrade. This quarter technology and content investments reached a high of 36% of total operating expenses. This is up from a 22% share of total operating expenses in the fourth quarter of 2004.
In addition to investing more in technology and absorbing shipping charges stemming from Amazon Prime and free shipping promotions, the company has also lowered prices – all in an effort to fend off stiff competition not only from other e-tailers, but also from traditional retailers who sell online, such as Wal-Mart. The result is that increased costs are eating into profits. In the second quarter, Amazon raised concern among investors and analysts by reporting a 55% drop in net operating income over last year.
