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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.
Trending in Retail Channels
Campbell Soup Company CEO Mark Clouse offered thoughts on messaging amid inflationary shifts in consumer behavior.
After months of elevated inflation and interest rate hikes that have the potential to cool demand, consumers are showing more signs of shifting behavior.
It’s showing up in retail sales data, but there’s also evidence in the observations of the brands responsible for grocery store staples.
The latest example came this week from Campbell Soup Company. CEO Mark Clouse told analysts that the consumer continues to be “resilient” despite continued price increases on food, but found that “consumers are beginning to feel that pressure” as time goes on.
This shows up in the categories they are buying. Overall, Clouse said Campbell sees a shift toward shelf-stable items, and away from more expensive prepared foods.
There is also change in when they make purchases. People are buying more at the beginning of the month. That’s because they are stretching paychecks as long as possible.
These shifts change how the company is communicating with consumers.
Clouse said the changes in behavior are an opportunity to “focus on value within our messaging without necessarily having to chase pricing all the way down.”
“No question that it's important that we protect affordability and that we make that relevant in the categories that we're in," Clouse said. "But I also think there's a lot of ways to frame value in different ways, right?”
A meal cooked with condensed soup may be cheaper than picking up a frozen item or ordering out. Consumers just need a reminder. Even within Campbell’s own portfolio, the company can elevate brands that have more value now, even if they may not always get the limelight.
The open question is whether the shift in behavior will begin to show up in the results of the companies that have raised prices. Campbell’s overall net sales grew 5% for the quarter ended April 30, while gross profit margins held steady around 30%. But the category-level results were more uneven. U.S. soup sales declined 11%, though the company said that was owed to comparisons with the quarter when supply chains reopened a year ago and expressed confidence that the category is seeing a longer-term resurgence as more people cook at home following the pandemic. Snacks, which includes Goldfish and Pepperidge Farm, were up 12% And while net sales increased overall, the amount of products people are buying is declining. Volumes were down 7%.
These are trends happening across the grocery store. Campbell is continuing to compete. It is leading with iconic brands, and a host of different ways to consume them. It is following that up with innovation that makes the products stand out. Then, it is driving home messaging that shows consumers how to fit the products into their lives, and even their tightening spending plans.
Campbell Soup is more than 150 years old, and has seen plenty of difficult economic environments. It is also a different business today, and will continue to evolve. At the end of the day, continued execution is what’s required.
“If it's good food, people are going to buy it, especially if it's a great value,” Clouse said.