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Amazon International Retail Margins Will Catch Up

- By Sangara Narayanan

Amazon (AMZN) has shaken up the retail industry in a way that no other company has ever done. They disrupted the status quo by taking the e-commerce route, although now, it looks more and more likely that they will enter the physical store concept as there are some big gaps in the delivered-to-your-home-after-you click-the-button business model.


But whatever Amazon does, the company has mastered the art of experimenting in the U.S. and replicating that success all over the world.

That's what they did with Amazon Web Services, that's what they did with Amazon Prime, Amazon Prime Video and so on. That started their work in the U.S. and then took the model to as many countries as possible.

More often than not, however, Amazon is being judged by its performance in North America retail, as well as that of Amazon Web Services.

The main reason for this is that both these segments are profitable, while the international segment is not, which leads investors and analysts to put a lot of emphasis on Amazon's performance in these two segments.

For any retailer, but especially a large one, size is the most important thing. Only by adding tens of billions of dollars to its top line was Amazon North America retail able to keep expanding its operating margin. Size and scale help retailers move large amounts of product at low margins, but still end up raking billions in operating profits. Amazon now has operations in more than ten countries, some developed and some developing. It's a clever mix of regions that can bring in the dollars, but also keeps Amazon ready for markets that are poised to grow.

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As we have noticed through Amazon's North America operations, it takes size to get the margins flowing, and size takes time. Thankfully, Amazon didn't try and expand into as many countries as it could, but instead decided to focus on a handful. Building a distribution network, fulfilment centres and brand awareness takes time, and a rapid addition of countries would have spread the company thin. That's possibly the reason why we don't hear every year that Amazon has expanded into a few more countries.

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Amazon's international operations brought in $43.98 billion in revenue in 2016, a growth of 24.2% compared to prior year. In comparison, Walmart's international revenue was $116.119 billion last year, a decline of 5.9% compared to prior year. Chinese e-commerce giant Alibaba strictly remains a one country company, though the company has made some efforts to enter into the Indian market by investing in Indian e-commerce companies.

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Except for Walmart and Amazon, no other big retailer has been able to conquer the international market. Regional retail markets continue to be dominated by regional players. Though the rate of growth in the international segment hasn't been consistent compared to North America retail - and is still many years away from being profitable - it must be noted that Amazon has increased its international sales nearly tenfold in 10 years. And the longer the company stays in operation in a particular country, the greater the odds of its growth.

China might be the one exception to that rule, but that's got a lot to do with the country's regulatory environment and the growth of Alibaba (BABA). In all other countries, Amazon is now searching for scale and, as long as its revenue keeps growing, margins will start catching up.

Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.

This article first appeared on GuruFocus.