No retailer is immune to current market pressures, not even Amazon. 

After years of double-digit growth, the reversal of the rapid shift to online during the coronavirus crisis, higher overheads and a global cost-of-living crisis have pushed Amazon to a tipping point.

At its third-quarter results last month, the online giant issued a bleak outlook for the critical golden quarter. Then last week, The Wall Street Journal reported that Amazon had launched a cost-cutting review of its unprofitable business units

As the etailer reassesses its strategy for long-term profitable growth, Retail Week Prospect analysts explore five key ways that Amazon will sharpen its focus to better balance its short- and long-term priorities.

1. Taking control of overheads

The disruption of the global pandemic accelerated growth at Amazon. As customer spending shifted online, the business had the capacity and supply chain to serve home-based consumers, growing revenue by 40% between May 2020 and May 2021.

Many companies, including Amazon, were optimistic that the trend would continue. However, footfall has returned to physical stores and customers are now reining in discretionary spending. Amazon’s revenue growth slipped to single digits for the first time during the fourth quarter of 2021 and remained slow throughout the first half of this year, increasing just 6% during the first two quarters. 

 

As a result, Amazon is taking control of its overheads across productivity, fixed cost leverage and inflation.

Amazon has adjusted staffing levels and improved the efficiency of its significantly expanded operations network. But as overheads increased, the company missed its $1.5bn (£1.2bn) cost-saving target for the third quarter by $500m (£425m). In October, a hiring freeze was introduced across its retail business, followed in November by a freeze for its corporate workforce.

Last week, it launched a strategic review of its operations, looking across the group to reduce overheads. This week, The New York Times reported that Amazon is planning to shed 10,000 jobs in its corporate and technology divisions and founder Jeff Bezos warned US businesses should “batten down the hatches” for a recession. The cuts would be the largest cuts in Amazon’s history – about 3% of its corporate employees and less than 1% of its global workforce.

 

Amazon is also dealing with the consequences of overinvesting in fulfilment capacity. At this time of year, the company is usually hiring temporary staff and opening new fulfilment centres but instead, it finds itself with excess space after doubling its footprint during the pandemic. In May, Amazon even began renting out space in its distribution centres to reduce costs. Capital expenditure for 2023 will be lower as the business grows into the space already opened. 

A major challenge for Amazon is that it has been running with very high inventory levels in its warehouses, a hangover from the pandemic and supply chain issues in Asia last year. This is a key area of focus, together with optimising distribution operations — making sure that trucks are used to their full capacity and preventing long-zone shipments.

Chief financial officer Brian Olsavsky told investors in October that the company felt good about the “arc of demand versus supply”. However, the remaining “wildcard” was inflation impacting business costs and customer spending. Here the company says it is prepared for a “variety of outcomes”, no doubt providing an accelerator to its cost-cutting focus.

2. Diversifying revenue streams

Amazon’s broad ecosystem allows it to generate diversified revenue from areas including Prime subscription fees, AWS cloud computing services, marketplace services and advertising. 

The online titan would not have been profitable in its third quarter without the contribution of $5.4bn (£4.4bn) in operating income from AWS, which is the fastest-growing division within Amazon.

However, even AWS has been affected by the difficult economic environment. Third-quarter revenues rose 28%, compared to 33% the previous quarter, as the business conceded it had seen “an uptick in AWS customers focused on controlling costs” and moving storage to lower-priced tiers.

The division has also been challenged by rising energy prices, hitting the cost of running its vast IT storage facilities. 

 

Marketplace is an important driver of Amazon’s revenue and an area where the company is continuing to push for growth. Marketplace sales accounted for a record 58% of the total unit mix during the third quarter and the income to Amazon from third-party sellers grew 23%. The company is working to bring more sellers on board and gained from the addition of a 5% “fuel and inflation surcharge” added to its Fulfilled by Amazon fees in April. 

Revenue from advertising and retail media jumped by a third during the same three-month period. This includes the sale of advertising to sellers, vendors and publishers as well as sponsored ads, display ads and video advertising on its platform.

Amazon prides itself on advertising to customers at the point where they are ready to spend. The danger with this strategy is that it must assess how much sponsored content customers are willing to tolerate before they turn away from the platform. 

3. ‘Maniacal’ focus on the customer

Amazon has always put the customer at the heart of its strategy and famously has an empty chair in meetings to represent the view of the customer. In its latest earnings release, chief executive Andy Jassy said the company would have a “maniacal focus” on putting the customer first.

But what does this actually mean? Prospect’s interpretation is that Amazon will ensure it has the right products and services in place for customers — focusing on assortment, original content and delivery — while aiming to protect customers from the impact of any strategy changes or cost-cutting measures.

Amazon’s Prime ecosystem is the industry benchmark for loyalty. It organised two large shopping events in the space of four months exclusively for Prime members – Prime Day in July and the Prime Early Access Sale in October. Both events drove additional revenue for the company but their exclusivity makes Prime members feel valued and shows Amazon addressing cost-of-living concerns. 

Amazon-Prime-Early-Access

Amid the cuts to overheads, Amazon will carefully innovate in areas customers care about most, only “winding down products and services where we believe our resources are better spent elsewhere”, according to Jassy.

Having increased its Prime membership fees in the US back in February, from $12.99 to $14.99 a month, and in the UK seven months later, from £7.99 to £8.99 a month, Amazon cannot afford to lose its members and will continue to add benefits exclusively for those who sign up.

4. Placing big innovation bets

Well-known for its disruptive innovation, Amazon is continuing to invest for the long term. But as it puts energy into the key projects to move its business forward, Prospect anticipates the winding down of smaller test-and-learn activities and reducing costs where it makes sense.

One area tipped for cost reduction is the Alexa division, which reportedly generates an operating loss of more than $5bn (£4.3bn) a year. Customers care about Alexa but their use of its capabilities undoubtedly falls far below the ambitions that Amazon set itself. Any reduction in the development of Alexa capabilities is highly unlikely to impact the consumer.

Amazon Rivian electric vehicle

Among Amazon’s big bets are electric vehicles, which form part of the company’s plans to reach net-zero carbon emissions by 2040. Amazon invested $1.3bn (£1.02bn) in electric vehicle manufacturer Rivian in 2019 and planned to roll out 10,000 electric vans by the end of 2022 and 100,000 by 2030. In reality, the company has only rolled out 1,000 vans this year amid manufacturing constraints. 

Amazon’s Prime Air division has been working since 2013 on the concept of airborne deliveries by drone. This work is set to come to fruition by the end of the year with its first drone deliveries to Prime customers expected in Lockeford, California. 

Amazon Prime Air drone

The company has worked closely with aviation authorities and created a “sophisticated and industry-leading sense-and-avoid system” that will enable drones to fly without visual observation while avoiding other aircraft, people, pets and obstacles. This last-mile innovation is an exciting potential development for the UK, where there is the authorisation to create a ‘drone superhighway’ by 2024, connecting Oxford, Cambridge, Reading and Coventry.

As it places its big bets on airborne deliveries, the company is winding down its Amazon Scout robot delivery division, redeploying its 400-person team to other roles.

5. Limiting overexposure to risk

Amazon’s two largest international markets, Germany and the UK, have provided strong growth, particularly during the pandemic, but international trading has been far more challenging this year.

Sales growth in Germany hit 33% in 2020 and in the UK revenue jumped 51%. Both markets racked up further growth of 26% and 20.5% respectively in 2021. The cost-of-living crisis has hit consumers hard in these major markets and it is no surprise to see the company scaling back its international projects.

Olsavsky said in October: “I think the biggest increase in losses versus Q2 was tied to some additional operating costs in Europe. We’ve seen higher fuel costs there, even more than in the US.”

He also pointed to a “tougher recessionary environment” in Europe because of the war in Ukraine and the energy crisis.

And Amazon faces currency volatility. The strong dollar versus the euro and the pound meant Amazon’s international sales fell 5% in dollar terms during the third quarter but grew 12% in constant currency.

Having already slowed the rollout of its cashier-less Amazon Fresh stores in the UK, Amazon is likely to reduce international capex to focus more on its domestic market. It is embedding Just Walk Out technology into Whole Foods Market stores in the US and has just opened its second Amazon Style fashion store.

There is no need for concern for Amazon, which remains one of the fastest-growing and most resilient retailers on the planet. However, it is interesting to assess how even the world’s giants are having to re-examine strategies to balance short- and long-term priorities.