Amazon Retail EMEA Strategy and Profitability

Former Finance Director at Amazon EMEA

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Former Finance Director at Amazon EMEA

The executive spent almost eight years at Amazon, culminating with the role of Finance Director of EU operations. He has experience running finance for multiple categories across the UK and Germany before leading the finance division for EMEA operations.Read more

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How much do the economics for Amazon differ between the merchandise categories?

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If you're looking at books, books in certain markets can be a very high margin business because you've got fixed pricing, so there is no pricing to your buying power. You can be sitting there making margins in the 30s. It really does depend on the categories, obviously, some are losses like video consoles is a brutal business, video games is better. Apparel can be a high margin category but obviously then depends on how well you manage your inventory in terms of full price sales. There's a broad spread and broad range, but consumer electronics is generally a loss-making business, so we'll be running in low single digits on the negative side through to categories where we're making 30+%, which is why apparel is very interesting.

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Is there a roadmap that where the markets move in that direction, and become more profitable over time? Just thinking about that face value, unsustainable situation, you have this 3P business that makes some money, but then everything is subsidized away from the 1P business. At some point, you have to make a free cash flow in that business.

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Free cash flow is very different. I think my view of Amazon is always a little bit misunderstood, having spent a lot of time there. Generally, when I read analyst reports, I think that Amazon was always focused on free cash flow more so than profitability, which is obviously you're leveraging supplier payment terms, you're focused highly on inventory turns and accounts payable balances to make sure you can cycle cash very, very quickly to fuel growth. That works very well in the retail business because of where you've got your suppliers. Less focus was in terms of pure profit dollars on an item but Amazon was relentless about driving costs out of the business. How do you try and find ways of Improving profitability without pushing up price?

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They already have tremendous scale, and it's something like I think $600 billion of GMV across the world. What's the top reason that they are not pulling that profitability lever, just a little bit? Costco in the US has a 3% operating margin and Amazon is not showing even that.

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The most simple answer is that, one of the ways that you can lose customers – and it's never immediate, but it is something that happens over time – is when you start feeling like people realize that your pricing is no longer honest. I think that that's one thing that Amazon has been. There was a conversation with the pricing team internally that I know I had when I joined. The pricing team – a bunch of very, very smart guys – had built the pricing tools that could optimize for profit or growth and Jeff got very upset, and said, "Guys, if I ever see that in the company again, you'll be fired". We optimize for customer trust, and I think that that is a fundamental belief in the company that you do not want to lose customer trust. You hold true to what is right, what is almost a fair value for a product and your pricing tools need to do that.

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