Amazon's investments in global expansion cause profit drop

Amazon.com on Thursday reported a jump in retail sales along with a profit slump, as its rapid, costly expansion into new shopping categories and countries showed no sign of slowing.

The world's largest online retailer posted second-quarter revenue of £29m, up 25 per cent from a year earlier. This impressive growth stands in stark comparison to increasing numbers of brick and mortar rivals who have struggled to adapt to a growing tendency for customers to shop online.

However despite these figures, Amazon posted a 77 per cent drop in their quarterly income which could mean it loses over £300m in operating profit.

In order to counter the notoriously thin margins of retail and maintain their market dominance, Amazon have been investing heavily in alternative shopping categories, faster shipping and video.

Video content included with Prime membership has helped to keep subscribers and encourage more to join the ranks.

Subscription sales including Prime fees rose 51 per cent in the second quarter to almost £2 billion, and it's estimated that over half of all US households will have Prime membership by the end of 2017.

Overall shares in Amazon have been at a record high of late, helping CEO Jeff Bezos to briefly become the richest person in the world, overtaking tech magnate Bill Gates.

Rising from its humble beginnings as a small-time book seller, Amazon has grown through investments in all manner of areas from clothes to appliances, and now groceries. Last month, the Seattle-based company made a deal to purchase Whole Foods for around £10 billion.

"The fact that they are investing on so many fronts right now just speaks to the opportunity that they have before them," said Edward Jones analyst Josh Olson. "We are giving them the benefit of doubt here because they have executed so well historically."

Amazon has also announced a brand new 2-hour delivery service called Prime Now, which will go through premier in Singapore. The move comes as Amazon continues its ongoing investment into Asia with the aim of becoming one of the major retail players on the continent. The company has already committed to investing over £3 billion in India as well as breaking into the Middle Eastern commerce market with its purchase of Souq.com.

Michael Patcher, an analyst at Wedbush Securities, said it was fairly normal for companies like Amazon to grow their expenses at a slower rate than their revenues.

"G&A up 50 (per cent) is crazy," he said, referring to general and administrative costs in the second quarter.
Operating expenses rose 28.2 per cent to nearly £30 billion in the second quarter ending 30 June. The operational costs of marketing and technology, among other things, also rose during this period.

Sales from Amazon's Web Services, the biggest cloud-computing business in the world and the company's largest source of revenue, increased by 42 per cent to £3 billion in this quarter, too, indicating that the mega-firms sizable investments are already beginning to pay off as they work to break into whole new markets and countries.

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