While revenue growth continues and expectations continue to be exceeded, seemingly all is not well at Amazon. With jobs being slashed and profits falling, where next for retail’s biggest giant?

Revenue growth of 9% to $514bn (£417bn) is impressive for an ecommerce-focused retailer amid ongoing consumer channel shifts and it beat the company’s own expectations. 

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Jassy said Amazon is striving to ‘meaningfully streamline costs’

Yet it’s the first time chief executive Andy Jassy has felt the need to attend Amazon’s investor call, a task usually left to chief finance officer Brian Olsavsky to tackle alone. 

Results, it’s fair to say, were mixed for 2022. Sales in North America were up but were nearly offset by a slump in international revenues, which were disrupted by volatile exchange rates and a strong US dollar.  

In the UK, in particular, Amazon sales were impacted by currency fluctuations – falling from $31.9bn last year to $30bn (£24.47bn). However, this amounted to a 5.1% sales increase in local currency. 

Full-year operating profit nearly halved to $12.2bn (£9.9bn) for the year and almost all of that was driven by the Amazon Web Services (AWS) division.

For more than a decade, Amazon has been the disruptor, shaking up the sale of categories including music, electronics and books, and shifting sales online.  

Now we are seeing external disruption wreak havoc on Amazon itself, following its ambitious overexpansion during the pandemic and the reining in of discretionary spending across its retail and AWS businesses.

Jassy told investors the company is striving to “meaningfully streamline costs” and “take a look at what we are investing in, without giving up the key strategic investments that will change the business over time”. 

Cost-of-living crisis

With the cost-of-living crisis hitting Amazon’s major markets in the US and Europe, Amazon revealed that its customers spent less in discretionary categories such as electronics during the fourth quarter, with a visible shift to buying lower-priced items. 

Shoppers increasingly went to Amazon for low prices on everyday essentials, with the company committed to maintaining a focus on “sharp pricing”, according to Jassy. 

As a result of these shifting consumer trends, net product sales for the year were essentially flat, edging down 1.2% in Q4, growing by 0.4% over the year as a whole. Online store sales were down 2% for the same period, while physical store sales jumped 6%. 

The group reported higher sales and fulfilment costs for the year and a 4% increase in worldwide shipping costs. 

Cost-cutting focus 

Amazon’s operating income was negatively impacted by employee severance and leases, following its decision to cut its workforce by 18,000 employees

This cost-cutting focus will continue throughout 2023. Jassy explained that it will concentrate on reducing the cost to serve customers and making its huge fulfilment centre network and transportation network link together more efficiently to “optimise the flow of goods”.

In the UK, Amazon announced in January that it plans to shutter three of its older distribution centres, impacting 1,200 jobs.

It has also faced its first strike action in the UK as warehouse workers protested over pay, putting further pressure on its fulfilment network.

Grocery ambitions falter

Impairment charges of $720m (£584m) featured on Amazon’s balance sheet, relating to property and equipment at its Amazon Fresh and Amazon Go stores. 

This came as the company “exited stores with low growth potential”, according to Jassy, which in the UK included its Amazon Fresh store in Dalston, London, after just 18 months of operation.  

Amazon Fresh store London 1

Amazon shuts its London Fresh store after just 18 months of operation

Despite its ambitions in grocery, which Jassy believes to be a “really important strategic area” for Amazon in light of its large scale and frequency opportunities, he admits there is more work needed to get the business on track.

The company has made progress in growing and improving profitability at its premium Whole Foods Market business, but alongside this has been developing a network of Amazon Fresh stores to serve a “mass offering”, which it perceives to be different.  

Jassy admits this has involved “a fair bit of experimentation in the stores to find what resonates with customers and to test the economics”.  

Perhaps the focus on putting costly, market-leading technology into its stores has come at the expense of what experienced grocers would see as the basics – location and assortment to drive repeat visits – which Amazon has yet to get right. 

More cautious than his predecessor, Jassy now believes the right thing to do is to wait until Amazon has the “differentiation and economics that work” before making any further moves to expand its grocery formats more extensively. 

As Amazon also sees grocery as an omnichannel business, with hybrid consumers wanting to shop in different ways, it has more work to do to link its online and physical store channels together. 

Its online Amazon Fresh service in the US recently angered Prime members by introducing a sharp hike in the order value needed for free home delivery – from $35 to $150 – which suggests a focus on cost control much more than a “maniacal focus” on its customers. 

Eye off the ball

For the first quarter of 2023, Amazon anticipates between 4% and 8% revenue growth. The focus for its business will be continued investment for the long term, but it will remain very thoughtful about streamlining costs.

As Jassy explains, the focus will be on the “key strategic investments that will change the business over time”. That means a pause on incremental headcount, some programmes being eliminated and a slowdown in both store expansion and device rollouts.

He explains that Amazon’s business model for investment in large programmes is focused on whether success would significantly “move the needle” at Amazon. 

There is no doubt that Jassy is the antidote to Jeff Bezos in terms of more thoughtful and considered leadership. Under his tenure, Amazon’s future is likely to be shaped, scrutinised and adapted into a company that is less bullish but perhaps more likely to build organic growth.

In the meantime, there are opportunities for Amazon’s multichannel competitors. This includes arch-rival Walmart, which is increasing investment and beating Amazon in areas such as drone delivery