Flood Stage Amazon?
In the 20th century, Amazon was known as a river in South America with numerous tributaries. It was and still is by far the largest river in the world in terms of the discharge of water.
In this 21st century, another Amazon has become known as one of the largest businesses in the world. Amazon is a diversified enterprise with numerous components.
In its 2021 annual report, Amazon states that it seeks to be “Earth’s most customer-centric company.” It defines its primary customer sets as consisting of consumers, sellers, developers, enterprises, content creators, advertisers, and employees.
Amazon’s net sales in 2021 increased by 22% to $469.8 billion. Its operating income increased to $24.9 billion, compared with operating income of $22.9 billion in 2020.
These are stunning numbers. Writing for Insider Intelligence in February 2022, Meaghan Yuen opens her piece stating, “As an ecommerce behemoth, Amazon reigns bigger than the next 14 largest US retailers.”
She goes on to observe that the
…diversification of Amazon’s revenue streams has been key to its virtuous cycle particularly as the company uses its various business divisions to support and drive growth for other divisions. The corporate powerhouse spans multiple industries, moving well beyond retail e-commerce and firmly into spaces such as cloud computing, online advertising, and digital payments.
Historically, Amazon’s public image has been a strong and positive one. In the past few years, however, that image has been tarnished somewhat. Recently, even though this Amazon is not a river, issues of financial performance, relations with its employees, subcontractors and third-party sellers, and other factors may be putting that image near flood stage.
Amazon’s release of its financial report for the first quarter of 2022 on April 28 was an indication that its period of unbridled growth and profitability may be coming to a close. In the New York Times, Karen Weise notes that this was “Amazon’s slowest quarterly growth in years and its first quarterly loss since 2015.” She adds that “The results fell far short of Wall Street expectations, causing Amazon’s share price to fall more than 10 percent in after-hours trading.”
In in her article, Ms. Weise reports that in a call with reporters Brian Olsavsky, Amazon’s finance chief, explained that some of the slowdown reflected the end of pandemic shopping habits and that some of loss was caused by operating inefficiently.
During the call, Mr. Olsavsky stated that Amazon was pulling back on some of its expansion plans. Ms. Weise quotes Olsavsky as as saying “We have too much space right now versus our demand patterns.” And, without the surge driven by the pandemic “we can tighten up our capacity.”
Amazon is definitely experiencing growing pains at the moment. In the long run, those pains will be small in comparison to the groaning pains that could be induced by its relations with its employees, third-party sellers, and contractors.
Amazon currently has more than 1.1 million workers. On its website, Amazon touts its “average starting pay of $18 per hour — more than double the federal minimum wage — and great benefits that support employees and eligible family members…” The benefits include health care coverage, paid parental leave, and paid college tuition. In December, 2021, Sebastian Herrera posted a Wall Street Journal article titled “Amazon Emerges as the Wage-and-Benefits Setter for Low Skilled Workers Across Industries.”
There is no question that Amazon is a standard-setter in this regard. But, as Jason Del Rey details in his April 21, 2022 Vox article, these wage and benefits may come at a cost — especially if one is a warehouse worker.
Del Rey notes that Amazon’s innovations such as the use of robots in the warehouses to boost productivity “…have created comparatively high injury and worker churn rates…” He elaborates that warehouse workers say that because of robots, the goals for pickers and stowers have risen from “about 100 pieces of merchandise an hour to 300 to 400 units per hour.”
Del Rey reports that in 2020, for every 200,000 hours worked at an Amazon warehouse in the U.S., there were 5.9 serious injury incidents, which was nearly double the rate at non-Amazon warehouses. He also highlights that “Even before the pandemic, the company’s turnover rate at times reached 150 percent…”
Those are not good statistics and the conditions described no doubt helped the newly formed Amazon Labor Union (ALU) win the “historic election” held near the end of March at the approximately 6,000-person warehouse on Staten Island, New York. The ALU campaigned on issues such as longer breaks, better job protection, and a higher hourly wage of $30.00. The ALU took that same message to an election held at a second Amazon warehouse of about 1,600 workers on Staten Island near the end of April — and lost.
This loss, in conjunction with the loss of a separate union drive election at an Amazon warehouse in Bessemer, Alabama in March, suggests that while Amazon’s relations with workers may be attenuating, they have definitely not been severed.
Amazon’s relations with its third-party sellers are of an entirely different type. They are arms-length and Amazon wants to keep it that way. Moira Weigel, assistant professor of communication studies at Northeastern University, wrote an insightful guest column published by the New York Times on April 21 that highlights the nature of the relationship with third-party sellers.
According to Professor Weigel, in 2020 Amazon owner Jeff Bezos told Congress that more than 60 percent of physical goods bought on Amazon come from third party sellers. In 2021, industry experts estimated that Amazon had approximately 6 million active third party sellers, and that 3,700 new accounts opened every day.
Amazon gets paid fees to list and store the sellers’ goods and a portion of their sales revenue. The fees earned from this arrangement earned Amazon $121 billion in 2021, compared to $60 billion in 2019. And the average seller today gives Amazon 34 percent of every transaction compared to 19 percent in 2014.
These numbers support Weigel’s assertion that “These third-party sellers deserve a lot of credit for making Amazon the juggernaut it is.” Indeed, they have made it a juggernaut in terms of size, revenue, and profits.
In spite of these substantial contributions to Amazon on the upside, Amazon wants to take no responsibility for the downside that may be created by some of its third-party sellers. That downside includes things such as: selling defective or fraudulent products that may damage users or not perform as promised; using fake customer reviews to promote their goods or criticize competitors; and bribing Amazon employees to be reinstated if their accounts are suspended.
That downside creates legal problems for those sellers, which Amazon has tried to avoid by maintaining it is not a seller but a third-party logistics provider — similar to a shopping mall. Professor Weigel notes that “Recently, some courts have challenged Amazon’s claim that it is not a seller.”
The Professor goes on to state, “..it seems difficult to argue with the claim that e-commerce platforms should vet businesses that sell large volumes of products through them or be liable for accidents, just as brick-and-mortar stores typically are.” She also asserts that Amazon should “become more accountable to the sellers who are its customers, too, by offering them clearer ways to dispute automated decisions and fairer terms for arbitration.”
While Amazon wants to distance itself from its sellers, it does the opposite with the contractors who deliver goods purchased through the company. Amazon wants them to be perceived as part of Amazon, and the general public probably does, too. Here’s the reality as Jason Del Rey set it out in his Vox article:
The Amazon delivery network is comprised of hundreds of thousands of drivers employed by thousands of small delivery firms who contract with Amazon. Those drivers wear Amazon uniforms, drive Amazon-branded vans, and deliver goods in Amazon labeled boxes and envelopes.
Even though these companies and drivers are independent from Amazon they are tightly controlled. Amazon sets the delivery quotas for drivers and monitors their performance and driving through apps on their phones. Amazon says “the average delivery route includes 250 packages” in a ten-hour shift. Del Rey reports, however, that there are “reports by some drivers that routes can total as much as 375 packages, even outside of peak shopping weeks.”
Regardless of the size of the quota, these workers are stretched. So, too, are the contractors who employ them. Del Rey states,
The small delivery firms that employ these drivers are also often at the mercy of Amazon. The company promises them consistent package volume when they deliver exclusively for Amazon, but it comes with a big caveat. Amazon can end the relationship without having to explain why.
In October, 2021, two Amazon contractors sued the company for “unreasonable demands.” In November, a lawsuit was filed in Georgia trying to hold Amazon liable for a serious crash caused by a contractor’s driver. This accident was just one of many in 2021. According to Bloomberg, “Amazon has been a defendant in 119 motor vehicle lawsuits this year alone, in 35 states.”
Just as with employees and sellers, there is evidence that Amazon’s relations with contractors are conflicted and souring. Given all of this, where do the Amazon’s relations stand with its customers?
Amazon has two key customer groups at this point in time. The users of Amazon Web Services (AWS), and Amazon consumers who are members of Amazon Prime’s shopping club.
Amazon’s annual report for 2021, and the quarterly earnings report for the first quarter of this year, show that AWS is on a strong upward trajectory. The picture on the status and future of Amazon Prime is still strong but not quite as clear.
According to statistics from various sources, summarized by Brian Dean for Backlinko, at the end of 2021 Amazon had over 200 million members internationally, and around 150 million members in the United States.
In early February, 2022, Amazon announced a price hike from $119 to $139/year for an annual subscription to Prime, and a monthly cost going up from $12.99 to $14.99. These increases went into effect on February 18 for new members, and March 25 for renewing members.
In her Washington Post article on the price increase, Rachel Lerman stated, “Amazon’s Prime program has proved to have loyal members, and Amazon is betting that people will stick around even with higher prices.” In her New York Times article, written about a month before the price increase, Shira Ovide observed, “People walk away from some products when prices go up, but it seems almost no one quits Prime.” She went on to state
Prime is one of America’s most resilient consumer products. It seems to defy our price-conscious tendencies. And Prime is another example of the power Amazon and America’s other tech giants have to rewire our brains.
It is too early to tell whether that “rewiring” will cause “people to stick around” this year. To date, there is insufficient evidence to draw any definitive conclusion on this.
Amazon in the Future
There is evidence though that Amazon’s future relations on all fronts will be more complex, rather than simpler. Examples to support this assessment come from Amazon’s actions in the past few months.
On April 13, Amazon added a fuel and surface surcharge to the fees it is charging sellers, which went into effect on April 28. According to Karen Weise of the New York Times, this was on top of fee increases for sellers that went into effect of January of this year.
On May 2, after the Supreme Court opinion that would overturn Roe v. Wade was leaked, Amazon informed its employees that it would pay up to $4,000 annually to cover travel expenses for a range of non-life-threatening medical treatments, including abortion. In his coverage of this, Jeffrey Dastin of Reuters noted, “The news came on the same day Amazon stopped offering paid time off for U.S. employees diagnosed with COVID-19, letting them have five days of excused unpaid leave instead.”
On June 3, Dave Clark, the chief executive of Amazon’s consumer business who, according to Karen Weise of the New York Times, was the chief architect of its massive warehouse operations.” In her article on his departure, she observes “…the model Mr. Clark built has faced growing pressures.”
These examples highlight that we are in topsy-turvy economic times, and the stability that helped fuel Amazon’s growth, followed by the pandemic benefits that ignited an accelerated expansion of Amazon’s capacity are probably over. The economy, with its continuing inflation, increasing interest rates, and the very real potential for a recession will test who and what Amazon really is.
In its 2021 annual report, Amazon states that “We are guided by four principles: customer obsession rather than competitor focus, passion for invention, commitment to operational excellence, and long-term thinking.” Andy Jassy, Amazon’s President and CEO, closes his letter to the company’s shareholders that accompanied that report as follows:
Albert Einstein is sometimes credited with describing compound interest as the eighth wonder of the world (“He who understands it, earns it. He who doesn’t, pays it”). We think of iterative innovation in much the same way. Iterative innovation creates magic for customers. Constantly inventing and improving products for customers has a compounding effect on the customer experience, and in turn on a business’s prospects.
Time is your friend when you are compounding gains. Amazon is a big company with some large businesses, but it’s still early days for us. We will continue to be insurgent — inventing in businesses that we’re in, in new businesses that we’ve yet to launch, and in new ideas that we haven’t even imagined yet. It remains Day 1.
Jassy’s words, with an emphasis on customers, innovation, and long-term thinking, were written in much happier and calmer economic times for Amazon. Amazon had definitely been “compounding gains” and time was absolutely Amazon’s “friend.”
The emphasis at Amazon currently in this time of contraction appears to be on the principle of “operational excellence” and cost containment. That doesn’t mean that the period of innovation, “insurgency,” and new business development is over, but it will most likely be much more constrained.
Time will tell. As the old saying goes, the future is promised to no one.
These new times will put Amazon’s ability to adhere to its philosophy and principles to the test. They will not put Amazon’s image under water.
In our opinion, however, they have begun, and will continue, to change the ebb and flow of the business. How Amazon manages and navigates that ebb and flow will determine how well it performs and how it is perceived in the future.