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Amazon’s $21B 2020 Profit: How it Got There and What’s Ahead

Jeff Bezos’ announcement that he was passing on the mantle of Amazon CEO this year certainly caught everyone’s attention, both in retail and in the business world at large. But the news some obscured what otherwise would be lauded as Amazon’s best quarter yet, with the e-commerce giant soaring past the $100 billion sales mark in the holiday season for the first time.

Officially taking in $125.6 billion, Amazon drove a 44 percent increase in net sales thanks to a season that capped off a massive paradigm shift in consumer shopping habits in 2020. Fueled by pandemic-driven online spending since March, net sales for the full year increased 38 percent to $386.1 billion.

While the sales numbers were impressive, the net income was even more stunning, with Amazon generating $7.2 billion for the quarter and a whopping $21.3 billion net profit for the full year.

These totals came amid a year of unprecedented spending for Amazon, even by its own standards. Amazon devoted more than $61 billion to shipping costs in 2020, with the fourth quarter surpassing $21 billion alone, representing a 67 percent year-over-year jump.

On top of shipping, Amazon just keeps on building. In the fourth-quarter earnings call, chief financial officer Brian Olsavsky said the square footage of the company’s fulfillment and logistics network grew approximately 50 percent year over year in 2020.

Amazon added “significant capacity” to its transportation network as well, he said, with the Amazon Logistics (AMZL) partner network of delivery drivers now accounting for more than half of shipments worldwide. It is notable that the Federal Trade Commission (FTC) recently ordered the online powerhouse to pay $61.7 million to settle charges that it failed to pay Amazon Flex drivers the full amount of tips they received from Amazon customers over a two-and-a-half year period.

Amazon has been able to save “about a billion dollars” in transportation costs last year due to the shutdown of travel and sales teams interacting with customers remotely.

“Unlike in a typical year when new buildings are mostly in place by the end of Q3, this year a significant number of them came online in Q4, as our teams pulled out all the stops to be ready for customer demand.” Olsavsky said. “It turns out we needed that capacity in order to fill the strong customer demand in Q4.”

Amazon dedicated 60 percent of fulfillment center capacity to seller products as it continued to grow its third-party offering. Third-party units represented 55 percent of total paid units during the quarter, the highest percentage the company has ever had since inviting third-party sellers on its platform 20 years ago, according to Olsavsky. Sellers surpassed $4.8 billion in worldwide sales from Black Friday through Cyber Monday alone, growing about 60 percent from the previous year.

Workforce, Covid investments made the difference

The investments in fulfillment throughout the quarter and the year couldn’t have been accomplished without Amazon’s massive infusion of capital into its workforce.

As the Covid-19 pandemic hindered supply chains and forced brick-and-mortar retailers to shut their doors for months at a time, resulting in mass furloughs and layoffs, Amazon went on a hiring spree. After the end of the first quarter of 2020, when Amazon had 840,400 full-time and part-time employees, the company hired 450,000 more to beef up its workforce to 1.3 million employees. This included a combined 200,000 hires in both September and October as the e-commerce giant braced for record online shopping demand.

In total, Amazon invested $2.5 billion in additional pay in 2020, much of it coming in the early months of the pandemic when the company added $2 per hour for hourly workers and doubled overtime pay. These policies were discontinued in June.

Of course, no talk of Amazon’s spending would be complete without mention of the Covid-related costs, which included procuring personal protective equipment and deep cleaning its facilities, amounting to more than $11.5 billion. In the first quarter, Amazon expects to spend another $2 billion on Covid costs.

For 2021, Olsavsky said that the “range of outcomes” brings added complexity to any projections for how Amazon plans to invest in fulfillment, logistics, delivery and customer service, only indicating that the company will probably build “for multiple scenarios” depending on the Covid-related conditions throughout the year.

When asked about whether Amazon would be able to consistently invest in one-day delivery amid the pandemic-driven demands, Olsavsky was confident that Amazon will continue to increase the standard in 2021, citing examples of last-minute deliveries made on Christmas Eve.

“The one-day [delivery] has been getting better. The issue in 2020 was essentially around capacity and volume and getting things out the door and being able to then hit a shortened time period, so it wasn’t that we were delaying or slowing down the shipment itself, it was the time taken to get through the warehouse and handle the backlog of demand,” Olsavsky said. “As the year progressed, we did see that get better and better. We do forecast that it will get better…When the dust settles and as we open up more and more capacity, you’ll see greater and greater one-day percentages for our Prime shipments.”

Olsvasky said that infrastructure, largely related to Amazon Web Services (AWS), would continue to be a healthy part of the tech giant’s investments in 2021, with the company expecting to expand AWS into more markets.

International business soars

Perhaps one of the more curious Covid-related impacts on Amazon was the effect the pandemic had on international business in the fourth quarter. While Prime Day’s shift to October pulled forward overall holiday sales and helped drive the 44 percent increase in net sales, the international segment saw a much bigger jump than its North American counterpart.

While sales in North America rose 40 percent to $75.3 billion in the quarter, international sales were up 57 percent to $37.5 billion. On a sequential basis, the regional growth shows an even larger disparity—North America saw 39 percent sales growth in the third quarter, whereas international sales grew just 30 percent.

“I would attribute it really to the government actions in lockdowns that we saw especially in the U.K. and Europe,” Olsavsky said. “I think that increased during the quarter, unfortunately for the economy, but it did drive higher sales on our site. We also saw probably a larger impact of moving Prime Day from Q3 to Q4 in international just because it’s a little more nascent there. It’s still ramping up but [had] a very strong performance.”

Going ahead, Olsavsky acknowledged that the international business, although promising due to higher volume sold, will face growth challenges amid increased advertising and less Covid-driven spending.

“We’re going to have a race between lapping things that may have been onetime in nature in 2020 versus accelerating Prime membership and Prime members purchases, purchase frequency, and adoption of digital benefits,” said Olsavsky.

Amazon did not break out Prime membership totals to close out the year, but Olsavsky said that the company saw “strong growth” in new member sign-ups in the holiday season, and that the additional volume leverage “helped to achieve higher-than-expected profits.” Consumer Intelligence Research Partners (CIRP) data indicated that as of Dec. 31, there are 142 million Prime members in the U.S., with 30 million added throughout 2020. CIRP noted that to close the quarter, 52 percent of Prime members had an annual membership, up from 49 percent just three months earlier.

Amazon CFO: ‘Today’s about Andy and not Jeff Bezos’

In the call, Olsavsky gave his vote of confidence to AWS CEO Andy Jassy, who will be replacing Bezos at the helm as the latter moves to executive chair.

“Andy has a chance to put his imprint on Amazon. He is certainly going to carry through culture and the vision and the invention factory that Amazon is, and we’ll take that to the next level,” Olsavsky said. “Jeff will be involved in many large one-way door issues… meaning the more important decisions like acquisitions, things like strategies, going into grocery and other things. Jeff’s always been involved with that, and that’s where you know we’ll keep his time focused on. But for now, today’s about Andy and not Jeff Bezos.”

The company will be working on backfilling the AWS CEO role, and will provide more comment on the process in the future.

Olsavsky also described the recent change at the top of Amazon’s retail business as a “natural transition,” with Jeff Wilke, Amazon’s CEO of worldwide consumer, announcing his retirement last August. Senior vice president of worldwide operations Dave Clark officially took over for Wilke in January.

Clark is credited for expanding Amazon’s fulfillment center network, creating and expanding its transportation capacity and the overall direction of the company’s grocery strategy, among other accomplishments.

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