Does Amazon Even Need Its Retail Business?
The changing of the guard at Amazon is a topic that’s been well covered these last few weeks, with Jeffs Bezos, Blackburn, and Wilke all moving on. The direction Amazon will take under the new leadership of Andy Jassy, currently the head of Amazon Web Services, is the real question. Where Amazon came from may not be where they’re going, and that may not be a terrible thing.
At the core of this is the numbers playing out. Let’s leave Amazon Stores (Whole Foods, Fresh) revenue out of this for the moment (it’s deminimis/declining anyway).
Projections are illustrative and mine, not Amazon’s
Before the pandemic, non-1P was surging ahead 36% y/y growth and 1P was bringing up the rear at 16%. COVID was the equalizer - primarily benefiting essentials (TP, Sanitizer, Lysol Wipes) and electronics owned by Amazon in bulk - precisely the type of thing 1P is good at. Low prices for things there is proven demand for. 1P surged and grew 39% y/y - interesting 3P kept up too at 40% y/y.
Post-pandemic, however, things will likely revert to the mean. Which means, that if 1P goes back to (say) 17% y/y in 2021 and non-1P grows at even 37% (It could be more given Ads trajectory), 2021 will mark the first year their retail business is less than 50% of their revenue.
Most Amazon shoppers associate the brand with the smiling cardboard boxes, quick delivery, competitive prices, and extensive (often too extensive!) selection. (Oh yeah, and sometimes questionable business practices, knock-off products, and increasingly polluted and irrelevant search results - but who’s watching?). The retail component of Amazon, however, is now less than 50% of their business. Jassy’s background is at AWS, which may not be what the everyday consumer immediately affiliates with Amazon, but it is the arm of the business that generates a huge percentage of their income. Does this mean the future of Amazon cares less about retail? What will the (new) executive focus be? This is certainly a trend to watch.
And maybe that’s OK. The possibly-too-extensive selection at Amazon sometimes drives people away from the site (when you’re looking for a raincoat and suddenly there are thousands of options, you may end up closing the tab and looking directly at some of the retailers whose products you were just seeing). Lowest price isn’t always the number one priority for customers - folks want to feel like they’re making an informed purchase, that they can trust the product they’re buying. Many retailers offer loyalty rewards programs, comparable shipping, in-store returns, and other incentives that steer some potential buyers away from Amazon. In the wake of COVID, many more buyers want to support small business, individual artists, Black-owned or woman-owned companies rather than the Corporate Monolith.
In addition to retail and Web Services, Amazon also has a multi-billion dollar advertising business. It is much easier to run - and profit from - these latter two areas than from the retail business. Anyone with a pulse can easily see that the advertising business has control of search. Period. Sure, the retail arm has billions and billions of dollars in sales every year, but at slim margins when factoring in the shipping, logistics, and actual robots involved in getting you that new air fryer tomorrow. The volume of sales means those slim margins are still a lot of money, but it pales in comparisons to Amazon’s other cash cows, and retail isn’t growing as fast as these other branches.
Amazon is famous for it’s day one thinking. The biggest one I have is: “If this were Day 1 at Amazon, would it even have a retail business?”
Don’t just dismiss this out of hand. It’s becoming a smaller component of the site, and first-party (1P) purchase order sizes continue to decline (although frequency is up with added volume). Amazon, like every other retailer these days, just doesn’t want to hold inventory if it doesn’t have to.
Retail at Amazon is not a place of continued resource and people investment, either. It's very (very) common to see people who used to be in Retail or Marketplace now in other areas like Alexa, Video, Advertising, Supply Chain, etc. It's commonly known that these days, the site is essentially "run by robots." Yes there are category teams, but the number is much smaller than it used to be. Automation helps increase efficiency, but it also (obviously) divests from people. The move toward a Jassy-led Amazon could mean a focus more on data and software, rather than on the selling of physical objects.
What does this mean for innovation? Quality? What does this mean for competition trying to knock it down? Probably not much in the immediate future, the flywheel still keeps spinning.
But it’s a space to watch. Where the dollars flow, the innovation follows. The opposite is also true.
What’s Next
Playing it out over 5-10 years is a super-interesting game as well. After all, that’s the level Amazon tends to think at. If you could pick a company that Amazon would look most like in the next 10 years, what would it be?
My answer surprisingly might be Google. Yes, they will have a retail presence and a marketplace. But their model could be dominated by cloud, advertising, search and platforms.
