Amazon has posted disappointing quarterly results and warned of difficult times ahead after facing a big increase in costs and its slowest-ever revenue growth.
After benefiting from a surge in sales during the pandemic, the online giant is now facing a litany of challenges. The company’s expenses have swelled after it was forced to offer higher wages to attract warehouse workers, whilst the increasing price of fuel is making it more costly to make deliveries. This all comes at a time when consumers’ disposable income is being squeezed by rising inflation.
During the first quarter ended 31 March, Amazon’s overall revenues grew 7% to $116.4bn. However, its main online stores division came in at $51.1bn, down from $52.9bn in the same period last year.
Operating profit was $3.7bn, short of analysts’ expectations of $5.3bn and well down on last year’s figure of $8.9bn. The company also reported a net loss of $3.8bn, much of which was driven by a hit from its investment in electric carmaker Rivian.
For the current quarter, Amazon forecast similarly low revenue growth of between 3% and 7%, with the disappointing outlook sending its shares down as much as 10% in after-hours trading last night.
“The pandemic and subsequent war in Ukraine have brought unusual growth and challenges,” said Andy Jassy, Amazon’s Chief Executive, whilst pointing to a recovery in delivery speeds and product consistency that were impacted by Covid.
Meanwhile, CFO Brian Olsavsky revealed that Amazon was pulling back on its aggressive expansion in warehousing space, suggesting it had overextended on adding capacity during the pandemic.
“The amount of space we’re going to add in 2022 is much lower than 2021 and 2020 from a space standpoint, and we’re even challenging a lot of that,” he said. “But you make commitments on warehouses, 12, 18 months in advance – so it’s hard to turn that on a dime.”
Olsavsky also stated that its unprecedented recruitment drive to meet surging demand over the last couple of years had left the business “overstaffed”, resulting in $2bn in additional costs during the quarter created by lower rates of productivity.
“Amazon’s results show that it is not immune to the macroeconomic slowdown affecting the rest of retail and e-commerce,” said Guru Hariharan, chief executive of CommerceIQ, an e-commerce management platform.
“As inflation and cost increases persist, shoppers are pulling back on purchasing, especially discretionary purchasing, which is disproportionately e-commerce.”
Amazon has sought to alleviate cost inflation by increasing the price of Prime membership in the US and introducing a “fuel and inflation surcharge” for third-party sellers on its marketplace platform.
The company said elevated staffing costs in a highly competitive labour market, as well as supply chain challenges, would mean slower growth for 2022 compared with the pandemic-fuelled surges in 2020 and 2021.
Deren Baker, CEO of Edge by Ascential, said whilst Amazon has had a challenging quarter, its own data shows that e-commerce will continue to be the leading driver of retail growth in the US (2021-2026), growing by 14% in 2022.
He also highlighted that with the recent launch of ‘Buy with Prime’ for merchants, Amazon is looking to become a major player in the emerging retail as-a-service market. The company has also made significant investments in retail innovations designed to reduce customer friction, such as ‘Just Walk Out’ technologies, which it is licensing to third-party retailers.
“Retail-as-a-service is the next big market opportunity for Amazon. With increasing labour and operational costs throughout the retail sector, Amazon is well-positioned to offer its tech and logistics infrastructure to third parties,” said Baker.
NAM Implications:
- Amazon Retail becoming more like other retailers:
- Increased expenses (higher wages to attract warehouse workers)
- Increasing price of fuel increasing delivery costs
- All at a time when consumers’ disposable income is being squeezed by rising inflation.
- But Amazon is in a better position than most to optimise necessary price rises…
- (based on their fact-based insight re our shopping behaviour and sensitivities)
- And keeping in line with their price-follower policies…
- i.e. Amazon are still a threat.
- [But do check Martin Huibel’s paper: How To Approach Cost Negotiations With Amazon (The Right Way)]
