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Amazon ecommerce sales fell 2% in holiday quarter
On an earnings call, CEO Andy Jassy outlined the thinking behind the company's cost-cutting in 2022.
After two years of exceeding even its own high bar of bigger and faster, Amazon is in the midst of a slowdown period.
Results from the fourth quarter of 2022 provide plenty of evidence.
- Net sales grew 9%. Overall sales grew 8.6%, marking the slowest holiday quarter growth in 10 years, according to GlobalData Managing Director Neil Saunders.
- Ecommerce, characterized as “online stores” by Amazon, fell 2%.
- Outlook for the first quarter remains 4-8%, which remains in a "light" zone by Amazon standards, CNBC reported.
On an earnings call with analysts, Amazon executives cited a consumer pullback amid rising inflation.
“In our worldwide stores business, with the ongoing economic uncertainty, coupled with the continuation of inflationary pressures, customers remain cautious about their spending behavior,” said CFO Brian Olsavsky. “We saw them spend less on discretionary categories and shift to lower-priced items and value brands in categories like electronics. We also saw them continue to spend on everyday essentials, such as consumables, beauty and softlines.”
Despite the wider pullback, events such as the first Prime Early Access Sale, Black Friday and Cyber Monday outperformed expectations, Olsavsky said.
Third-party sellers were an especially big driver of sales, as they accounted for 59% of overall sales. Sellers aren’t only driving sales, but also Amazon’s business. Amazon’s segment called third-party seller services, which includes Fulfillment by Amazon, grew 20% year-over-year.
Advertising revenue also continued to be a bright spot, rising 23% year-over-year, surging to an $11.7 billion business.
Putting on the brakes
Yet it is also a time when Amazon is pulling back. CEO Andy Jassy joined the call, and outlined several of the ways that the company has sought to cut costs.
In Jassy’s first year as CEO, a big priority was scaling back in fulfillment and transportation. In early 2022, Amazon said it overbuilt its logistics and warehouse network during the pandemic as it sought to scale up quickly to meet the massive demand for ecommerce. So one of Jassy’s priorities in his first year as CEO has been to pull back.
Jassy outlined the cycle:
“Over the last few years, we took a fulfillment center footprint that we've built over 25 years and doubled it in just a couple of years,” Jassy said. And then we, at the same time, built out a transportation network for last mile roughly the size of UPS in a couple of years. And so when you do both of those things to meet the huge surge in demand…it took everything we had. And so there's a lot to figure out how to optimize and how to make [it] more efficient and more productive.”
It’s “a different network” now, Jassy said, and the process of bringing it back into balance is still underway. In the early part of 2022, Amazon delayed some builds and mothballed other facilities.
“To figure out how to be really efficient across all those links and have them be highly utilized and to get the flows in those facilities working the right way, it takes time,” Jassy said. “So we're working very hard on it.” The work continues into 2023.
Amazon also made cost-cutting moves in other areas “where we didn't have conviction that they were going to be big needle movers for Amazon,” Jassy said. It pulled back on physical store expansion in areas including grocery, and closed 4-star bookstores. It pulled back development in devices. It ended fabric.com, Amazon Care, Amazon Glo and Amazon Explore. And finally, the company eliminated 18,000 roles in a massive layoff.
“As we got into the early part of the summer, where we start our operating planning process…there was a lot of things happening in the macro economy. We started that process with the high-level tenet of we want to find a way to meaningfully streamline our costs in all of our businesses, not just their existing large businesses, but also in some of the investments we're making,” Jassy said.
The company thought about it this way: “We want to actually do a pretty good, thorough look about what we're investing and how much we think we need to, but doing so without having to give up our ability to invest in the key long-term strategic investments that we think could change broad customer experiences and change Amazon over time.”
Trending in Operations
Amazon leads in retail media, with nearly 40% market share
MediaRadar shares the top five brands spending on retail media.
Retail media has exploded in recent years, as the power of ecommerce marketplaces has presented opportunities for brands to reach consumers by advertising on the same platform where they shop and buy products.
During this expansion, retailers from Michaels to Best Buy to Kroger launched their own retail media networks to create avenues for brands to leverage first-party data that comes from sales and loyalty programs for advertising on marketplaces. Gradually, that data is also being used to advertise across the web, as well.
Now, a new market that crosses advertising and commerce is coming into view. In all, retail media is now worth an estimated $100 billion, according to a new study from advertising intelligence and sales enablement platform MediaRadar.
Top advertisers with Amazon. (Source: MediaRadar)
When it comes to the retail leaders in the space, findings from MediaRadar included the following:
Amazon is the dominant force in retail media, capturing 37% of market share. Over 14,200 companies advertised 17,000-plus brands on the online giant in 2022.
General/mass retailers, including Walmart and Target collectively captured 36% of ad spend in retail media.
That means the largest players in the space accounted for 73% of retail media ad investment in 2022.
Still, the gap between Amazon and the rest of the field is notable. Amazon reported having a $31 billion advertising business in early 2022, and growth only continued from there as it posted growth north of 20% in each quarter of the year.
Just as Amazon has the lead in ecommerce, it also has the lead in retail media. This makes the company not only a powerhouse in commerce, but also one of the largest digital advertising giants.
"Amazon has such a tight grip on the digital space that they really sit in a category of their own," said Todd Krizelman, CEO and cofounder of MediaRadar, in a statement. "Other players are growing quickly, but it will be difficult for legacy brick and mortar retailers to beat Amazon on its own terrain. Retailers should explore other opportunities to extend retail media - such as in-store digital experiences or other channels like email newsletters, where Amazon doesn't have as much traction."
Top advertisers with general retailers (Source: MediaRadar)
When it comes to brand adoption of this channel, MediaRadar shared the following:
In all, nearly 26,000 companies advertised almost 40,000 brands across retail media networks.
Top categories for retail media included consumer electronics (15% of spend), housewares (6%), snacks & desserts (6%), household maintenance products (5%), and furniture/decor (5%). This accounted for 37% of total retail ad spend last year.
The top five brands spending in retail media include HP, Palmolive, Pepperidge Farm, Planters, Ritz, Epson and Starbucks.
For brands, retail media is serving as a viable new advertising channel at a time when privacy-oriented shifts like Apple’s App Tracking Transparency and the coming demise of third-party cookies are making long-used tools for social media-based advertising less efficient than they once were.
"Brands are making a big push into retail media right now," said Krizelman. "This trend will only continue as more advertisers seek lower funnel channels to drive performance for their spend, and as identity-based advertising on the open web continues to decline. Retail media offers a solution to these issues."