Amazon Annual Letter to Shareholders: Thinking About Shein, Temu, and Primitives

Here are some of the topics that Andy Jassy talked about in this year's letter:

* Willingness to offer CRaP items vs Lower ASP items

It's well known that in the 1P and 3P businesses, Amazon over last decade has culled its catalog to remove items where it cannot realize a profit, whether offered from the merchant or Amazon itself. It's clear that Amazon is thinking about this the opposite way now. How can we be structurally profitable for more items?

From my view, Amazon saw the potential threat from cheap items from Asia.

> It drew a straight line from here to transportation costs.

> The straight line continued from a national fulfillment center to a regionalized one.

> This straight line continued from a regionalized center to doubling its same-day facilities.

A few stats: same-day/overnight items increased 70% y/y. they consider this the key to everyday essentials growing 20% y/y.

Look out corner store, and look out neighborhood pharmacies.

> All of this putting products closer has reduced costs to serve $0.45 per unit YoY. It strikes me that Amazon is continuing to focus on this.

* Cost to serve and low ASP items called out explicitly

I hadn't seen Amazon mention cost to serve in an annual letter before? I think there is a clear reason why.

It's clear to me that Amazon is worried about getting "reverse-flywheeled" and in the last few years has taken steps to get ahead of this trend. A reverse flywheel might have been:

* cost to serve too high

* amazon CRaPs items it can't serve profitably

* those items migrate to Chinese marketplaces

* consumers follow

* Chinese marketplaces now can go up-market because they have the consumer now, too.

Amazon wants to fix "root cause" here, and they determined that an important multi-year priority was reducing cost to serve, and 2023 was the first year (not the last IMO) that they saw the fruits of their labor.

Reducing costs to serve and improving their same-day logistics, also helps with a few other goals:

* Growth in free cash flow and operating margin. Operating income in 2023 improved 201% YoY from $12.2B (an operating margin of 2.4%) to $36.9B (an operating margin of 6.4%).

* Re-thinking grocery. I noticed grocery finally got a mention with a thought-provoking question:

"What if we used our same-day facilities to enable customers to easily add milk, eggs, or other perishable items to any Amazon order and get same day? It might change how people think of splitting up their weekly grocery shopping, and make perishable shopping as convenient as non-perishable shopping already is."

It still doesn't solve Amazon Fresh stores, but to understand that Amazon is thinking hard about perishables in addition to Temu - more on this later.

Finally, if you follow AWS, it's built on a core of developer primitives. Jassy thinks about all of Amazon this way. More to write here too.