Amazon.com 2005 Annual Report Download - page 42

We expect that, over time, our International segment will represent 50% or more of our consolidated net
sales. Additionally, as we continue to offer increased selection, lower prices, and additional product lines within
our Electronics and other general merchandise category, we expect to see the relative mix of sales from this
category increase. See “Supplemental Information” below.
Gross profit information is as follows:
Year Ended December 31,
2005 2004 2003
(in millions)
Gross Profit:
North America ................................. $1,267 $1,024 $ 867
International ................................... 772 578 390
Consolidated ................................... $2,039 $1,602 $1,257
Gross Profit Growth Rate:
North America ................................. 24% 18% 17%
International ................................... 33 48 55
Consolidated ................................... 27 27 27
Gross Margin:
North America ................................. 26.9% 26.6% 26.6%
International ................................... 20.4 18.8 19.5
Consolidated ................................... 24.0 23.1 23.9
The increase in gross profit in absolute terms during 2005, compared to 2004 and 2003, corresponds with
increases in sales, including increases in sales by third-party sellers, increases in amounts earned from our
co-branded credit card agreements, and increases in amounts earned from Amazon Enterprise Solutions, offset by
our free shipping offers and lower prices for customers. Generally, our gross margins fluctuate based on several
factors, including our product, service, and geographic mix of sales; sales volumes by third-party sellers; changes
in vendor pricing, including the extent to which we receive discounts and allowances; lowering prices for
customers, including from competitive pricing decisions; improvements in product sourcing and inventory
management; and the extent to which our customers accept our free shipping and membership offers. Such free
shipping and membership offers reduce shipping revenue and reduce our gross margins on retail sales. Amazon
Prime, introduced in 2005, is a shipping membership program in which members receive free two-day shipping
and discounted overnight shipping. We have offered free membership trials for Amazon Prime, and we expect to
continue to offer these trials in the future. We view our shipping offers as an effective worldwide marketing tool
and intend to continue offering them indefinitely.
Sales of products by third-party sellers on our websites continue to increase, representing 28%, 26%, and
22% of unit sales in 2005, 2004, and 2003. Since revenues from these sales are recorded as a net amount, they
generally result in lower revenues but higher gross margin per unit. If product sales by third-party sellers
continue to increase, the higher gross margin attributes of these sales will offset decreases in our gross margins
due to lowering prices for customers over time by offering price reductions, free shipping offers, and promotions.
Gross profit growth is also affected by changes in exchange rates—see “Effect of Exchange Rates” below.
North America segment gross margins in 2005 improved by 30 basis points compared to 2004 resulting
primarily from increases in sales by third-party sellers, increases in amounts earned from our co-branded credit
card agreement, and increases in amounts earned from service agreements, offset partially by our efforts to
continue reducing prices for customers. Since we focus on profit dollars rather than margins, we are largely
neutral on whether an item is sold by us or by a third party.
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