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Don’t waste another dime on bloated channel reporting and vanity metrics.
Don’t waste another dime on bloated channel reporting and vanity metrics.
Ecommerce platforms offered a look at how they're navigating shifts in the economy and consumer behavior.
Q2 earnings brought bluer skies for Amazon. (Photo by Flickr user Phil Murphy, used under Creative Commons license.)
Many of the companies that run the platforms powering the ecommerce landscape reported earnings from the second quarter of 2022 this week.
The results came on a week when the macro picture got cloudier, as the latest GDP report showed the second straight quarter of contraction in the economy, while the Federal Reserve raised interest rates to cool demand. While all of the executives acknowledged “headwinds” from inflation and higher gas prices, as well as a concern about a pullback in consumer spending as the economy tightens, the results were not uniform across the board.
Here’s a look at key numbers that illustrate how each of the retail channels are faring:
That’s the year-over-year sales growth posted by the largest ecommerce company in a second quarter that was seen as an improvement over Q1 results. Though Amazon as a whole reported its second straight quarterly loss of $2 billion, Wall Street was cheered by the increase in revenue, as well as bigger projected third quarter sales growth of 13% to 17%. As always with Amazon, there was lots of fascinating data reflecting not only performance across its many business lines, but also the scale at which the company operates. Here are a few more that particularly stood out.
That’s how much Walmart said its profit would drop in the second quarter. While the company doesn’t report earnings until August, its Monday evening move to pre-emptively warn the market about dipping profits made waves this week, given what it highlighted about consumer behavior amid inflation.
Walmart said it was seeing customers spending more on food and fuel. As a result, there was less spending on general merchandise items, which are more profitable. It will be more heavily discounting that general merchandise, namely clothing, to move inventory. So, lower profits.
This comes at a time when Walmart was already offering markdowns on many items in the categories that were popular in the pandemic, but showed up after demand for them dipped as a result of supply chain issues.
The real headline stat of the week from Shopify was 1,000, or 10%. That’s the number of people that were laid off by the software company as a result of what CEO Tobi Lütke said was a misplaced bet on pandemic growth continuing at early pandemic rates. Read more here.
During its earnings call on the day after the layoff announcement, Shopify reported that its gross merchandise value for offline commerce grew 47% year-over-year, helping revenue grow to $1.3 billion. This category includes the point-of-sale systems Shopify offers to power operations at merchants’ brick-and-mortar stores.
The growth in this area comes amid a return to more in-store shopping as pandemic restrictions lifted in 2022. Executives said the company added thousands of new merchants onto the POS in the quarter, and saw existing ecommerce customers add the hardware for brick-and-mortar, as well.
Executives said that building out the in-store system was another bet it made on building early in the pandemic. Now, it’s showing signs of paying off.
Overall, Shopify reported revenue growth of 16% year over year for the second quarter, reaching $1.3 billion. It also reported a net loss of $1.2 billion.
That’s how many new buyers the Etsy marketplace added in the second quarter across its marketplaces. It’s a “meaningfully elevated” rate of new customer acquisition when compared to pre-pandemic levels, indicating that the growth of the last two years isn't subsiding at all ecommerce platforms. Reported alongside second-quarter revenue growth of 10% year-over-year that beat Wall Street expectations, shares in the company surged following the earnings report, CNBC reported.
On Etsy's earnings call, CFO Rachel Glaser also provided a deeper look at movement in various categories of goods on the platform. From the Seeking Alpha transcript:
Reopening headwinds have specifically pressured the home and living and craft supply categories, which collectively represented over 40% of our second quarter GMS and were meaningful beneficiaries of stay at home related consumer purchasing trends during the pandemic. Trends remain positive in paper and party and apparel categories, as consumers continue to shift to in-person events and activities. Demand was also strong for travel related needs, including luggage tags, travel wallets, and fanny packs. Weddings and parties remained bright spots, especially wedding favors as larger in-person weddings resumed.
That’s how much profit the ecommerce home and furniture retailer reported in the second quarter. Even though Overstock’s revenue declined 34% year-over-year, this stands out because many other platforms are posting losses this year. The company completed its transition to a singular focus on home furnishings and furniture in June, and is now seeing home improvement items outpace other categories.
“While we cannot control the macro environment and the impact of high gas prices, increasing interest rates, record inflation and uncertainty surrounding geopolitical events has on a consumer’s sentiment and competitor's behavior, we can control and have controlled many elements of our business. In fact, our asset-light business model is highly advantageous during times like these. We don't have expensive logistics operations with a high fixed cost base or significant owned inventory on our balance sheet,” CEO Jonanthan Johnson told analysts.
The company is pulling back after breakneck pandemic expansion. Will it sacrifice the shopping experience along the way?
Amazon is in a period of rebalancing.
The company has long scaled at a relentless pace as it sought to not only provide a marketplace for commerce, but the infrastructure that enabled it, as well. Amazon found another level of overdrive over the last two years, as demand spiked to unseen heights during the pandemic and the company tried to build to keep up.
This wasn’t necessarily a period that saw the kind of invention that Jeff Bezos made an existential tenet of the company, but it nonetheless seems to be shaking out as a cycle that included risk and fallout.
In this case, the risk was not a new device like a smartphone or a move to bend the future to Amazon's will like drone delivery. Rather, it was an expansion that took its already-vast operations to new heights.
Nowhere was this more evident than the company’s logistics network. As CEO Andy Jassy described it to analysts Thursday on an earnings call, the company doubled the size of a fulfillment network it took a quarter-century to build in two years. It also built out a last-mile delivery network that was the size of UPS, which is one of the top two carriers in the U.S.
In 2022, all of that expansion ran into 40-year-high inflation, war in Ukraine and a pullback in demand for goods amid reopening. The company first admitted the problem: It had overbuilt.
But the solution is not to tear down. It had to keep expanding as only Amazon does, while still cutting back in a period of “belt-tightening,” as executives have put it.
That’s evident in watching developments out of the logistics network alone. Amazon pulled out of some areas, and canceled plans to expand into some new warehouses. Yet, as Business Insider reported, it still added 79 million square feet – a footprint that is equal to half of next-closest competitor Walmart’s entire distribution network. It is also expanding Buy with Prime, a new program that will allow direct-to-consumer brands to offer Prime benefits, and, by extension, access to Amazon’s logistics network. Another service, called Amazon Warehousing and Delivery, is designed for upstream storage, necessitating more space to be made available in the network.
At the same time, it will seek to keep doing more for consumers.
Jassy indicated as much when he was prompted to outline his priority areas. Beyond cost-cutting, he said speed is the second highest priority for Amazon. As if to conform this, he said later in the call that one-day shipping is getting off the ground in North America.
Selection is another priority area. At Amazon, that phrase translates to a few things, but top of mind is “expanding the third-party seller marketplace.” Third-party sellers accounted for 59% of sales in Q4. Beyond sales, Amazon’s work with the sellers who post their products on the marketplace is also lucrative for the company. Amazon allows these sellers to tap its logistics network to offer Prime through the Fulfillment by Amazon program. Its business segment called third-party seller services grew 20% year-over-year in the fourth quarter, right in line with the massively profitable cloud computing division Amazon Web Services.
Price, Jassy said, is another area of importance, especially with the consumer pullback on discretionary purchases being observed amid inflation.
“I think pricing being sharp is always important,” Jassy said. “But particularly in this type of uncertain economy, where customers are very conscious about how much they're spending, having the millions of deals that we put together with our selling partners in the fourth quarter was an important part of the demand that you saw.”
Finally, Jassy cited a priority of improving the customer experience. He said Buy with Prime would give subscribers the ability to use their benefits across the web, and noted that virtual try-on for shoes brings change to the shopping experience.
But it’s in this area that the tradeoffs that may be happening under the surface may rear their head again. GlobalData Managing Director Neil Saunders noted that online shopping generally is becoming “more difficult" on Amazon.
“While the Amazon marketplace is far from a terrible place to shop, it has become more complex and cluttered with a multitude of products, delivery options, and prices levels for shoppers to sift through,” Saunders wrote in note released at the time of the earnings call. “The result is that impulse buying has dropped and that more people are migrating away to other retailers. This is not yet a serious problem as erosion has only happened at the margins, but it is something Amazon will need to address and arrest to prevent further decline.”
Taking a rhetorical step further, the journalist John Hermann wrote this week that a “junkification” of Amazon is taking place, while arguing that “everything is going according to plan" for the company.
He placed the growth of the third-party seller marketplace at the center of this trend. But it also comes as Amazon grows its advertising business, with many taking note of a growing number of ads on the platform. The company also wants to keep growing Prime, and is now using content such as Lord of the Rings and NFL’s Thursday Night Football as key acquisition channels. Both had “record” signups of new Prime members, CFO Brian Olsavsky said.
“We see a direct link between that type of engagement and higher purchases of everyday products on our Amazon website,” he said.
It will have to do each of these things at once, while entering a period that will require it to be “more targeted with its growth ambitions,” as Saunders put it.
"Since its inception, Amazon has had a culture of throwing dollars at many different things to see where they led and what they could learn," Saunders said. "That approach worked well for a younger, fast-growth business. It works far less successfully for a more mature entity. In our view, management deserves credit for recognizing this and quickly responding. However, the shift requires a lot of care because Amazon needs to find a new balance between being ambitious and innovative and being more frugal with its spending – which will be very challenging."
Jassy said the changes of the pandemic made its logistics a "different network." That may be true of the whole company. Rather than an isolated cycle of overbuilding and pulling back, this may prove to be a period that changes Amazon altogether. The bets will still be there, but the risk will be magnified with fewer dollars that don't pay off to go around. As hinted by the logistics buildout of the pandemic and even Buy with Prime, they also may look more operational.
Less delivery robot, more delivery optimization.
As Jassy put it: “We're going to be very thoughtful about how we streamline our costs, and I think you see a lot of that, but we're also going to continue to invest for the long term.”
The recipients of those investments will say a lot about where it wants to head in this next year.