Amazon reported earnings last month and while the company achieved another $100 billion in quarterly revenue, they still missed analyst forecasts – the first time that has happened since 2018.
Quarterly growth slowed from more than 40% (both year-over-year and compared to the previous quarter) to a mere 13%. Amazon CFO Brian Olsavsky further metered expectations on the earnings call by saying that a continued slowdown in growth numbers should be expected.
Some of us in the industry weren’t totally surprised by this decreased momentum. There were rumors earlier in the year that Amazon was worried about sustaining revenue comps from a year ago at a time when eCommerce had exploded due to the COVID-19 pandemic and ensuing lockdowns. When Amazon announced that its annual Prime Day would not come in July (as is custom) but instead in June, and began selling related advertising packages to brands in March and April of this year, the news left many wondering if the change in timing had to do with achieving year-over-year financial goals.
There were other notable headwinds impacting Amazon’s report as well. In May of this year, Amazon announced that they would raise hourly wages for 500,000 workers between $0.50 and $3.00. Olsavsky stated in the call that higher wage pressures will be a factor in the diminished financial forecast going forward.
However, looking deeper into the report there are a few bright spots that illuminate where Amazon is thriving. An increase of 87% in their “other” services category (which is the media sales group) is a demonstration of the magnitude of Amazon’s power not just as a retailer, but as an advertising platform.
In Q2 of this year, advertisers reported seeing an increase in the average cost per click (CPC) to their sponsored ads. According to Pacvue, a leading third-party API tool for managing retail media campaigns, the average CPC was $1.22, up $.90 from the previous quarter. This rise in media costs resulted in a decreased return for many advertisers – Pacvue reported advertisers saw as much as a 26% reduction in Return on Ad Spend (ROAS) during the quarter.
Advertisers that are hyper-focused on profitable growth will need to continue closely monitoring this trend. We’ll be curious to see how major Amazon competitors like Walmart and Target fared during this same timeframe, as they have been taking significant steps to increase the revenue generated from advertising on their platforms. Walmart and Target will both report earnings this week, and we’re interested in learning more on how the pandemic and expanded retail media offerings will affect those results.
Brands may soon find that the rise in costs of Amazon and its competition are just too steep for their budgets, and could look elsewhere for incremental opportunities to capture consumer interest. For now, brand advertisers would be smart to evaluate the trends in cost and performance they are seeing in their Amazon programs and collaborate with their agency partners to explore other platforms that may drive the same incrementality at a reduced rate. The great news? Many of those programs already exist and more are on the way. These include things like sponsored ads offerings available from partners like Criteo, CitrusAds, and Quotient who power the ad experience across a broad range of retailers such as Target, Kohls, Best Buy, and Home Depot, just to name a few.
Interested in learning more about how our teams at 3Q Digital can help you not only drive better advertising results, but improve cost-efficiency of your campaigns at the same time? Reach out to speak with one of our experts!
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