Retail Channels

Amazon CEO Andy Jassy touts fulfillment reorg, ad expansion

Jassy's annual shareholder letter also included thoughts on grocery, B2B and generative AI.

person picking up a package.

(Photo courtesy of Amazon)

Amazon is the leader in U.S. ecommerce, so watching the company’s priorities can provide insight into where the industry is heading.

It’s with that in mind that we read CEO Andy Jassy’s annual shareholder letter when it hit inboxes on Thursday. Jassy offered an overview of Amazon’s business, with plenty of insights on how the company is carrying out its campaign of cost-cutting, and considering where it plays a role in major market segments like advertising, grocery and generative AI.

Here are five key takeaways for ecommerce leaders:

Fulfillment: Reducing costs

Amazon built capacity in its fulfillment network quickly during the pandemic to keep up with the spike in demand for goods, and online shopping. Jassy shared that the annual revenue of Amazon’s consumer business grew from $245 billion in 2019 to $434 billion in 2022.

“This meant that we had to double the fulfillment center footprint that we’d built over the prior 25 years and substantially accelerate building a last-mile transportation network that’s now the size of UPS (along with a new sortation center network to assist with efficiency and speed when items needed to traverse long distances)—all in the span of about two years,” Jassy wrote.

As demand normalized following the return to in-person shopping and supply chain costs rose, the company went from a mode of building to optimizing the network. In recent months, Jassy said the company “scrutinized every process path in our fulfillment centers and transportation network and redesigned scores of processes and mechanisms.” That has included scaling back some warehouse space, even as it still plans to continue to open more. The result has been “steady productivity gains and cost reductions” in recent quarters.

Amazon also reorganized its fulfillment network to take a more regionalized approach. The network now has eight regions serving individual geographic areas. This is designed to improve efficiency of inventory placement. Previously, items that weren’t available in one local fulfillment center were shipping from other parts of the country.

Now, Jassy said, “Each of these regions has broad, relevant selection to operate in a largely self-sufficient way, while still being able to ship nationally when necessary…We also continue to improve our advanced machine learning algorithms to better predict what customers in various parts of the country will need so that we have the right inventory in the right regions at the right time.”

A big focus for 2023: Reducing delivery speeds for Prime, and Amazon plans to be able to continue growing the amount of next-day and two-day delivery.

Advertising: Leading in retail media

No one has benefitted from the boom in retail media as much as Amazon, as the company was well-positioned to capture ad dollars close to the point of sale when attribution changes with iOS 14.5 presented challenges to social media advertising. Amazon’s advertising business grew 25% year-over-year in 2022 to reach $31 billion in revenue, and is the leader in the retail media market.

For those seeking a quick primer: Jassy’s latter offers a cogent explanation of what retail media is:

“Akin to physical retailers’ advertising businesses selling shelf space, end-caps, and placement in their circulars, our sponsored products and brands offerings have been an integral part of the Amazon shopping experience for more than a decade,” he wrote. “However, unlike physical retailers, Amazon can tailor these sponsored products to be relevant to what customers are searching for given what we know about shopping behaviors and our very deep investment in machine learning algorithms.”

Amazon is also advancing its product suite available to advertisers. This includes investments in machine learning, as well as planning and measurement solutions that provide a view into the effectiveness and efficiency of ads.

On the latter front, Jassy touted Amazon Marketing Cloud. The clean room offers a digital environment where advertisers can perform analytics on data from across a host of first-and-third-party data sources in a way that protects user privacy and proprietary information. Amazon’s advertising and AWS teams have also collaborated to allow companies to store data in AWS, and provide access to Amazon’s demand-side platform.

“We also see future opportunity to thoughtfully integrate advertising into our video, live sports, audio, and grocery products,” Jassy wrote.

Grocery: Finding the ‘right format’

Jassy made clear that Amazon sees grocery as a “big growth opportunity” for Amazon, given that it is an $800 billion market segment where Amazon already has a presence. Yet the CEO’s message also signaled that the company has yet to arrive at the store concept that will help it expand to a mass market that goes beyond the primarily large pack sizes available online, physical store experiments and specialty nature of Whole Foods.

“While we’re pleased with the size and growth of our grocery business, we aspire to serve more of our customers’ grocery needs than we do today,” Jassy wrote. “To do so, we need a broader physical store footprint given that most of the grocery shopping still happens in physical venues.”

While Jassy mentioned Amazon Fresh stores, the company has scaled back on that front by closing some stores and cutting jobs amid wider company layoffs. Jassy added that, “We’re working hard to identify and build the right mass grocery format for Amazon scale.” Translation: We haven’t found the right grocery store concept yet.

B2B: A $35B business

In recent months, we’ve seen Walmart and Instacart roll out B2B ecommerce sites that are designed to provide supplies and bulk orders to offices and facilities of businesses, municipalities and other organizations. After scaling logistics reach and product assortment, these platforms are making good on the opportunity to serve a market segment that’s primed to apply digital tools to buying processes for customers, and deliver large accounts and repeat orders to the retailer that does so.

Jassy’s letter offers a reminder: The ecommerce leader has already been bringing business-facing procurement to the online marketplace for years. Launched in 2015, Amazon Business now drives $35 billion in annualized gross sales and has six million active customers. That roster includes 96 of the global Fortune 100, Jassy wrote. As with the consumer-facing business, Amazon’s B2B marketplace includes third-party sellers. It also has its own subscription program: Business Prime.

“We believe that we’ve only scratched the surface of what’s possible to date, and plan to keep building the features our business customers tell us they need and want,” Jassy wrote.

In a separate blog post published on Thursday, Amazon indicated that those expansion areas may include small businesses, of which there are “millions around the world” that spend “trillions every year on supplies and procurement.”

One to watch: Generative AI

Along with the release of Jassy’s letter, Amazon on Thursday made a splash in generative AI. It’s an area that has gained outsized attention in recent months, especially with the release of ChatGPT.

Jassy’s letter made clear that the company sees a path to introduce more tools that are built around large language models (LLMs) for ecommerce.

“We have been working on our own LLMs for a while now, believe it will transform and improve virtually every customer experience, and will continue to invest substantially in these models across all of our consumer, seller, brand, and creator experiences,” Jassy said. “Additionally, as we’ve done for years in AWS, we’re democratizing this technology so companies of all sizes can leverage Generative AI.”

On Thursday, the company also announced the release of new tools for building with generative AI on AWS. Jassy also referenced CodeWhisperer, a tool that generates code suggestions.

The announcement comes as Google and Microsoft recently made big leaps into generative AI. This signals Amazon aims to be right there in the race with them. Generative AI “will be a big deal for customers, our shareholders, and Amazon,” Jassy wrote.

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