With the final quarter concluded, Amazon has closed the books on one of the worst financial years in its history.
For the full fiscal, the online giant made a loss of $2.7 billion – the first time it has been in the red since 2014 when it posted a much more modest $241 million loss. While some of this is down to the company’s investment in Rivian, which is putting significant pressure on the bottom line, it is also clear that a material slowdown across many parts of the business is causing considerable pain.
In a nutshell, the current problem for Amazon is that it spent most of the pandemic driving with its foot to the floor to keep up with demand, but as demand dropped back it did not apply the brakes fast enough. The net result is that it has veered off course and had a bit of a financial crash. Management has spent most of the past year trying to make repairs in the form of reining in spending, but the actions were not sufficient to save the quarter or the fiscal year.
Looking in more detail at the fourth quarter, overall sales rose by 8.6 per cent. This looks reasonable enough, but it is the slowest final quarter growth in over 10 years. Most of this deterioration has come from the product side of the business where, despite a very weak prior year comparative, sales fell by 1.2 per cent.
Worryingly, product sales came in below both last year and 2020, which shows that Amazon has given back some – but by no means all – of the gains it made during the pandemic. That said, product revenue is still running 39.5 per cent above where it was in the fourth quarter of 2019. Moreover, unfavorable foreign exchange rates were unhelpful. As such, it would be unfair to characterize Amazon has been in a parlous state.
Nevertheless, the wider consumer economy was unhelpful to Amazon over the period, with consumers cutting back on the amount they bought in response to more constrained budgets. However, Amazon underperformed the market so must shoulder some responsibility for its numbers. All the deterioration came from online, where sales dropped by 2.3 per cent. Physical stores, which is mostly Whole Foods, performed much better with a 5.7 per cent uplift in sales – although much of this is down to inflation rather than volume growth.
One of the slight criticisms we have of Amazon, and something we detected from our consumer research over the period, is that shopping online has become much more difficult. While the Amazon marketplace is far from a terrible place to shop, it has become more complex and cluttered with a multitude of products, delivery options, and prices levels for shoppers to sift through. The result is that impulse buying has dropped and that more people are migrating away to other retailers. This is not yet a serious problem as erosion has only happened at the margins, but it is something Amazon will need to address and arrest to prevent further decline. The one silver lining is that this dynamic underscores how competitive the retail market is and demonstrates Amazon has no special or monopoly position within it which allows it to compel consumers.
Other parts of the business have also slowed down compared to the past. Service sales rose by 19.2 per cent which sounds robust enough but is the slowest pace of expansion in over 10 years. Subscription revenue also slowed, growing by 13 per cent year-over-year – a marked deterioration on the average growth rate of 27 per cent over the past four years. All these things send a clear signal that after a very frothy period, things are cooling off and Amazon can no longer expect continuous high growth as the norm.
The shift in mood music is one of the reasons Amazon is changing tack and looking to be more targeted with its growth ambitions. Since its inception, Amazon has had a culture of throwing dollars at many different things to see where they led and what they could learn. That approach worked well for a younger, fast-growth business. It works far less successfully for a more mature entity. In our view, management deserves credit for recognizing this and quickly responding. However, the shift requires a lot of care because Amazon needs to find a new balance between being ambitious and innovative and being more frugal with its spending – which will be very challenging.
With the fiscal over, Amazon will be eager to put a challenging year behind it and improve performance over the year ahead. In our view this will be difficult as many of the favorable dynamics that have helped the business over the past ten years have faded. However, Amazon is controlling the things it can control – such as costs – and is looking to bolster its business in new areas like healthcare. In some ways, we believe the slowdown in the core may force Amazon to be more innovative elsewhere.
The bottom line is that despite a difficult period, Amazon isn’t broken. Its business model remains very relevant, its past investments are still extremely valuable, and it still serves customers in a way that many other retailers struggle to do. However, there is no doubt that the easy days of growth are now firmly over.
