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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 19% year-over-year, surging to an $11.6 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
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.