Dive Brief:

• Amazon on Thursday once again demonstrated how much of its strength resides in its cloud business as its service growth again outpaced retail growth in the first quarter. Total net sales rose from $51 billion to $59.7 billion, according to a company press release. Net product sales rose to $34.3 billion from $31.6 billion, while net service sales rose to $25.4 billion from $19.4 billion.

• The company's physical store net sales, mostly from its Whole Foods operations, rose 1% year over year to $4.31 billion from $4.26 billion, (though edging down slightly from the previous quarter). That doesn't factor in Whole Foods digital sales, which would bring the increase to about 6%, Chief Financial Officer Brian Olsavsky said on a conference call with analysts Thursday. Online, its third-party marketplace now serves up 58% of its retail sales, according to Jeff Bezos' letter to shareholders earlier this month. 

• Net income in the period rose from $1.6 billion to $3.6 billion — a 119% increase — as the company's operating margin expanded to 7.4% from 3.8% in the year-ago quarter. It helps that it's getting a handle on expenses. Shipping costs rose 21% year over year to $7.3 billion from $6.1 billion a year ago, dropping significantly from the holiday quarter, when shipping costs reached $9 billion.

Dive Insight:

After two decades of disrupting retail, Amazon is facing new realities as a mature company — that it's getting harder to grab market share at the same rate as before and that its rivals have risen to meet its challenge.

"A year ago, Amazon grew its product sales by over a third; today, that growth rate has come down to a relatively meager 8.5%," GlobalData Managing Director Neil Saunders said in comments emailed to Retail Dive. "In our view the trend is only likely to accelerate going forward and it will put Amazon under more competitive pressure [than] it has been before," he added. "For a long time, Amazon was the only real player in the game, now it is having to share the field with an increasing lineup of formidable rivals."

The e-commerce giant is hardly taking that sitting down, however. Olsavsky made waves Thursday evening with his announcement that Amazon is working to halve its free two-day shipping promise for Prime members to just one day. It's taking an $800 million investment that will reverse its expense trends, at least in the near term, Olsavsky​ warned.

Amazon's expansion of sales through its marketplace has helped it stoke sales at less expense, but those slowed in the quarter as well. "A larger than expected slowdown in other revenues after a record year of growth showcases the moderating sales for third-party sellers as the platform seeks to maximize profitability, at some cost to these sellers," Monica Peart, senior forecasting director at eMarketing, said in comments emailed to Retail Dive.

And profitability, long thought to be an afterthought at Amazon, has indeed been maximized. While its AWS cloud services unit continues to be a source of support no other retailer enjoys — net sales there grew to $7.7 billion from $5.4 billion a year ago and operating income in that business surged to $2.2 billion from $1.4 billion last year — margins on the retail side have also expanded, although not so much from product sales.

"On the non-AWS side, sales are slowing, with physical stores (i.e. Whole Foods) essentially flat, and we note the reduced growth is largely generated by third-party sales. However the real story on the retail side is margin expansion, which is up around 360 bps to almost 6.4%, and is likely driven in large part by the rapidly-growing and higher-margin advertising business," Moody's Investors Service analyst Charlie O'Shea said in comments emailed to Retail Dive. 

According to Saunders, Amazon's performance demonstrates that it must continue to innovate, burnish the benefits to its Prime members, improve discovery of its massive online selection, get busier in under-penetrated markets like beauty and do something about Whole Foods, where it's losing market share in food.

"In a perverse way this is advantageous to Amazon as it puts an end to the lie that the company is somehow a monopoly or that it is immune from competitive forces," he said. "It clearly isn't and in order to bring growth rates back it will need to innovate, invest and change, just like any other retailer in the market."