The year 2022 turned out to be quite the difficult one for Amazon, as the tech giant came to terms with a new reality of high inflation and slowing e-commerce sales.
A slowdown in its core e-commerce business was the biggest problem Amazon had to contend with this year. Revenue from its online stores dropped from $60 billion at the end of the holiday quarter in 2021, to $51.1 billion and $50.8 billion at the end of the first quarter and second quarter respectively. Because of Prime Day, Amazon’s e-commerce revenue increased in the third quarter compared to the first half of the year, but this strong growth is anticipated to level off in the fourth quarter. Separately, Amazon was also stuck with too much warehouse space, as it added more than 450 facilities to stock, sort and move items at the height of the pandemic.
This was also Amazon’s first full year without founder Jeff Bezos, who formally stepped down as Amazon CEO in July last year. All told: it’s created a new paradigm for the e-commerce giant. Experts told Modern Retail that this year Amazon has effectively switched gears from hyper-growth mode to cost optimization mode. In essence, Amazon has had to reset expectations from the days of its historic and meteoric rise in line with a maturing market that has a lot of economic headwinds. What’s more, the company has recently started a massive cost-cutting review, indicating the business is preparing for a further slowdown.
“This year was a little bit more challenging year for e-commerce. And since Amazon is obviously the largest portion of e-commerce in the U.S., that made it a challenging year for them,” Jason Goldberg, chief commerce strategy officer at Publicis told Modern Retail.
Goldberg said a combination of rising brick-and-mortar sales and a significant shift in purchase behavior away from discretionary purchases to essentials, as a response to inflation, hurt Amazon’s core retail marketplace division.
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For more than two decades, Amazon’s core e-commerce business expanded rapidly, attracting more sellers and customers to its products and services. Amazon’s flagship Prime membership program, introduced in 2005, has also been credited with the success of its marketplace. Today, Prime reportedly has an estimated 153 million U.S. members.
While Prime has been core to Amazon’s success, analysts indicated that the recent price increase in the membership program has made the offering more unaffordable for some people. In February, the cost of a Prime membership increased from $119 to $139 annually. At a time when Prime growth has started to flatten in the U.S., this may have resulted in a churn in subscriber numbers.
Miya Knights, director and publisher of Retail Technology agreed that Amazon’s core business growth has changed drastically since the pandemic. “There has been an incredible amount of strain on Amazon’s retail business. Even things like Prime Day have been less potent in terms of boosts that they can give to sales for Amazon,” said Knights. She added that “Amazon miscalculated that the demand for online would sustain at the levels that they saw it grow to during the pandemic. The apex example of that was how they were stuck with too much warehouse space for example.”
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Earlier this year, Amazon said during an earnings call that it was pausing investing in new warehouse spaces after two years of massive investments. “Despite still seeing strong customer demand and expansion of our FBA business, we currently have excess capacity in our fulfillment and transportation network,” Amazon CFO Brian Olsavsky said following the company’s first quarter earnings results. “We have slowed our 2022 and 2023 operations expansion plans to better align with expected customer demand,” Olsavsky added months later during the company’s second quarter earnings call.
Amid this pullback on warehouse space, Amazon has also been looking for more ways to monetize this excess capacity. In September, the company launched a new paid service to let sellers use its fulfillment centers and warehouse space for long-term stockpiling and automated distribution. In May, Amazon had announced a new feature called Buy With Prime to let merchants offer Prime fulfillment for products sold on their own website.
But the ultimate thorn in Amazon’s side this year was inflation leading people to pull back spending in certain categories. “While consumers continued spending online last year, a lot more of their spending as a result of inflation went to things like groceries, and less to apparel and consumer electronics,” said Goldberg. Goldberg also noted that the trend benefitted Amazon’s rival Walmart which sold digital groceries and essentials to consumers more efficiently than Amazon.
Both experts also concurred that without Bezos, Amazon has started to lose its status as a Day One company, combined with all the challenges it has faced this year. The Day One mentality meant that, despite being 28 years old, Amazon still approached each day as if it were the first day of their brand-new startup. And Bezos often said that day two is death for companies.
“This year, when your CEO or founder retires, it’s hard to maintain that narrative that you’re still a Day One company,” said Goldberg. “And so a lot of us would look at this and say, 2022 was the year that Amazon efficiently shifted from being a Day One company to a Day Two company. As an outside observer, you can look a lot of things and see it’s harder for them to maintain that day one, and it’s starting to feel a lot more like a day two business.”
Knights echoed the same sentiment. “The test that Amazon has had to face is: is Amazon without Jeff Bezos Day Two in Amazon? And I do see some elements of Amazon eating itself.”
In particular, Amazon’s pivot toward trying to squeeze more revenue out of its advertising business could be potentially “dangerous territory, because they’re starting to mess with the customer experience.”
In October, Amazon unveiled new ad tools at its Unboxed conference designed to get more advertisers testing out video ads. These include a new Sponsored Display Video Creative, to make it simpler for sellers to produce creatives for video ads. For the most recent quarter, Amazon reported that revenue from its advertising business grew 25% year-over-year to $9.54 billion.
Ultimately, the next year is potentially going to be off to a rough start for the Seattle retailer, said Goldberg.
“I think it’s pretty clear that at least for the first half of next year, all retailers and especially online retailers, are going to be really challenged for profitability and operational efficiencies. I expect that that’s going to be a very common theme for Amazon’s retail business,” said Goldberg.