Has All Of Amazon CRaPed Itself Out?

Has All Of Amazon CRaPed Itself Out?

Amazon has used the term - internally at first, and then externally - called CRaP -- meaning "can't realize a profit" on certain first-party vendor items

Generally, these types of products are:

* Low cost (like less than $15 historically, but that number keeps rising)

* Expensive to ship

After listening to the earnings call, you wonder if inflation is not tamed in the consumer's mind, that Amazon is in somewhat of a perfect storm.

* Consumers trading down and reprioritizing

* Walmart continues to drop prices

* Amazon's fulfillment costs going up.

This environment benefits a strong 1P business, which Amazon has never been particularly good at managing -- even Jeff Bezos is famously quoted as saying, "Third-party sellers kick our first-party butt."

All this would be normal if Amazon hadn't just doubled its fulfillment infrastructure.

* Even on the earnings call, Amazon admitted that it would have to learn to operate this new network, which is fundamentally different with double the nodes.

* More nodes give Amazon more flexibility, more storage, and (potentially) faster performance [if staffing and automation is right] but at much higher costs.

These higher fulfillment costs put pressure on Amazon's cost structure. Essentially, due to no changes on the vendor's end, more products fall in the CRaP realm.

Not to mention Amazon's first-party vendors are trying to recover costs too, and Amazon has less pricing power than Walmart.

In the meantime, Walmart has a few structural advantages in an uncertain market:

* Walmart has understood how to lower costs and reduce prices since 1962. It was a founding principle.

* Walmart is starting to grow its advertising and third-party businesses, which are beginning to contribute to margin materially.

* Walmart is starting to invest more in micro-fulfillment with its Alert Innovation purchase in 2022 which should reduce costs further over time.

* The last mile is approximately half of your fulfillment costs, and Walmart is better positioned to optimize this last mile because it can use its Stores as fulfillment, and improve the sales productivity per square foot in its real estate, similar to how Target has done in the last ten years.

What Does This Mean?

* Expect Vendors to Get Hit for their Sharpest Pricing Ever

In some cases, expect this not to be enough. Even Andy Jassy recognized on the earnings call that it will need to sharpen its prices on items consumers want.

Seems like a reverse flywheel: Amazon fulfillment costs go up, Amazon price matches Walmart on a like item, Amazon loses more money per unit.

At this point, Amazon only has two responses: Amazon selection could decline (CRaP itself out), or Amazon loses more money. Sounds like a lose, lose.

The true fix is harder: Amazon needs traffic volume, and fast, to recover its structural profitability. Expect Amazon to continue strong efforts to greatly increase its traffic.

Why Does Walmart Have a Short-Term Advantage In the Battle with Walmart?

One of the challenges Amazon has vis-a-vis Walmart is simple:

* For years Walmart has operated profitably from a free cash point of view, and for years Amazon has been roughly breakeven, despite the growth of the advertising business in the past 5 years.

Rather than use this to become more efficient and have the retail business stand on its own, Amazon used its AWS and ad revenue to subsidize the retail business and be a "crutch" for it.

Walmart is in a better position here. With a structurally profitable retail business, growing ad and fulfillment service revenues somewhat act as cyclical tailwinds because of the starting points of the two firms.