Amazon once seemed invincible, but the company is navigating a bumpy, post-pandemic road with a new CEO at the helm.
The Gist
- Move toward retail efficiency.Layoffs and regional undertaken to boost Amazon's operational efficiency.
- New retail competitors.Chinese retailers challenge Amazon's market share with lower prices.
- AWS challenges.Slowing growth and increased competition in the cloud services market.
Almost immediately after Jeff Bezos handed Amazon to Andy Jassy in July 2021, the trouble began. The company had been soaring post-pandemic, bolstered by overwhelming interest in ecommerce and the cloud, but a return to in-person life and a broad tech drawback changed it all fast. As Jassy took over, Amazon’s share price plunged, customers pulled back, easy deals became hard and hard deals fell apart. With Bezos living the good life, his anointed CEO dealt with the fallout.
Next month, Jassy will reach the two year point in his bumpy run as CEO. He’s helped bring some stability to the company, but his record’s been marked by approximately 27,000 layoffs, a rush toward retail efficiency, slowing cloud growth and questions about the company’s focus. Amazon stock is up 48% this year, but down approximately 30% since Jassy took over. And if his first two years were a crucible, the next will be defining, as he’ll face mounting challenges while hoping Bezos doesn’t pull an Iger.
Here’s where things stand inside Jassy’s Amazon at his two year mark:
Retail: New Efficiency and New Competition
After Amazon’s retail business grew 39% in 2020, it decided to double its fulfillment footprint in 24 months. The aim was to add capacity quickly in case pandemic buying habits kept up. When that hope didn’t materialize, Amazon was stuck with excess space and costs. “We knew we might be overbuilding,” Jassy admitted late last year, but the company proceeded nonetheless. Rising inflation and an uncertain economy further complicated the decision, as people spent less freely on the site. Interest rate increases then drove the market to demand maximum efficiency, leaving Amazon’s entire retail operation misaligned.
Responding to Wall Street, Jassy conducted deep layoffs and looked for efficiency across the business. Amazon soon made plans to sublease its excess warehouse space and sought to use its existing space better. It shifted from a national fulfillment model to a regional model, and many of those regions are now largely self-sufficient, capable of shipping you whatever you need without relying on another network of warehouses. The company also changed its website to help the efficiency push. “The first few non-sponsored results are going to be products already available in the local distribution center,” Bernstein analyst Mark Shmulik told me, sounding impressed with the changes. ”They're actually tying inventory to how they're displaying the results.”
With retail stabilizing, Amazon must now fend off new competitors capitalizing on the bargain shopping trend. Notably, Chinese retailers Temu and Shein are continuing to gain adoption in the United States, with Temu alone reaching 74.1 million downloads, per Apptopia. Not all Temu users are active, but usage is soaring. These challengers are effectively bringing many of the made-in-China brands on Amazon directly to consumers at a lower price, though with worrying labor practices. To avoid losing share, Amazon will have to respond. In retail, there’s no such thing as a break.
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Learning Opportunities
Amazon Web Services: Resetting Expectations in a Different Market
In the zero interest rate era, companies would spend wildly on cloud services without much thought. “It wasn't just capacity,” said Shmulik. “It was value added services like ‘Oh, I want the platinum SLA.’” Amazon Web Services’ customers believed the good times would roll on, that growth was inevitable, and that extra space or higher levels of services were worth the cost. No longer. As interest rates rose, companies looked for places to cut, and CFOs began scrutinizing the fancier AWS packages. In many cases, they limited plans to increase spending or even cut back.
Alongside a pullback from bigger cloud customers, Amazon’s struggled to keep growing with startup money as VC funding grew scarce. “It's still a bit dry out there, aside from some pockets of AI investments,” said Shmulik. “These digitally native tech startups are typically born on AWS so you're not seeing those dollars flowing.”
AWS growth slowed to 16% in this year’s first quarter, down from 20% last year. And it may slow further before it picks up. The company’s cloud services division will also have to work to keep its shine as competitors including Microsoft and Google rush to support AI. AWS did counter in April with new tools to build generative AI applications in AWS. This fight is in its infancy though, and how Amazon fares could meaningfully influence the company’s trajectory.
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Experimental Products: AI and Focus
Jeff Bezos had plenty of executives to pick from when considering his eventual replacement and landed on Jassy. By selecting the technologist running AWS, instead of someone with deep retail experience, Bezos was making a bet on the future. Jassy had been at the helm of Amazon’s most successful expansion (the AWS building in Seattle is called ‘re:invent’) and was best positioned to lead the company through necessary transformations in the future.
Amazon under Jassy has, however, been notably absent in the race to release new consumer, generative AI applications. Currently, there’s a document floating around the company with more than 60 employee-sourced ideas for ChatGPT-like uses. But Amazon is clearly behind, a surprise given its lead in voice computing with Alexa.
Amazon’s delay on ChatGPT-style tech underscores Jassy’s challenge. To reward Bezos’s faith in him, he’ll have to push forward with new experiments at a time when the market is punishing excess spending. The temptation, currently, is to shut down experimental projects vs. spin them up. And while focus is necessary in today’s Amazon, being timid to push ahead could hold the company back in the long run.
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