Amazon’s eCommerce Strategy in 2022
There’s been lots of activity for Amazon in 2022, and I wanted to create one article that contains all of my recent thoughts on what’s going on with Amazon. The major themes are as follows:
Amazon Earnings and Logistics Investments
Amazon’s Moves into Direct to Consumer
Amazon’s Upcoming Style Department Store
What’s Next for Amazon Aggregators?
We will wrap up with a discussion of Andy Jassy’s First Shareholder Letter, and what it means for the future of Amazon, and why Amazon is so damn good at innovation.
Amazon Earnings and Logistics Investments
What Amazon’s Earnings Mean For The Company’s eCommerce Business
Going back to 2021, Amazon’s Q3 earnings showcased the many challenges they’ve faced due to the Pandemic. This was a time when COVID was in full swing.
Amazon reported Q3 earnings in a somewhat challenging environment, mostly for operating profit but also for top-line growth. They faced deceleration with a reported increase of 15% in net sales, which seems like a small number for Amazon. Here are just a few of the highlights that stood out to me in the report:
Labor shortages are present across the network and costs are higher, signing bonuses are common and wages are rising. It seemed to me this was a transitional quarter where they moved from one constraint (capacity) to another, bigger constraint (labor).
A lot of unexpected operating costs due to labor shortages. Not all facilities are staffed properly, which is causing “chaos” costs due to rerouting to products to facilities that were properly staffed.
They are finally ahead of previous capacity constraints, and even pulled in some expected 2022 capacity builds into 2021.
Overall, they were able to double logistics network capacity in the last 18 months since the start of the pandemic. I came away thinking Amazon could literally not invest enough in robots.
Advertising or “Other” revenue grew 50% y/y. This is a material deceleration y/y compared to Q1 and Q2 which were in the 70-80% range. I think likely mix/shift back to travel/services in Q3.
More recently, Amazon’s Q4 2021 reports seemed to focus a lot more on Amazon’s fulfillment and advertising initiatives. A few callouts worth noting are:
Amazon 3P seller units up to 56% of Q4 unit sales, highest 4Q ever.
Amazon Advertising is now broken out in earnings reports, not hidden in other. Take a bow!
Advertising growth decelerated from 55% y/y growth in Q3 to 33% y/y growth in Q4. This is likely due to supply chain / inventory issues.
$31B business today, which is a little less than a third of Facebook revenue is what I calculate.
Doubled operations and staff in last 2 years. Up to 1.6M employees.
Hiring was not at the level of great efficiency. Chaos costs in their network and higher third-party transportation costs were higher than expected. If more staff existed at the beginning of the quarter, then we could have taken even more share of parcels.
New fulfillment center spend is moderating going forward, and will match business growth. Still represents 30% of all capex, which is increasing next year.
Amazon’s Advertising priorities:
Improve tool usability for sellers/brands (I hope they also mean agencies and technology platforms too - i.e. better APIs)
Video advertising for sponsored ads across live sports, IMDB, Twitch, Prime Video, etc.
Moving along, Amazon’s Q1 2022 earnings were quite troubled:
They doubled their warehouse and logistics capacity from Q1 2020 to middle of 2021.
This led to a huge amount of empty capacity due to the inability to hire.
Once they did kick their recruiting team in motion, they found that the economy had changed. Now they have too much capacity - both staff and facilities - for the volume in the channel today.
On top of this, COVID recovery has slowed the growth of eCommerce — in fact eCommerce growth y/y in 2022 has declined for the first time in absolute terms ever for the company.
It’s very clear to me that for Amazon to continue to grow, it will need to prove that it can take share of off-Amazon eCommerce.
In business, this is known as a “bullwhip effect.” And even the biggest players are not immune to it.
Amazon’s Moves into Direct to Consumer
Given the relative faster growth of Shopify as compared to Amazon, as well as the increasing competition between Amazon and Shopify, there has been a lot of speculation about what Amazon has been up to as it plans to tackle off-Amazon eCommerce.
What are the Options for Amazon’s eCommerce Strategy?
What if Amazon Is the best-positioned company to diversify sellers off Amazon?
Ok this might be crazy, but follow me.
Who knows Amazon sellers better than Amazon itself? They have the data, they have the analytics. You can also pretty much guess they have an internal index of the top 1000 brands globally and pricing up to the minute.
Their (display) advertising business has been moving in the direction of allowing you to advertise not only on non-Amazon websites, but also to advertise non-Amazon properties.
Amazon Multi-Channel Fulfillment (MCF) has been quietly signing up partnerships with eCommerce platforms, such as BigCommerce. Likely those partnerships are not enough on their own to drive enough volume through their facilities. Amazon tends to like to control its own volume fueled by its flywheel, rather than rely on things like sales teams and extensive marketing.
Amazon recently doubled its fulfillment capacity in the last 2 years. However, I couldn’t help but notice that Amazon's business didn't double in the past two years. So what’s up? It's clear to me the purpose of this capacity is for third-parties, not Amazon itself. And since DTC is growing faster than Amazon, it would make sense this is where the capacity is aimed at.
Gaining A Competitive Advantage Through Amazon
Most businesses need to be on Amazon, and it's a significant channel. Which means you need to optimize imagery, video, and content. All things which need to be on your brand website too. Imagine all your A+ content was also on your own store? And Amazon had the lowest fulfillment prices in the industry that would fulfill to multiple channels without Amazon branding?
Amazon seems to have abandoned its "One Vendor" initiative from years ago to combine 1P and 3P tools, but what if they resurrected that and the hub is instead of Amazon, a true multi-channel store that supports both retail (1P) and D2C?
What do you need to succeed in eCommerce?
Advertising
Payments
Supply Chain
Who has the largest of all of these in one place? Amazon.
Their biggest gap is somewhat simple - tools to help you present your brand. But then again, Amazon acquired Perpule and Selz in the last 2 years.
In addition to this, Amazon has also announced another acquisition in the eCommerce software market. That's right, Amazon acquired a multichannel inventory and fulfillment solution Veeqo. It’s totally possible that this solution will become the basis for Amazon's multichannel App Store.
With this acquisition, Amazon now has the trifecta - eCommerce, POS, and App Store.
These assets, combined with existing assets like an advertising and fulfillment solution, plus a connection to one of the most liquid eCommerce marketplaces on the planet, and the fact that Amazon tends to think in 10 year time horizons, what do you think they are planning next? Sure looks like a different approach than they've taken previously to the Stores market.
Earlier this year, I mentioned that I would not be surprised at all if Amazon introduces a kind of global "off-Amazon Prime" to buyers which is designed to reinforce its advertising > software > fulfillment flywheel.
Well, this definitely happened! Amazon recently announced its Buy with Prime initiative in April 2022.
But it’s not enough for Amazon to just launch Buy With Prime. Amazon really needs to figure out adoption for the product if it’s going to be a force in the industry.
Getting Adoption for Buy With Prime
Of course Buy With Prime is a trap. But it's a trap that will be hard for many sellers to avoid.
Why? Conversion rate.
I expect Buy With Prime - if applied to a website properly — will be 2-3x typical conversion rate, and I expect Amazon already knows this. Fast, free shipping and your account is already stored? I can tell you, as a consumer I will be clicking this box wherever I find it. That's Amazon's leverage.
Optimizing Off-Amazon eCommerce
Goodbye Paypal?
Most people when they evaluate Buy With Prime will think about the big players. Would someone like Walmart or Macy's ever adopt this? Probably not.
However for the SMB and mid-market, it holds promise. Strategically for Amazon this has a number of advantages:
Off-Amazon eCommerce is growing faster than on-Amazon eCommerce. Amazon gets to tap into this.
Most 3PLs suck and many independent DTC sites hate fulfillment. This completely takes this off the table for you.
Merchants will get a lot less customer service when ecommerce buyers use Prime on your site.
More inventory in Amazon's fulfillment centers = higher parcel volume = higher network utilization = lower fulfillment costs.
Merchant Response to Amazon Buy With Prime
Merchants give up a lot for this. In particular, say goodbye to your own loyalty program. This affects some, but how many independent sites truly have trusted relationships with their customers?
The big question is: What can Shopify do about this?
Of course Shopify has to respond. My understanding is there is a big debate raging inside of Shopify right now about what to do next. If Shopify is smart, it will not let the fox in henhouse. Meaning, Shopify currently does not allow third-party checkout flows on it site, and this is the last.
In short- many marketplace-oriented brands will adopt. Many others will wait and see what happens next, and quite a few will obviously never consider it. Ever.
Because it's still a trap.
People forget -- the ultimate incentive in eCommerce is not conversion, it's traffic. Something like 75-85% of Amazon sellers use FBA in some form or fashion. So that gives you some tailwinds immediately. But to take full advantage of that, you need not just benefits -- you need what's called a "burning platform."
It's the difference between a vitamin and an aspirin. One you MUST TAKE to stop pain, and the other you SHOULD TAKE because it should help out. (VCs talk about this in funding pitches too).
The Burning Platform in eCommerce
What's a burning platform in eCommerce? It's not conversion.
The only true burning platform in eCommerce is traffic. It's the ultimate carrot. In other words, if I do not install this thing, I am reducing my traffic by 10% compared to my competition.
I bring this up because Amazon has not yet announced the true tie-in between Amazon's Marketplace TRAFFIC and Buy with Prime itself.
Here are a few ideas:
If Amazon committed to surfacing Buy With Prime listings on Amazon automatically in some way, perhaps through your brand storefront, that could be big.
If Amazon automatically entered Buy With Prime listings into a free tier of Amazon Advertising, that could be another idea. Perhaps a tie-in with brand registry.
Whatever it will be (and it will be something, because Amazon is all-in here) we have yet to see the traffic "shoe" drop on this program yet. Don't underestimate the difficulty of adoption when evaluating Buy With Prime, because I am sure Amazon is not.
Amazon’s New Style Department Store
In the past year, Amazon has announced that it’s getting into the department store business. Yes, that’s right, Amazon the eCommerce site which has famously killed department stores, is becoming a department store, and it’s called Amazon Style.
And from what they’ve released, Amazon's new "Style" department store concept kicks sand in the face of investors who think retail innovation is dead.
Following a year when retail investors are running away from store valuations, Amazon is still showing people what's possible in retail through digital technology.
Remember when I talked about what "noun" Amazon would use to anchor its department store? Well the name is "Style", and I think by and large it's one of the best choices they could have made. The name is versatile, aspirational, and merchandise-inclusive.
As part of this launch, Amazon released a video that I scanned a few times. Their merchandise appears to be apparel and accessory focused: shirts, sweaters, coats, hats, shoes, all typical department store stuff.
With a name like Style, I would imagine Amazon could put anything here you might imagine in a typical Macy's. Relative to the typical retail store, let’s break down the innovations introduced here:
Amazon Style Show Floor
No size runs on the floor itself. Size runs are in the back room. Not totally unique but uncommon.
The negative here is you can't hold up an item to your body if your size isn't the one on the floor.
You don't have to haul products to fitting rooms. Just add it to your list, and it will "appear" there by magic Amazon elves.
Scan a QR and send the product to a fitting room, or the "Pickup" area. (They don't call it checkout, because ... they already know your credit card).
You can select multiple styles, sizes and colors for the same item.
The store is literally watching what you look at for personalization reasons later.
I don't get the sense that these stores are truly "Just Walk Out" because there are no size runs, and you would be walking out with the model.
Amazon Style Fitting Room
In this store, the fitting rooms are open. Many fitting rooms are not even open right now in typical stores I visit.
You don't wait in line for a fitting room. Associates populate it for you, and you get a notification from Amazon when your room is ready.
You unlock your secure fitting room with amazon's app.
Inside, fitting room touch screens give you an "upsell/complete the look/suggestions" on the wall, which allows you to browse merchandise personalized based on what you look at in the store. You can get it sent to your fitting room.
Let me say this again, Amazon is surveilling what you look at in the store. I posted about this a few months ago, knowing that "Just Walk Out" works this way, but they are advancing on this idea.
Amazon Style Pickup Area
You do have to haul your items to the "Pickup" area, where the agent will give you a bag. But they don't give you a receipt and you don't have to pay, because ... well it's all digital and they already have your credit card.
This will likely change when cash is involved.
All in all, I came away impressed. However, I did not see anything about the return experience. It’s obviously a big topic and one of the reasons for the store.
What’s Next for Amazon Aggregators?
The End Of The Amazon Rollup Model
It’s the beginning of the end for a lot of Amazon rollup companies. The Amazon rollup model was only ever going to work for a select few: those with a narrow category focus (many acquired all over the category spectrum), and those with extreme operational experience (most had never built a profitable Amazon business before raising money).
I also think a focus on the smaller end of the brand spectrum is always the greatest opportunity. It's not about building the most tech, and it's not about being the biggest, either. Sometimes being large only means that you leave a bigger hole in the ground when you crash.
Recently the Information published an Amazon aggregator article which highlighted a few areas:
The more companies you acquire, the harder it is to integrate and run them.
Several of these companies have bought high and sold low from a valuation point of view, due to the pandemic.
It's easier than you think to get booted off Amazon.
As an industry, these companies took about $4 in debt for every $1 in equity. Debt of course needs to be repaid with cash flow. Sometimes cash flow is hard to come by, particularly if you are overinvesting (many of these aggregators incorrectly thought they were tech companies -- so did WeWork who is now WeCrashed).
The industry took on about $14B in funding, which means that only $3.8B in equity and $11.2B in debt. That is a crushing amount of debt to take on.
It sounds to me like the creditors won this round. Before the pandemic, larger sellers were buying smaller sellers, of course. But right before and during the pandemic, investors raised money to simply aggregate growth and EBIT with no real differentiation.
The narrative was simple:
small to medium-size sellers are under optimized in so many ways (people, advertising, supply chain primarily)
amazon 3P still growing fast
The main problem with this narrative is that it does not solve for cash flow. Another huge problem is any cost savings are being eaten up by rising supply chain costs, materials and labor inflation.
In the end, as Warren Buffet has always said, it really is about cash flow.
Trust me, the most successful sellers on Amazon do not want you to hear about them. Ever. They want to remain hidden and keep throwing off cash to their owners.
What We Learn From Andy Jassy’s First Shareholder Letter
Amazon’s Growth Initiatives
New Amazon CEO, Andy Jassy recently released his very first Amazon shareholder letter. It very much proves his Jeff-bot like status. Here are my thoughts:
I still believe one of the enduring legacies of Amazon will be its leadership principles and training. Few companies work like this and actually have any principles at all for "how" innovation happens.
Amazon does.
Amazon's principle of single-threaded teams with an accountable owner is a simple yet effective idea. That coupled with the idea to innovate/move fast and give these teams broad latitude on "two-way door" decisions that can be reversed if they prove wrong, is one of the core tenets that Amazon does so well.
Andy Jassy understands this. So many companies don't understand it.
I can't tell you how many >$100M+ companies, who don't have an established eCommerce business, have simply given eCommerce to their traditional management team and said "figure it out amongst yourselves."
No ownership.
No talent.
No bandwidth.
No goalposts.
These projects don't have a chance in hell. Then IT gets these "requirements" from half-invested business leaders and you wonder why IT is struggling with it -- who also has no revenue accountability.
It's very popular in the product world to start with "why". We like to have a reason. In new initiatives, I tend to think that's the wrong place to start. Always start with "who". Your core talent will define the direction of an initiative. Give them responsibility, clear the deck, and get out of the way. Don't give this team a "why". Honestly, the why is obvious for most brands. Even if you have the why, that's not enough.
You need the who. Try this exercise within your company. Pick any initiative that everyone knows will be important in 3-5 years. Can you name the SINGLE accountable owner? Employees can ask this, but they are often not successful. You know who actually needs to ask this more than anyone?
Boards of Directors. This holds weak CEOs accountable for understanding how a real plan can be put together for something important.
Conclusion
I think Amazon’s shareholder letter is a great place to finish this article because it gives you a sense that Amazon’s forward-looking investments are going to be as aggressive and interesting as its previous investments.
It’s very hard to classify Amazon at this stage in its life. It’s a multi-industry, multinational conglomerate. It’s a proven innovator, and if it feels that it can enter your industry — even if it has no previous experience — that doesn’t mean it won’t.
Looking for e-com strategy help?
Look no further. One of the reasons that I spend so much time writing about companies like Amazon and Shopify is that these are the two largest ecosystems in eCommerce. Every brand, investor, agency, and software company is affected by the moves these two companies make — either directly, or indirectly.
So, if you are in the eCommerce ecosystem somewhere and are looking to launch a new offering, wouldn’t it make sense to seek out advice from one of the deepest thinkers in the space?
Schedule a consultation with eCommerce consultant Rick Watson to learn more.
