Amazon Braces for Slowing eComm Growth in 2023
Update 03/10/2023: 🪓 Cost cutting remains high on Amazon’s priority list after suffering a $2.7 billion net loss in 2022. Growth in certain areas such as the company’s cloud computing business is also expected to continue to decline in 2023, according to Amazon Chief Financial Officer Brian Olsavsky.
To curtail expenses as profit weakens, Amazon is:
- Permanently closing 8 of its 29 self-checkout Amazon Go stores in Seattle, New York, and San Francisco.
- Delaying the expansion of Amazon Fresh to focus on “experimenting with selection, checkout formats, assortment, and price points” before doubling down on physical stores.
- Pausing construction of its second corporate headquarters in Virginia, also known as Amazon HQ2. The move coincides with the company’s recent job cuts impacting 18,000 employees.
In addition, Amazon also reportedly continues to close warehouses this year.
According to MWPVL, Amazon has so far shut down a total of 99 logistics sites in 30 US states, up 29 from last year’s report.
Many of these facilities were old buildings that cost a fortune to maintain and were located outside of bigger cities, per CNBC. With Amazon expanding its same-day delivery network, the site closures may be an attempt to reallocate resources to those new same-day sites while reducing outbound transportation costs.
🚨 As US consumers spend less on products due to inflation, Amazon is left to deal with lots of unused warehouse space, which contributed to the company’s $3.8 billion profit loss in Q1 and another $2 billion in Q2 2022.
New data from MWPVL International suggests that it may take the online retail giant three (3) years to recover from overbuilding its fulfillment network during the pandemic. However, Amazon rep, Lisa Levandowski, reportedly called MWPVL’s estimations “pure fiction.”
Amazon CEO Andy Jassy himself did mention – albeit did not exactly say how long – in his Q1 2022 earnings call that “improving productivity and cost efficiencies” throughout the logistics side of things “may take some time” as the company tries to “work through ongoing inflationary and supply chain pressures.”
As a highlight to the concern, within the first 72 hours of the new year, Tech Crunch reported that Amazon had secured an $8B loan to help weather some of the uncertainty.
In 2022, the eComm giant has taken a few steps geared towards financial recovery amid a slowing online growth and a looming recession, including raising their FBA fees for 2023.
Recent moves that Amazon has been making to improve profitability include:
Subleasing or shutting down several old warehouses across the US.
After nearly doubling its fulfillment network during the pandemic, Amazon had to majorly pullback last year to lower operational costs and capital expenditures. As of September 2022, the company has shut down or subleased more than 20 logistics centers and postponed or canceled the openings of 50 more sites. And in doing so, Amazon saved approximately $4 billion in 2022, according to MWPVL Founder & President, Marc Wulfraat.
Increasing warehouse automation with robots to improve productivity and efficiency.
Amazon has recently deployed multiple robotic arm systems, Robin, Cardinal and Sparrow, in some of its facilities to streamline its fulfillment process – a sign that the company could also be ramping up warehouse automation to reduce its workforce amid increasing unionization activity, which could drive up annual operating expenses by hundreds of millions of dollars.
Rolling out Prime Air, Amazon’s drone delivery service
Rolling out Prime Air, Amazon’s drone delivery service, which could be “faster, cheaper, and greener” than traditional shipping modes, i.e., manned, gasoline vehicles versus unmanned, fully electric cargo aircrafts. Moreover, according to UVL Robotics, drones can efficiently take hundreds of quick trips per day (within a 6-mile radius) and transfer packages from days to hours. Amazon’s drone service in particular is expected to cut down last-mile shipping times from 2 days to under an hour. With increased delivery efficiency, it could potentially reduce Amazon’s outbound transportation expense, and perhaps that would also translate to lower fulfillment fees in the future. 🤞🏼
Introducing Buy with Prime (BWP) to non-Amazon sellers to possibly increase fulfillment revenue.
What better way to fill up unused warehouse space than to offer it to hundreds of thousands of non-Amazon merchants? Instead of building out their own logistics infrastructure in an attempt to offer free 1- to 2-day shipping and returns, DTC businesses can now pay to use Amazon’s fulfillment without having to sell on the platform directly.
Market intel firm, PipeCandy, estimates that there are around 120,000 Direct-to-Consumer (DTC) brands in the US. The growing DTC market represents an important growth area for Amazon, which if they’re able to capture, could help them to stay ahead of Shopify, Walmart, and other rivals.
Presently, 17% of 21,000 US DTC merchants that PipeCandy have surveyed are using Amazon Pay (which is conditional to BWP) as a payment channel alternative. Majority of these stores are in the $5-$50 million gross merchandise volume range, which only represents 8% of the overall B2C goods aggregate sold in the US.
Therefore, it’s still too early to say whether or not BWP is going to make a significant dent in Shopify’s checkout processing revenue, which is still currently the preferred checkout provider of DTC stores.
Rising MCF fees is another factor that could stop merchants from using BWP, which makes increased warehouse and logistics efficiency through automation all the more important for Amazon to remain competitive.
Selling excess cargo jet space
Selling excess cargo jet space is yet another attempt by Amazon to offset the cost of overexpansion they have accumulated throughout the pandemic. In a Bloomberg post, Amazon is reportedly looking to hire execs with experience in selling excess air freighter space.
This year, global demand for air cargo is expected to fall by 25% or $150 billion, so Amazon might be looking to increase profits during this softening period by offering their surplus cargo space to third-party shippers. Amazon might venture into importing perishable and seasonal goods into the US on return flights, according to the sources familiar with the matter. For example, shippers could use Amazon’s cargo space to transport flowers from South America for Valentine’s Day and seafood from Canada and New Zealand to the US.
All of these profit recovery and growth initiatives point to Amazon adjusting from accelerated pandemic-era expansion to declining online sales. But whether or not these efforts could lead to a slowing down of fee increases in the coming months is still up for debate, given the fact that current inflation numbers remain above 8%, with no signs of letting up.
Therefore, it’s possible Amazon might still introduce new fees this year to account for any significant increase in prices. And unless the tech giant speeds up the wider rollout of their robots and drones, among other cost-efficient logistics systems, FBA fees will likely remain high, or become even higher, in the coming years.