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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.
Past Prime Days and consumers' summer spending plans offers hints for this year's event.
(Illustration by The Current)
The inventory is sent. All of the coupons are in. Cue the livestreams.
Prime Day 2022 is nearly here.
While we wait for Amazon’s annual ecommerce holiday to arrive on July 12-13, let's take a look at the prospects for this year’s Prime Day. For a few data-driven predictions, we turn to Prime Days past, and insights about the current state of the consumer. Here’s a look:
Prime Day is now in its eighth year, so there is plenty of data from years gone by that can offer a suggestion about how this year will turn out.
For one, it’s a good bet that this one will be bigger than the last. According to Digital Commerce 360, each year’s Prime Day has brought sales growth. In 2021, gross merchandise sales were $11.19 billion, according to the media outlet. However, year-over-year growth slowed down to 7.7% in 2021, as compared with a 45% jump from 2019-2020. We’ll see whether that proves to be an anomaly or the start of a new trend.
For sellers, the effectiveness of Prime Day promotions has risen in recent years. According to an analysis of data from Prime Day 2020 and 2021 by real-time commerce operating system Tradeswell, there was a significant increase in median percentage change of gross margin between the two years. In 2020, products sold on Prime Day had an increase of 32% in gross margin than the week prior. In 2021, the same measure showed a 72% increase in gross margin. That could bode well for sellers this year, especially those with discounts in the 10% to 30% range that Tradeswell deemed a sweet spot.
(Chart via Tradeswell)
This year’s Prime Day arrives at a tenuous time for consumers. Against a backdrop of inflation, they face competing impulses.
On one hand, rising prices may make people more likely to seek out the kinds of deals that Prime Day offers.
On the other hand, they may have less discretionary money to spend on the electronics, household goods and apparel that Prime Day is known for featuring.
If recent trends are any indication, neither factor may end up slowing down spending. To date, rising prices haven’t put much of a damper on consumer demand. Retail sales have continued to grow, and multiple first-quarter earnings reports (including Amazon's) featured executives saying that the health of the consumer remains good, despite rising costs.
Data indicates that is poised to hold true this summer, and for Prime Day in particular. According to a survey of 1,115 consumers by Adobe Commerce, 61% of consumers are looking forward to summer sales like Prime Day, while 76% of those planning to participate in these shopping holidays said they will spend the same amount as last year, or more. But some impact of inflation is expected, however, as about 24% signaled that they don’t plan to shop on Prime Day because they have fewer discretionary funds available.
Summer shopping plans, by category. (Graph via Adobe)
The effects of inflation could also be evident in the activity of the sellers. Nearly two-thirds of respondents (64%) predict there will be fewer sales than last year. Along with price pressure, brands are facing higher costs throughout the supply chain – including fees like a fuel surcharge from Amazon. This leads to choices about what they can offer when it comes to discounts.
Before the rush for deals begins, it’s worth taking a step back to consider the scale of Prime Day, which gives the already-massive Amazon an even bigger presence in US retail. According to results of a pre-event survey by market research tech firm Numerator, Amazon is expected to capture more than 20% of the share of consumer packaged goods dollars on those two days. This share has been growing each year, from 16.2% in 2019 to 19.1% in 2021. It is expected to surpass 20% for the first time this year.
In each of those years, Amazon’s CPG share has increased 4-5x on Prime Day. In the process, it takes share from smaller retailers and in-store locations of major retailers. Only Target, which will offer its own deals timed with Prime Day next week, saw a slight positive increase of .8% in 2021.
It’s another reminder that when Prime Day arrives, Amazon is the center of gravity. Everything else in retail revolves around it.
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.