As the tech giant wobbles and footfall recovers, smart multichannel retailers have a genuine opportunity to ‘do what Amazon does not’, writes Lisa Byfield-Green

Amazon Fresh store London

Amazon has already paused the rollout of its checkout-free grocery stores in the UK

No retailer is immune to current market forces, not even Amazon. After years of racing forwards in double-digit growth mode, the retailer has reached a tipping point of overexpansion and spiralling costs.

As cracks appear in Amazon’s armour, there is an evolving window of opportunity for its competitors to invest in a customer-focused strategy that delivers excellence across both physical and online retail.

Amazon has been conducting a strategic review of its operations aimed at reducing overheads since the autumn. This week it accelerated this focus with the announcement that it plans to “eliminate” 18,000 roles globally

The company will shed workers across areas such as stores, operations and people, experience and technology (PXT). Some job losses are expected to be in Amazon’s European business.

In light of this announcement, what can we expect from Amazon in the coming months and what are the implications for the wider market?

Overexpansion and excess stock

For most large retailers, strategic reviews and cost reduction are part of the rhythm of managing a business, particularly during a cost-of-living crisis. However, for Amazon, with its double-digit rates of growth and resilient share price, this level of scrutiny is only now being applied to the business for the first time.

Like many within the industry, Amazon saw a huge shift online during the pandemic and it invested heavily to double its distribution network and capitalise on this opportunity. This led to global growth rates of 38% and 21.7% for 2020 and 2021 respectively – and growth of 51% and 20.5% in the UK for the same periods.  

However, the consequences of this investment are beginning to hit home, as shoppers revert to more regular shopping habits and the company finds itself with excess space. Like many other retailers, it also has been running with high inventory levels in light of supply chain challenges, which contributes to high overheads and is another key area of focus.

Operating expenses at Amazon have continued to creep up. In its most recent third quarter, they accounted for 101% of net sales in North America and 106% of sales in its international division. While Amazon is no stranger to loss-making quarters, these run rates must be of increasing concern.

Spending reined in 

Amazon’s major markets across the US and Europe (Germany, the UK, France, Spain and Italy) are all suffering from spiralling inflation, which is impacting business costs and customers’ ability to spend.

Amazon relies on impulse purchases, with its Prime and rapid delivery options making it easy for customers to buy without thinking. However, shoppers are in a different mindset and the year ahead is likely to be challenging, particularly in Amazon’s two largest international markets, Germany and the UK. We can expect to see growth in these markets significantly lower than in previous years. 

“Amazon is not yet a master of physical retail and operating stores incurs significant operation overheads, above and beyond those in the rest of the business”

That means innovation and new activities in these markets are likely to be reined in. At the same time, we can expect to see a renewed focus on Prime-only offers and incentives, and the prioritisation of things customers care about such as improvements in delivery speed and reliability, which has recently taken a hit.

Chief finance officer Brian Olsavsky told analysts in October that it was seeing a “tougher recessionary environment” in Europe, impacted by the war in Ukraine and the energy crisis. On top of this, currency volatility of the strong dollar versus the euro and pound is impacting Amazon’s bottom line. All of this will lead to belt-tightening in the region for the next few months. 

Stores not mastered

One area tipped for cost reduction by chief executive Andy Jassy is Amazon’s stores division. This is no surprise when we look at performance. Amazon is not yet a master of physical retail and operating stores incurs significant operation overheads, above and beyond those in the rest of the business. 

Despite acquiring Whole Foods Market in 2017 and operating over 500 Whole Foods stores, more than 50 Amazon Fresh and Amazon Go stores in the US and 19 in the UK, the whole physical retail division contributes just 3.8% of Amazon’s total revenue. This is a decline from 7.4% of Amazon’s total business in 2018, the first full year following its Whole Foods acquisition.

At the time, the Whole Foods acquisition struck fear into the heart of the international grocery community it wondered which retailer would be the next target. But Amazon has not made any significant moves to acquire more bricks-and-mortar stores and has been slow to develop its own formats.

In March 2022, Amazon shuttered 68 Amazon Books and 4-star stores across the US and UK, including two opened just months previously at Bluewater and Stratford. 

It would not be a surprise if the two Amazon Style fashion stores opened last year were similarly targeted for closure. As tech showcases, the stores are excellent, but in terms of delivering the kind of fashion experience to drive returning footfall, they appear lacklustre.

For the time being, the rollout of Amazon Fresh stores in the UK is on hold, but we may well see some of them being quietly shuttered. The 19 stores currently in operation are unlikely to generate loyal returning footfall anytime soon and opening the stores is costly. The majority of them are also located close to existing convenience stores of leading grocers.

The return of footfall to retail parks, high streets and shopping centres gives multichannel retailers a real opportunity to ‘do what Amazon does not’ – a mantra that has never been more relevant than it is now.

It will take Amazon time to work through the necessary changes to its business model. During this period, we can expect to see the company focused even more heavily on the US where inflation and the cost-of-living crisis are having a lesser impact than in Europe.

The business will prioritise its Prime ecosystem and put customers at the heart of its strategy. Innovation will remain a core part, too, but ROI will be a significant consideration. 

We can expect Amazon to come back resurgent in 2024 following its restructuring efforts. But in the meantime, there is plenty of opportunity up for grabs for smart omnichannel retailers that can put customers first and serve them across channels, wherever they choose to shop.