Costs and Expenses in Amazon’s Business Operations
Amazon is the leading e-commerce brand of the world and also a leading player in the cloud industry. Amazon’s revenue over the past three years has seen massive growth driven by increased global sales as well as growth in sales of cloud-based services. The net revenue of the company in 2019 grew to $280.5 billion compared to $232.9 billion in 2018. The popularity of Amazon’s e-commerce platform as well as its cloud services has grown a lot during recent years. While on the one hand, the net sales of Amazon have grown rapidly, on the other its operating expenses have also grown faster, driven mainly by growth in research and development expenses as well as the cost of sales and fulfillment costs.
There are many types of costs involved in running an e-commerce website that serves millions of users worldwide. While the cost of sales is the largest operating expense incurred by Amazon, the expenses related to research and development as well as fulfillment are also among the significant expenses that Amazon incurs each year.
Cost of Sales:
Amazon’s cost of sales mainly includes the purchase price of the consumer products that Amazon sells on its e-commerce platform, inbound and outbound shipping costs, including costs related to sortation and delivery centers, as well as the costs of digital media and content including video and music. The higher sales of Amazon in 2019 drove the growth in its cost of sales in the year. With higher sales, the product costs as well as the shipping costs of the company grew. Amazon includes the costs of shipping for receiving products from its suppliers in inventory. These costs are recognized as cost of sales upon the sale of products to the customers. The shipping costs of Amazon which include the costs of sortation as well as delivery centers and transportation costs reached $37.9 billion in 2019 from $27.7 billion in 2018. In the future, Amazon’s shipping costs are expected to continue to increase driven by increased acceptance of the shipping offers from Amazon by its customers. The costs of shipping will also increase because apart from reducing shipping rates and using more expensive methods of shipping including faster delivery, the company also offers additional services. Over time, Amazon will try to mitigate its shipping costs through higher sales volume, optimization of its fulfillment network as well as by negotiating better terms with its suppliers and by achieving higher operational efficiency. Offering lower prices is one of the core pillars of the business strategy of Amazon and one way that the company offers its customers lower prices is through shipping offers.
The company includes the costs of operatng its AWS (Amazon Web Services) segment in its research and development expenses which it includes as Technology and Content expenses in its annual report (form 10K). It is because the company leverages a shared infrastructure that supports both its internal technology needs as external sales to the customers of Amazon web services.
The fulfillment costs of Amazon include the costs of staffing and operations of its North American and International fulfillment centers, retail stores, customer service centers, and payment processing costs. The company includes the AWS payment processing and transaction-related costs as fulfillment costs but the other AWS costs are classified as technology and content expenses. The changes in fulfillment costs as a percentage of net costs reflect several things that include changes in payment processing and transaction-related costs, level of Amazon’s productivity and accuracy, changes in the volume, size, and weight of the units received and fulfilled, the extent of the utilization of Amazon fulfillment services by third parties, as well as the mix of products and services sold by Amazon.
The fulfillment costs of Amazon increased in 2019 compared to the previous year increased due to several factors and mainly due to the growth in variable costs which grew due to higher products and services sales volume, inventory levels and costs incurred due to the expansion of Amazon’s fulfillment network and retail stores. In the future, Amazon plans to expand its fulfillment network in order to accommodate a larger selection of products and in-stock inventory levels.
Technology and Content (Research and Development Expenses)
Amazon classifies its research and development expenses as technology and content expenses. These expenses mainly include the staffing expenses (payroll and related expenses) for the employees engaged in research and development, as well as the employees involved in the design and maintenance of its ecommerce platform and the infrastructure costs. Infrastruture expenses of Amazon include the servers, networking equipment, data centers related depreciation and amortization, rent, utilities and other expenses necessary for running AWS as well as other Amazon businesses. The research and development costs of Amzon geew in 2019 mainly due to increased costs of technological infarstructure and higher spending on the payment and related costs of employees involved in research and development projects. Until now, Amazon’s research and development expenses have grown at a fast rate but in 2020 Amazon expects it to grow at a slower rate because of an increase in the useful life of its servers which is going to impact nearly all segments.
The marketing expenses of Amazon mainly include the advertising expenses as well as payroll and related expenses of staff employed in the marketing and sales functions, including sales commissions realted to AWS. Aazon uses several marketing channels for the marketing of its ecommerce, Prime Video and AWS platforms. It uses sponsored search, third party customer referrals, social and online advertising, television advertising and other various form of marketing and promotional campaigns. The marketing costs of Amazon are largely variable which is because of growing sales and changing advertising rates. Marketing costs can increase or decrease based on increased or decreased competition as well as changes in the marketing mix of the company.
General and Administrative Expenses:
The general and administrative expenses of Amazon grew in 2019 mainly due to increased costs of payroll and employment related expenses of Amazon employees. The following table shows the operating expenses of Amazon for the past two years:
|Amazon’s Operating Expenses||2018||2019|
|Cost of Sales||$139,156||$165,536|
|Technology and Content||$28,837||$35,931|
|General and Administrative||$4,336||$5,203|
|Other Operating Expenses net||$296||$201|
|Total Operating Expenses||$220,466||$265,981|
Amazon (NASDAQ: AMZN) is the largest e-commerce brand as well as one of the leading cloud services brand. The company which was founded in 1994 has seen enormous growth over the last five years and has greatly extended its range of cloud-based services. Amazon has its headquarters in Seattle, Washington, United States. The CEO of Amazon is Jeff Bezos. Amazon Web Services (AWS) is the cloud services platform of Amazon. Amazon is also the largest R&D spender in the entire industry. The company has divided its business into three main segments that include Amazon North America, Amazon International, and AWS.