Amazon’s revenue during the quarter leading up to Christmas beat Wall Street’s expectations, although the online giant warned that its operating profit could fall to zero at the start of this year as its cost-saving drive fails to make up for the impact of consumers and customers of its cloud services clamping down on spending.
During its fourth quarter ended 31 December, Amazon’s net sales increased a better-than-expected 9% to $149.2bn. This was driven by strong growth in its Advertising (+23%) and AWS (+20%) units, which made up for weaker performance in its Online (+2%) and Physical Stores (+6%) divisions.
Operating income decreased by 22.8% to $2.7bn as market conditions toughened.
For the full year, Amazon’s operating profit slid 51% to $12.2bn on sales up 9% to $514.0bn.
Facing higher costs, inflation and recession fears, Amazon has embarked on an extensive cost-cutting programme that includes more than 18,000 employees losing their jobs.
The group also took another $720m charge from closing or impairing assets of some of its supermarket stores, among other items, noting it has yet to find the right formula to become a major player in the grocery market.
Chief Executive Andy Jassy stated that the company needs a distinctive store format that’s doing well financially before embarking on a major expansion.
Speaking yesterday, he said: “We’re not going to expand the physical Fresh stores until we have that equation, with differentiation and economic value that we like, but we’re optimistic that we’re going to find that in 2023.”
Despite Amazon’s progress in packaged food and other goods, Jassy admitted that the company has yet to win significant market share in fresh food categories.
Michael Pachter, an analyst with Wedbush Securities, suggested Amazon has itself to blame, having drawn consumers to online shopping decades ago. “Retail is a tough business,” he said. “They are flushing money down a toilet pursuing Amazon Fresh stores” and thinking “they can brand a new concept and capture share from retailers who have been successful for decades.”
Last month, Amazon closed one of its till-free ‘just walk out’ Fresh stores in the UK. However, it also opened two more, restarting its expansion programme after a pause towards the end of 2022.
Despite its cost-cutting plans, Amazon is forecasting that it will earn between $0 and $4bn in operating income this current quarter, compared with $3.7bn in the same period a year ago.
CFO Brian Olsavsky attributed this to sales growth easing in its AWS cloud business, as well as brands pouring less money into Amazon’s advertising service and retail demand weakening.
“We remain nervous as everyone else is about the consumer spending and … how people will prioritise their budgets moving forward,” he said.
Olsavsky noted that consumer spending had shifted to value brands in some categories and it was seeing a greater percentage of sales in home essentials.
Demand in Europe and the UK was also hurt by high inflation and the Ukraine war, lowering international growth rates, he said.
Results analysis by Martin Heubel, Founder and Director of Consulterce, a strategy consultancy for B2C Household & CPG brands.
It’s no secret that Amazon is in crisis mode right now. The recent round of layoffs, Amazon Smile’s closure, and Prime membership fees increased reveal Andy Jassy’s attempt to right-size the business across divisions.
While AWS and Advertising have proven to be reliable growth drivers in the past, recession fears and lower household spending have slowed Amazon’s growth performance significantly.
But what about profitability?
Rising fuel, labour, and operations costs continue to pressure Amazon’s operating income. While AWS and Advertising soften the impact, they can’t fully offset it.
The result?
Amazon needs to refocus on its bottom line, through:
Automation & Consolidation
Amazon will increase automation efforts in its less profitable retail division. Suppliers will see the removal of account managers, shifting responsibility for business-critical tasks from Amazon to brands.
Large enterprise suppliers will continue to see a consolidation of programmes and trade alignments at regional (pan-EU) level.
3PL Expansion
Amazon will increase its focus on service offerings beyond its marketplace, targeting 3PL providers and competitors like Shopify.
Buy with Prime is expected to be one of Amazon’s biggest bets in 2023. Paired with the recently launched Amazon Warehousing & Distribution (AWD) service and FBA capacity management system, Amazon intends to monetise its existing fulfilment capabilities.
This is a low-hanging fruit for the online retailer that could quickly become one of its most profitable business divisions.
Reprioritisation of Future Big Bets
We can expect Amazon to continue streamlining operations and cutting headcount in divisions with a low probability of high margins. This mainly affects its Fresh and Devices divisions. Expect Amazon to either monetise or reduce its existing service offering in 2023.
NAM Implications:
- Amazon’s crisis mode has to be more than serious for the rest of us, methinks!
- Worth a detailed read and Martin’s analysis.
