Amazon is one of the biggest retailers in the world, with total value at the end of 2016 surpassing the value of other U.S. retail giants like Wal-Mart, Kohl’s, Target, Sears, Macy’s and Nordstrom’s combined. So at $355.9 billion market value, it’s a little surprising to see Amazon continue to post slim profit margins on its e-commerce sales, by far the largest portion of the company’s business. Amazon’s continued investment and exploration into things like automated grocery stores and drone delivery start to make even more sense when you dive into their 2016 numbers.

A recent peek into their annual filing by Bloomberg reveals some interesting stats around Amazon’s subscription and cloud services, big growth areas with much higher margins and less overhead than retail goods. Where retail margins are low, largely due to the high costs of shipping, subscription fees (including Prime) are growing at 40% annually. In 2016, Amazon brought in $6.4 billion from Prime and other subscription services such as e-books and movie rentals – a little less than the company spent on net shipping costs for the year.

Credit: Bloomberg

People flock to Amazon for their value on retail products but also their convenience – whether it’s fast shipping, greater availability or the ease of ordering on non-traditional platforms like Amazon’s Echo voice assistant or Dash button subscription service. But the company’s commerce volume only slightly makes up for the high cost of shipping those products around the globe.

Amazon is investing in higher margin areas of its business, like Amazon Web Services, which boasted almost 25% profit margins in Q4 of 2016, compared with retail’s 3%. But the company is also using technology and exploring areas where it can automate and upgrade its method of product delivery to grow retail without growing its shipping costs.

Future Of Grocery

Back in December, The Spoon covered Amazon’s move to create automated grocery stores using a combination of sensors, visual recognition and deep learning. The project, called Amazon Go, uses “Just Walk Out,” a system of technology that identifies shoppers via facial recognition, identifies products using sensors and RFID tags and ultimately learns what you buy and what you thought about buying so they can market to you later.

Currently, Amazon offers consumers grocery items via its Amazon Pantry program, which lets customers fill a box of dry goods (food, cleaning, hygiene, etc) and ship everything for a flat $5.99. The appeal for Amazon Pantry shoppers is not just convenience but also price as Pantry goods are usually cheaper or on par with Wal-Mart and Target prices – taking direct aim at both traditional grocers and competitor retailers. But the program still drives hefty shipping expenditures – and only offers those “middle of the grocery store” items. Amazon Go could offer both fresh and dry goods using methods of automation technology that would greatly reduce overhead.

The Robots Are Coming

The other major area where Amazon is investing R&D is the use of robots, mainly drones, for delivery as opposed to the traditional UPS driver. Prime Air has been an Amazon initiative that takes airborne unmanned drones to drop packages at our doorsteps, using remote charging stations and coordinate technology to significantly reduce the cost of bringing those brown boxes to customers. The first package was delivered back in December to an Amazon customer in the UK and it looks like the company is still working on ways to make Prime Air a feasibility in the heavily regulated U.S. airspace.

Last week, the U.S. Patent Office awarded Amazon a patent for a method of air delivery that does not involve landing a drone in your front yard but rather using parachutes, magnets and sensors to hover above and drop the package from the air. The patent application explains that this method could be a safer and less intrusive way for drones to deliver customer packages. Despite the patent and other testing and work Amazon has done with Prime Air in the U.S., the method of using unmanned machines to navigate package delivery is still illegal.

Nevertheless, Amazon’s strategy to create different avenues of lower-cost delivery models when it comes to its retail business make sense, especially when you look at where they are currently profitable and where investors would like to see higher margins. The grocery store of the future and robotic delivery certainly seem futuristic and neither are mass market options for Amazon today. But it’s clear based on its financials and initiatives in the space that Amazon is looking for ways to make retail more profitable and efficient in the not too distant future.

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