Amazon's move: more operational efficiency with robots and logistics

Artificial intelligence. More: cloud computing. More: electronic commerce. These are words which, on the one hand, fit Amazon; and which, on the other hand, are constantly used in reference to the business of the giant founded by Jeff Bezos. However, there are other words - rarely referred to the Seattle-based company by the media - that, instead, describe an important part of the current strategy. What are we talking about? Essentially the terms operational efficiency and cost reduction. It is a focus that the market has repeatedly appreciated. An example? The reaction of investors to last year's third quarter results. Amazon's share price rose 6.2 per cent the day after the data was published. Indeed! The share price jump was also, and above all, caused by higher than estimated revenues and profits. The quarterly turnover was 158.9 billion against expectations of 157.3 billion. Diluted earnings per share, for its part, came in at $1.43 against a consensus forecast of $1.14. That said, however, investors were favourably impressed by the efficiency and expense pressures programme.

To understand the reason for this attitude, one has to widen the angle of vision. Big tech - and not only - are increasing their capitalised investments in order to occupy the first class of the train bound for Artificial Intelligence (Ai). Operators, in general, do not seem to welcome such outlays with much enthusiasm. In particular, because they fear that the huge Capex will not guarantee the correct return in the future. So it is not surprising that the market, again in the last quarter, turned its nose up at some companies. One among others: Meta. Mark Zuckeberg's company - which, together with Bezos himself, will be paying homage to Trump on Inauguration Day - had won back investors after refocusing on its core social business and putting the failing Metaverse in the background. True! Optimising, for example, advertising with Ai has paid off. Apart from this, however, the Reality Labs (to which the metaverse itself is traced and in which Zuckeberg continues to invest) still posted an operating loss of EUR 4.4 billion in the third quarter. In the face of this, operators - fearful of new 'meta leaks' - expressed their fears.

The film projected at Amazon is different. The Seattle-based multinational - despite indicating that Capex in 2025 is expected to exceed USD 75 billion in 2024 - has, in fact, focused on corporate efficiency. A factor that - here is the real point of difference - does not remain at the level of narrative alone, but is reflected in the numbers. In the first nine months of 2024, the operating profit of the North American area - to which the e-commerce and advertising of those markets is essentially attributed - rose to 15.7 billion dollars (it was 8.4 billion a year earlier). The same business then - but in the rest of the world - reached an operating income of 2.5 billion, compared to a loss of 2.2 billion 12 months earlier. In other words, the two divisions - which have always had volatile profitability - managed to increase operating income. This was also due to increased efficiencies. This can be replicated at the consolidated level and more in the long term. How? By analysing the dynamics of the ratio of operating income to revenues from 2019 to today. Well: the margin six years ago was 5.2%. The indicator, passing through the 5.3% in 2021 and the drop in 2022 (2.4%), reached 6.4 in 2023. Finally, in the first nine months of 2024, it reached double figures. Of course! On the one hand, the reported indicator thus calculated is crude; on the other hand, individual annual figures are always the consequence of one-off accounting items. Therefore, their signalling value is not high. That being said, however, the underlying trend of margin improvement remains. And it is this characteristic that - at least in the latest quarterly results - has been appreciated by the market, which has given the company confidence in its ability to be able to monetise the high Capex.

Yes, trust. But what in concrete terms are Amazon's efficiency moves? First of all, on an accounting level, there is - in the first nine months of 2024 - the decrease in expenses for both marketing and administration. Also, more on the operational front, there is the regionalisation of logistics and deliveries. This is a project started in America -and which will be extended to the rest of the world- which allows, for example, to improve warehouse distribution capacity. Not only that. Another focus is the continuous implementation of same-day delivery facilities. "Here," CEO Andy Jassy indicated in the conference call on the latest quarterly report, "more than 40 million customers in the third quarter received a free same-day order. This 'implies an increase of over 25 per cent year-on-year'. Finally, there is the commitment to process robotization. Last September saw the opening of the 12th generation warehouse in Shreveport, Louisiana. The building represents a step forward in the company's logistics operations. It contains systems that, on the one hand, co-ordinate mobile robots and robotic arms to optimise the storage and retrieval of products; and, on the other hand, manage the sorting, stacking and consolidation of customer orders using Ai.In short: the effort on this front is clear.

So far, some suggestions on numbers and operational efficiency. It must not, however, be forgotten that - despite the increase in profitability, in the wake of the same streamlining, of e-commerce - Amazon's wealth engine remains cloud computing. The division to which it is traced - Aws - realised an operating income of 29.2 billion in the first nine months of 2024 (it had been 17.5 a year earlier). That being said, Aws' turnover increased by 19 per cent in the third quarter. This figure is upwards, but in line with the expansion of the second quarter. A fact - the latter - that 'insatiable' investors have interpreted as the possible effect of tough competition in the cloud. Especially now that the Ia gold rush has entered into full swing. True! Aws - according to Statista - firmly holds the first position in the cloud computing sector with 31% market share. And, however, competition from others is increasingly fierce. This is, for instance, the case with Microsoft, which boasts a market share of 20%, or Google cloud itself (12% market share). According to some experts, the very company founded by Bill gates is a formidable rival. Particularly in the medium to long term. Microsoft - is the indication - has a dominant position in the market for business software, with key products including Office 365. In addition, Microsoft has further consolidated its strong relationship with the developer and business community through the Windows ecosystem. This is a condition - the analysts go on to explain - that can enable the Redmond company - also by leveraging its products already present in enterprises - to grow in the IT cloud, giving Amazon a run for its money.