Amazon's Flywheel of CRaP And Other Earnings Takeaways
While I was out on break, Amazon had earnings. And oh yeah, Wall St. freaked the fuck out.
Let's first discuss the freakout, I would consider it a variety of factors:
* The main driver is a worse than expected employment labor report in the United States showing employers slowing hiring.
* Secondary drivers included Investor AI ROI worries (which has driven NVIDIA's crazy bubble-like rise), Buffett halving his Apple shares, and Japan's Nikkei which was mostly a reaction to the US labor report.
Take a breath, it's a rough Monday for your portfolio. The question on my mind is simple: Is this the sound of the other shoe dropping finally?
The labor market has outpaced expectations for the last 6 months. It couldn't escape what consumers have been telling us about reality forever.
Let's talk about Amazon, though. It didn't have a bad quarter. It's actually executing well and fundamentals have not changed. Amazon is however adjusting to the consumer. A few things stood out:
* Amazon feels we are going into a cycle where with consumers trading down consistently, unit volume will outpace GMV gains. This means lower ASPs.
Over the years, Amazon has had the luxury of its "Can't Realize a Profit (CRaP)" program to remove first-party items (mostly) that Amazon cannot, well, profitably sell due to advertising, shipping costs etc.
Amazon is reversing these trends and I call it Amazon's new CRaP Flywheel.
* Amazon reduces its cost to serve.
* More items become profitable to serve.
* Selection expands.
* Fulfillment speed improvements drive speed improvements.
* Amazon gains consideration for new categories like every essentials / convenience/pharmacy.
* Unit velocity improves and Amazon gains share of wallet from competition.
* Higher sell-through gives them more money to invest in reducing cost to serve. The CRaP Flywheel rolls on.
A few other tidbits from Amazon's earnings - where is Amazon reducing cost to serve?
* Regionalizing its outbound fullfilment network - not done here.
* Regionalizing its inbound fulfillment network - just getting started here.
Did I mention that it's horrible to walk into a pharmacy or other essentials retailer these days due to product being locked up? Who do you think that benefits?
Amazon.
My advice to retailers:
* Batton down the hatches and dust off those worst-case plans I spoke about at the beginning of the year. Not because you WILL need them, but because, well, you might need them.
* Consider further improvements in your cost to serve, and how that might help you expand growth - not just fuel your bottom line.
* Ratchet up your storytelling so that you can help consumers make decisions faster and differentiate your offers from the myriad of competitors out there.
And hang on tight. It's going to be a wild finish to this year.
