Amazon operates in 58 countries, and while its international operations tend to be offsetting in terms of costs and revenues, there still foreign currency profits that end up being translated back to Amazonâ€™s financial statements. This creates translational risk for the company. The operating offsets mean that Amazon doesnâ€™t need to utilize hedging strategies, but tactics like offsetting costs and revenues, and diversification of international operations, help Amazon reduce the translational risk that it faces. This paper will examine what foreign currency exchange rate risks Amazon faces, and what tactics it undertakes to mitigate these risks on its income statement and balance sheet.
Amazon has online retail operations in 58 countries around the world, and these are typically priced in local currency. This has implications for the companyâ€™s strategies with respect to foreign exchange risk, and foreign exchange cash flows. The use of local pricing is aided, however, by the fact that Amazon sources a lot of its goods either at the global level, utilizes local sources, or uses third party resellers to help with the provision of the goods that are on each national-level site. This paper will discuss the international aspect of Amazonâ€™s business, in terms of foreign currency pricing and in terms of how the foreign currency policies Amazon utilizes impact on its bottom line.
Amazon operates in at least 58 different countries around the world. This means that it has exposure to a large number of currencies â€“ less than 58 because of the euro â€“ and those transactions will ultimately have implications for Amazonâ€™s bottom line. Amazon notes in its latest annual report that â€œinternational activities are significant to our revenues and profits, and we plan to further expand internationally.â€ The typical structure for international operations for Amazon mirrors the structure of domestic operations â€“ the company has a website or a set of websites that serve as the main shopping portal. That shopping portal is then serviced by one or more warehouses from which goods are dispatched. There is typically also a third-party vendor program, through which third party companies offer goods through Amazon. In those situations, the goods do not pass through an Amazon warehouse.
Amazonâ€™s North America business unit features warehouses in most major cities, and in many cases Amazon has its own couriers to do deliveries. In some markets, neither of these conditions holds. Many foreign markets do feature warehouses, where Amazon holds inventory that it will eventually deliver to customers. This holding of inventory is typically going to be one of the primary means of exposure, along with the eventual sale of inventory, to foreign currency risk. As an example, Amazon in the UK will purchase goods in dollars, yuan, pounds or euros, but will always sell in pounds. Where it is possible to purchase in pounds and sell in pounds, there is no foreign exchange rate risk. In Canada, for example, Amazon will use a mix of locally provisioned goods and goods that have been imported through its US main company and then shipped to Canada, creating both additional costs and foreign exchange rate risk on the sale.
Pricing at Amazon is typically based on cost-plus, while to an extent taking into account local market conditions. In the highly competitive US market, Amazon leverages its bargaining power to bring prices on things like Amazon Basics down. The transparency of comparing pricing across similar products is also built into the system, so that there is a quasi-auction feel to the pricing â€“ a vendor can easily see if its products are priced competitively, should it be curious about sales levels. There are more tricks and subtleties to Amazonâ€™s pricing, but cost-plus is at the core of the pricing system. Because so many consumers search Amazon first, there is less need for Amazon to take market considerations into account, except with high volume products that are sold at the larger competitors (i.e. Best Buy, Walmart, Home Depot, etc.) (Medium, 2019).
Even in foreign markets, Amazon tends to adopt the same pricing strategy as in the US, and one of the tricks it uses is to leverage its data. Amazon changes prices on products frequently, based on a broad range of variables including profit margins, inventory, competitorsâ€™ prices, shopping patterns and a wide of other input variables (Mehta, Detroja & Agashe, 2018). Amazon uses this data for things like loss lead pricing, in the hopes that consumers will start to think that Amazonâ€™s prices overall are good. The complexity of Amazonâ€™s pricing strategy is mirrored in other countries, but is obviously better in countries where sufficient data exists to make solid data-driven decisions. The prices are set in local currency, as well, but the frequent changes may take into account foreign currency fluctuations in some situations.
On its financial statements, Amazon reports in US dollars. Most likely its internal reporting is by country, and is done with both local currency before being translated over to USD.
Contributions to Profit
In the United States, Amazonâ€™s annual sales are $193.6 billion. The two largest foreign markets are Germany ($22.2. billion) and the UK ($17.5 billion), with Japan at fourth ($16 billion) (Statista, 2019). The currencies are the euro and pound respectively in these countries, and those currencies are used on the retail side. They are highly likely to be the currencies of choice on the cost side as well. While Amazon does not specify this, these are very large markets and goods sourced in and for these markets will almost always be denominated in their home currencies. It is entirely possible that for some of Amazonâ€™s smaller markets, other currencies besides the home one might be used for the costs â€“ for example a small market country in Europe that would source much of its consumer goods in euros.
Combined, foreign currency operations contribute $280.522 billion to Amazonâ€™s revenues, and $265.981 billion to its expenses, so there is both a substantial top line and bottom line impact for Amazon of foreign currency exchange rates. The impact of exchange rates is slightly different each year, and for the revenue and cost sides, because of where and when the revenues and costs take place. For example, in 2019 the foreign currency impact was slightly bigger on the cost side than on the revenue side. Nevertheless, when taken on a percentage basis of Amazonâ€™s overall scale, the exchange rate effect ($180 million last year, $226 million the year before) is relatively inconsequential (Amazon 2019 Annual Report).
Given that sales from international operations constituted 27% of revenue for Amazon, the company faces a substantial amount of foreign exchange rate risk. This risk is recorded in both the North America segment (i.e. Canada and Mexico) and the International segment. Outside of North America, most of the risk comes from British pounds, euros and Japanese yen. Aside from the Mexican peso, the top four countries for foreign exchange rate risk are all in the category of reserve currencies. These are the currencies that are most widely-held by central banks around the world, most commonly used in international transactions, and for which the most robust forex markets exist. The US is the worldâ€™s largest reserve currency, followed by the euro, the yen and the pound. The Canadian dollar ranks sixth, just behind the Chinese renminbi (HowMuch,net, 2019).
What this means for Amazon is that much of its exposure to foreign exchange rate risk is in reserve currencies that can fairly easily be subject to a financial hedge. That said, Amazonâ€™s first choice is the operating hedge. An operating hedge is when a company matches to the best of its ability the revenues and costs associated with doing business in a country. For a manufacturer, this can be quite difficult because it means that the company has to produce in that country. But for a retailer, if it is large enough to source most of its goods in a given country in local currency, then it can establish an operating hedge. That said, if Amazon is selling in Canada, but those goods come from China and are purchased in USD and then shipped to North America, there will still be forex risk exposure. In Europe, the UK and Japan, it should be expected that there is a more significant operating hedge in place for Amazon, and those are the three largest foreign currency markets that the company has.
Another means of hedging foreign currency exchange risk is through diversification. The way that works is that if Amazon is operating in just one foreign country, then all the revenues and profits from that operation are subject to the risk associated with a single currency pairing. Amazon operates in around fifty different currencies around the world, and that provides a measure of diversification for it. How this works is similar to how diversification works in any other context. If Amazon faces a foreign exchange loss on its British operations, but a foreign currency gain on its European operations, then the loss and gain can mainly cancel each other out. This is not necessarily going to happen when translating forex transactions back to USD, because the USD tends to be the worldâ€™s reserve currency and often if it increases in strength then it increases against all other currencies. But Amazon does have a high degree of diversification for its foreign currency exchange rate risk.
A third means of hedging against foreign currency exchange rate risk is to utilize forex markets, options and other tactics in order to manage the volatility associated with foreign currency risk (Reiff, 2020). For Amazon, however, most of the risk it faces with foreign exchange in translation risk, rather than transaction risk. Hedging techniques, such as derivatives trading, tend to be better for transactional forex risk. For translational risk, there is no movement of currency, no transactions, just the risk associated with translating foreign currency-denominated transactions back to US dollars for reporting purposes. Diversification is a better approach for this, rather than transactional approaches.
The company outlines what this translational exposure can mean for its financial statements, in the 2019 Annual Report: â€œBased on the balance of foreign funds as of December 31, 2019 of $15.3 billion, an assumed 5%, 10% and 20% adverse change to foreign exchange would result in fair value declines of $765 million, $1.5 billion and $3.1 billion. Fluctuations in fair value are recorded in â€œAccumulated other comprehensive income (loss)â€, a separate component of stockholderâ€™s equity.â€ The company further notes that â€œEquity securities with readily determinable fair values are included in â€œMarketing securitiesâ€ on our consolidated balance sheets, and are measured at fair value with changes recognized in net income. There will also be year-over-year variability in the impact that foreign exchange rate volatility has on Amazonâ€™s financial statements. For example, in 2017 the company saw a forex gain of $202 million, a loss of $186 the next year, and a $95 million gain last year, according to the 2019 Annual Report.
Impact of USD Changes
Amazonâ€™s financial statements are in US dollars. What this means is that if the USD increases in value – for this example we will assume this is against all of Amazonâ€™s foreign currencies â€“ then Amazonâ€™s profits will decrease, all other things being equal. The independent variable is the value of the US versus these other currencies. If the value of the USD goes up against those currencies, then the profits from those operations will be lower once translated into USD. If the foreign operations were losing money, on the other hand, the opposite would occur. But since on aggregate Amazonâ€™s foreign operations are profitable, the value of that profit in USD would decrease if the USD rose in value.
The opposite holds true if the USD goes down in value. In that case, the foreign currencies would be more valuable when translated back to USD. So a decline in the value of the USD would increase Amazonâ€™s profitability, because the value of the foreign profits would be higher in USD terms.
Amazon does most of its business in the US by far, but operates across 58 international markets, and these markets typically use foreign currencies. The largest of these markets also happen to be major world economies with reserve currencies. Therefore, costs and revenue in those markets are, in all likelihood, only denominated in local currency. However, there are likely some situations where Amazon makes bulk purchases of particular items and then makes those items available globally, in which case there might be some costs on the USD side that are incurred by foreign subsidiaries. Revenues, however, will always be in foreign currency.
Amazon does not deal with foreign exchange up front, necessarily. Its pricing model is complex, and driven by big data, and not entirely transparent. It is known that there are several variables, only one of which might be the prevailing foreign exchange rates. Thus, Amazon does not specifically or deliberately price to maintain USD profitability on a given item, and might not address foreign exchange rate risk in any meaningful way in its pricing strategy. Thus, most of the dealing with foreign exchange rate risk falls to other parts of the business.
The company mainly faces translational risk, though there will naturally be some transactional risk as well. The translational risk that Amazon faces is not managed through hedging, which is typically a poor way of handling translation risk in general. Translation risk can be minimized by offsetting transactions on the revenue and cost side, something Amazon typically does with its foreign subsidiaries. Furthermore, Amazon utilizes diversification to further hedge forex risk. This tactic means that the company operates in a number of different countries, and foreign currency movements in those countries would theoretically offset each other. That may not happen all the time, especially in times when the USD is moving the same way against all other major currencies, but this approach is something that has become a key part of Amazonâ€™s hedging strategy. With very little transactional foreign currency exchange rate risk, Amazon does not note any major hedging strategies in its annual report.
For the most part, Amazon matches operating risks associated with foreign currency transactions with operating tactics to mitigate those risks. Those operational offsets are the best way to handle translational risk. As a result, Amazon typically does not have a major impact from this foreign exchange rate risk â€“ the numbers are pretty big but are a very small component of the companyâ€™s overall income statement and balance sheet, and once placed into that context Amazon does appear to have an effective strategy for dealing with the foreign currency exchange rate risk that it faces.
Amazon 2019 Annual Report. Retrieved April 29, 2020 from https://s2.q4cdn.com/299287126/files/doc_financials/2020/ar/2019-Annual-Report.pdf
HowMuch.net (2019) Charting the most powerful reserve currencies in the world. HowMuch.net. Retrieved April 29, 2020 from https://howmuch.net/articles/worlds-top-reserve-currencies-2019
Mehta, N., Detroja, P. & Agashe, A. (2018) Amazon changes prices on its products about every 10 minutes â€“ hereâ€™s how and why they do it. Business Insider. Retrieved April 29, 2020 from https://www.businessinsider.com/amazon-price-changes-2018-8
Reiff, N. (2020) Hedge. Investopedia. Retrieved April 29, 2020 from https://www.investopedia.com/terms/h/hedge.asp
Roamy (2019) The consequences of Amazonâ€™s pricing power. Medium.com. Retrieved April 29, 2020 from https://medium.com/goods-services/https-medium-com-goods-services-amazons-pricing-power-797e28b63fbd
Statista (2019) Annual net sales of Amazon in selected leading markets from 2014 to 2019. Statista. Retrieved April 29, 2020 from https://www.statista.com/statistics/672782/net-sales-of-amazon-leading-markets/
Are you busy and do not have time to handle your assignment? Are you scared that your paper will not make the grade? Do you have responsibilities that may hinder you from turning in your assignment on time? Are you tired and can barely handle your assignment? Are your grades inconsistent?
Whichever your reason is, it is valid! You can get professional academic help from our service at affordable rates. We have a team of professional academic writers who can handle all your assignments.
Students barely have time to read. We got you! Have your literature essay or book review written without having the hassle of reading the book. You can get your literature paper custom-written for you by our literature specialists.
Do you struggle with finance? No need to torture yourself if finance is not your cup of tea. You can order your finance paper from our academic writing service and get 100% original work from competent finance experts.
While psychology may be an interesting subject, you may lack sufficient time to handle your assignments. Don’t despair; by using our academic writing service, you can be assured of perfect grades. Moreover, your grades will be consistent.
Engineering is quite a demanding subject. Students face a lot of pressure and barely have enough time to do what they love to do. Our academic writing service got you covered! Our engineering specialists follow the paper instructions and ensure timely delivery of the paper.
In the nursing course, you may have difficulties with literature reviews, annotated bibliographies, critical essays, and other assignments. Our nursing assignment writers will offer you professional nursing paper help at low prices.
Truth be told, sociology papers can be quite exhausting. Our academic writing service relieves you of fatigue, pressure, and stress. You can relax and have peace of mind as our academic writers handle your sociology assignment.
We take pride in having some of the best business writers in the industry. Our business writers have a lot of experience in the field. They are reliable, and you can be assured of a high-grade paper. They are able to handle business papers of any subject, length, deadline, and difficulty!
We boast of having some of the most experienced statistics experts in the industry. Our statistics experts have diverse skills, expertise, and knowledge to handle any kind of assignment. They have access to all kinds of software to get your assignment done.
Writing a law essay may prove to be an insurmountable obstacle, especially when you need to know the peculiarities of the legislative framework. Take advantage of our top-notch law specialists and get superb grades and 100% satisfaction.
We have highlighted some of the most popular subjects we handle above. Those are just a tip of the iceberg. We deal in all academic disciplines since our writers are as diverse. They have been drawn from across all disciplines, and orders are assigned to those writers believed to be the best in the field. In a nutshell, there is no task we cannot handle; all you need to do is place your order with us. As long as your instructions are clear, just trust we shall deliver irrespective of the discipline.
Our essay writers are graduates with bachelor's, masters, Ph.D., and doctorate degrees in various subjects. The minimum requirement to be an essay writer with our essay writing service is to have a college degree. All our academic writers have a minimum of two years of academic writing. We have a stringent recruitment process to ensure that we get only the most competent essay writers in the industry. We also ensure that the writers are handsomely compensated for their value. The majority of our writers are native English speakers. As such, the fluency of language and grammar is impeccable.
There is a very low likelihood that you won’t like the paper.
Not at all. All papers are written from scratch. There is no way your tutor or instructor will realize that you did not write the paper yourself. In fact, we recommend using our assignment help services for consistent results.
We check all papers for plagiarism before we submit them. We use powerful plagiarism checking software such as SafeAssign, LopesWrite, and Turnitin. We also upload the plagiarism report so that you can review it. We understand that plagiarism is academic suicide. We would not take the risk of submitting plagiarized work and jeopardize your academic journey. Furthermore, we do not sell or use prewritten papers, and each paper is written from scratch.
You determine when you get the paper by setting the deadline when placing the order. All papers are delivered within the deadline. We are well aware that we operate in a time-sensitive industry. As such, we have laid out strategies to ensure that the client receives the paper on time and they never miss the deadline. We understand that papers that are submitted late have some points deducted. We do not want you to miss any points due to late submission. We work on beating deadlines by huge margins in order to ensure that you have ample time to review the paper before you submit it.
We have a privacy and confidentiality policy that guides our work. We NEVER share any customer information with third parties. Noone will ever know that you used our assignment help services. It’s only between you and us. We are bound by our policies to protect the customer’s identity and information. All your information, such as your names, phone number, email, order information, and so on, are protected. We have robust security systems that ensure that your data is protected. Hacking our systems is close to impossible, and it has never happened.
You fill all the paper instructions in the order form. Make sure you include all the helpful materials so that our academic writers can deliver the perfect paper. It will also help to eliminate unnecessary revisions.
Proceed to pay for the paper so that it can be assigned to one of our expert academic writers. The paper subject is matched with the writer’s area of specialization.
You communicate with the writer and know about the progress of the paper. The client can ask the writer for drafts of the paper. The client can upload extra material and include additional instructions from the lecturer. Receive a paper.
The paper is sent to your email and uploaded to your personal account. You also get a plagiarism report attached to your paper.
PLACE THIS ORDER OR A SIMILAR ORDER WITH US TODAY AND GET A PERFECT SCORE!!!
Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.
You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.Read more
Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.Read more
Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.Read more
Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.Read more
By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.Read more