John Whelan: Amazon's expansion in Ireland shows its gameplan to beat Shein
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Amazon, a major player in the retail industry in Ireland, has reported significant growth in sales revenue with every segment of its business growing at a double-digit rate, in its quarter end September 30.
The most notable item in Amazon’s earnings report was the surprising improvement in margins.
Analysts have for some time flagged the fall in consumer demand across the wider retail industry, indicating the challenges to maintaining margins.
Hence, Amazon’s ability to actually grow margins as well as expand sales by 7% in the quarter was remarkable.
The consensus estimates by Wall Street analysts, project Amazon’s net profit margin to increase to 8% in 2024, from 5% in the prior year.
In comparison, Walmart, the massive US retailer, had a net income of 3% margin in the same period, up from 2% in 2023.
Key to the margin improvement has been Amazon’s overhauling its coordination network to "regionalise" where inventory is located closer to the customer, such as the opening of the first fulfilment centre warehouse in Ireland at Baldonnel in Dublin.
Amazon previously operated its fulfilment network on an international level, transporting products from major warehouse centres in the US, mainland Europe, and sites in Asia and Africa, as goods were ordered.
With an estimated 50,000 to 60,000 parcels a day imported into Ireland from these international fulfilment centres, the logic of locating a fulfilment centre here was a no-brainer.
And whereas the fulfilment centre was opened in 2022, it has been a gradual build-up to a fully autonomous unit which is due in 2025, when citizens here will be able to buy on Amazon.ie.
The move should mean more one-day delivery services around Ireland as well as a wider range of products free from customs charges or trade restrictions.
This regionalisation effort underway for some time, has transformed the company’s inventory management processes with Amazon saying that the optimisation has led to reduced costs, which is certainly showing through in Amazon's current quarter release.
Much of the door-to-door delivery in Ireland is handled through its partnership with An Post, who have also moved the dial against competitors by signing of The Climate Pledge, co-founded by Amazon, with its target to reach net-zero carbon by 2040, a decade ahead of the Paris Agreement’s goal of 2050.
Like its tech peers, Amazon said it expected higher capital expenditures for the near future to help develop AI (artificial intelligence) software, indicating at its quarterly reporting that capital expenditures are expected to rise to around $75bn (€68.6bn) this year.
To figure out where exactly to place inventory in each country, the company is using AI to predict what products will be in demand in each area and place them accordingly.
Commenting on the push into AI, Udit Madan, vice president, Amazon Worldwide Operations, stated in a recent interview that Amazon has seen a 15% reduction in the distance items travel from fulfilment centres to customers.
The AI investment is particularly important as the company faces increased competition from discount retailers such as Shein, which sell a wide range of goods at bargain-basement prices directly from China.
According to a report compiled by Money.co.uk, Shein has taken over giants like Nike and Adidas as the most-Googled clothing brand, and Zara and Macy’s in online sales.
The Shein business model works like Amazon — a sprawling online marketplace that brings together about 6,000 clothing factories in China under Shein’s label, while AI software collects near-instant data about which items are selling, and which are not, to visibly boost the popular items.
Perhaps the least understood aspect of Amazon's operations is the role of Amazon Web Services (AWS) in supporting its sales, marketing. and logistics.
AWS investment in data centres across Ireland and internationally with the associated AI investment, is key to its successful logistics, enabling the development of very sophisticated models to anticipate how much capacity is needed, where to place inventory and rapidly scheduling aircraft, trucks, vans, and drivers to move goods from suppliers to meet customer needs.
Retail competitors will struggle to keep up due to pricing power, and the AI technology capabilities of Amazon.
Smaller retailers here in Ireland and internationally will need to achieve significant differentiation in terms of service, assortment, and store/online experience, to compete.