Amazon’s Fulfillment Center Investments Aimed To Corner More Market Share

There is little question that Amazon has redefined the e-tail industry. According to a recent study by Forrester, Why Amazon Matters Now More Than Ever, Amazon is a leading source of research for online buyers. The report claims that 30% of online buyers use Amazon to research products first, compared with 13% of buyers who use Google. Forrester estimates that Amazon’s share in the U.S. e-commerce revenues grew from 9% in 2001 to 19% in 2011. Amazon plans to increase its footprint and is investing heavily to ensure this growth continues.

Amazon’s Financials
Amazon’s (NASDAQ:AMZN) Q2 revenues grew 29% over the year to $12.83 billion, marginally shy of the Street’s target of $12.9 billion. However, net income fell 96% over the year to $0.01 per share, missing analyst expectations of $0.03 per share.

By segment, product revenues grew 25% to $10.79 billion and services revenues grew 57% to $2.04 billion. The company did not divulge details, but it claims that the Kindle Fire tablet/e-reader remained the best-selling product among the products sold on Amazon’s website. North American sales grew 36% over the year, while international sales grew 22%.

For the current quarter, Amazon projected losses between $350 million and $50 million on revenues of $12.9 billion-$14.3 billion. Analysts were projecting income of $119.6 million on revenues of $14.1 billion for the period.

Amazon’s Expansion
Over the next few quarters, Amazon will increase its investments in growth opportunities, resulting in weak earnings guidance. The company has already built six fulfillment centers and is looking to add a total of 18 such centers by the end of this year. Analysts believe that Amazon is expanding its physical presence to help shorten the delivery time for products. Some even expect Amazon to begin to offer same-day delivery on its products in the cities where it is opening the new fulfillment centers. If Amazon is able to reduce its delivery times, it will also begin to compete with the brick and mortar retail stores, a move that will make it bigger force to reckon with in the retail segment.

It is also developing a mobile platform that will work with Kindle Fire tablet computer and other mobile gadgets, including smartphones. To cater to the expected holiday rush, Amazon is expanding its website support and marketing investments. 

Amazon also recently announced the acquisition of UpNext, a 3-D mapping service. Amazon will up the ante with both Google and Apple through this acquisition as these players of course already have in-house mapping services. Analysts expect Amazon to be able to include GPS radio and other mapping capabilities to Kindle Fire’s upgraded versions. The terms of the deal were not disclosed.

Despite the shrinking margins, analysts believe that Amazon continues to develop a good business model. The company is seeing strong growth in the high-margin digital business. Amazon direct, its online streaming service, has a library of more than 18,000 movies and TV episodes. The earlier acquisition of LOVEFiLM has also delivered strong results as the company is the leading European film and TV subscription service. Analysts believe that growing its digital services will stand Amazon in good stead in the long run.

Amazon’s stock is trading at $237.32, with a market capitalization of $107.27 billion. It touched an all-time high of $246.71 in October 2011.