Bad News for a Tech Giant
1) Amazon plans to lay off more people than before (18k vs. the earlier 10k).
2) Online sales are slowing, and Amazon's e-commerce division went into the red for the past few quarters.
3) More concerning for Amazon is the expectation that AWS revenue growth is slated to slow down.
4) In 2022, Amazon shut 68 stores, including all Amazon Books and 4-star and Pop-Up shops.
So what does this all mean? Is it the end of Amazon's romance with the physical format?
It is easy to conclude that Amazon's physical format experiment has failed. It is also wrong.
AWS is what drives the profitability of the entire company. If AWS revenues slow down, then there is a cause for concern. Hence, CEO Andy Jassy is acting on cost control, expense deferral, and layoffs.
Many questioned the rationale when Amazon bought Whole Foods Market in 2017 for $13.7BN. Whole foods acquisition was Amazon's foray into the large Grocery segment in the US. The grocery segment has been demanding to crack for a long time.
Over the last 5 years, Whole Foods has been transformed quietly:
- Products have gone more local compared to regional (cost-effective, personalized to local tastes driving more revenue per store).
- Amazon's " Just Walk out" feature has been implemented in multiple stores. There is no need to pay at the till- your Amazon account is linked to your palm print, and the account is charged automatically with the goods you picked up. It cuts down wait time and increases basket size; when customers automatically pay, they spend more on every trip to the store. Also, there is no need to hire expensive staff at the till.
- More private-label brands have been introduced, driving costs down and higher customer purchases. This is a familiar strategy that Amazon employs on its e-commerce site.
- Online orders have been driven higher using a dark store concept (In Brooklyn). Closed to customers, these operate like Amazon warehouses with robots, except that they are for perishable goods. The idea is to make grocery fulfillment cheaper by moving it closer to the customer and reducing personnel costs.
Given the above optimizations and improvements, Amazon investors need to consider the physical store closures resulting from a tech giant optimizing its cost profile and refocusing on profitable growth. At the time of writing this article, Amazon’s stock was trading at $94.55, compared to a 52-week high of $170.83. Clearly, investors are jittery.
Rapid hiring and opening of several warehouses during the pandemic have left Amazon with a high-cost base, and it needs to reduce its cost base. To put the current staff layoffs in perspective, Amazon has 1.54 Million full-time and part-time workers on its rolls!
Grocery is worth over USD 1.16 Trillion in the US, and around 11% of it is ordered online. Amazon wants to take a larger share of the online grocery market by optimizing the Whole foods and the Amazon fresh format.
In a Feb 2023 interview with the FT, CEO Andy Jassy promised to double down on its physical store strategy, despite placing growth plans on hold. So, chances of an early exit from the physical format are low.
This will be a long and hard-fought battle with multiple players, including Walmart, Instacart, Kroger, and others. Bring the popcorn; the battle is far from over!