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Friday, July 1, 2022

Amazon has a problem. It’s too big

Amazon.com Inc. is in better shape than it looks. But Andy Jassy, who succeeded founder Jeff Bezos as chief executive last July, is enduring a CEO baptism by fire with few equals in modern corporate history.

A $608-billion Amazon (2021 sales) that seemed destined to dominate global retailing is now in urgent need of a turnaround.

Amazon massively overexpanded during the pandemic only to find that post-pandemic consumer demand now falls far short of its vastly bigger capacity.

For investors, Amazon’s first-quarter results in April were a shocker. The firm declared its first quarterly loss in seven years. Its first-quarter revenue growth, at just seven per cent, was its poorest for that period in about two decades.

Amazon’s revenues actually dropped three per cent in its core online businesses, including its flagship online general store. And revenue growth slowed in its subscription businesses, including Prime Video.

Amazon’s shares have plummeted in value by more than 40 per cent since Jassy became CEO. That’s a loss of more than $770 billion in shareholder value on Jassy’s watch.

An Amazon that has known only relentless growth in its 28 years must now shrink. But Jassy is a builder who turned Amazon’s cloud-computing service, Amazon Web Services (AWS), into the world’s largest provider before taking on his current job.

That adds to the market’s uncertainty on whether Jassy can or will undertake a bold downsizing of parent Amazon.com.

The effects of a significant Amazon downsizing would have widespread implications.

It would be felt in pricing and product selection for the Canadians who spent an estimated $12.7 billion (U.S.) on Amazon’s flagship retail site last year and were just hit with a hike in subscription rates for Amazon’s Prime membership service.

It would have an impact on staffing levels and commercial real estate markets in the dozens of countries in which Amazon has rapidly expanded. That includes new Amazon warehouses and other logistics facilities in Southern Ontario.

For now, Jassy has used a light touch in addressing Amazon’s woes.

He hopes through attrition to cap Amazon’s global workforce of more than 1.6 million, roughly double its employee count only two years ago.

Jassy, 54, has scrapped several ambitious expansion plans he inherited. Amazon is now trying to sublease some of the buildings in its vast logistics network.

Earlier this year, Amazon abruptly closed its experiment with a chain of brick-and-mortar stores and closed six underperforming superstores at its Whole Foods division.

While investors are impatient for more, no one has called for Jassy’s head, yet.

That Amazon built for a tomorrow that never came isn’t Jassy’s fault. With his hands full building up AWS, Jassy wasn’t part of the Bezos team that bet that the pandemic consumer shift to online retail was permanent.

Instead, while post-pandemic consumers haven’t abandoned online, they are, at online retail’s expense, re-embracing traditional brick-and-mortar retailing.

Online retail is estimated to have accounted for only 13 per of total retail sales in North America in last year’s fourth quarter. That’s down from a pandemic peak of close to 16 per cent per cent in 2020.

And Amazon’s monopoly in online retailing is long gone.

In Canada, Amazon still leads in online retail, with its aforementioned $12.7 billion in 2021 revenue. But its nine closest rivals in Canadian e-commerce collectively generated $17.6 billion in revenues last year.

And Amazon’s competitors are just warming up, aiming to take more market share from Amazon by using Amazon’s marketing and technological innovations against it.

That said, Amazon is a solid if fragmented business. Its $43.2 billion in profits last year were up more than 11-fold since 2017.

The company’s future depends on Jassy’s willingness to reduce Amazon to its essentials.

If Jassy is up for the necessary dismantling, he will be tempted to exit most of Amazon’s retail operations outside of North America. Together they accounted for a mere 25 per cent of total retail revenues in the latest quarter. And most are chronic money losers.

There would be no shame in retreating to North America, which accounts for almost 60 per cent of Amazon’s total retail sales. Walmart has sensibly scaled back its international ambitions, quitting several European and Asian markets.

And as non-core businesses, Prime Video and Whole Foods are distractions that are candidates for the auction block.

Five years out, an Amazon focused on its market-leading online retail and cloud-computing businesses might justify the company’s current stock valuation. There’s room for Amazon stock to fall further, priced as it is at 52 times earnings. (Walmart’s p/e multiple is 26.)

For now, Amazon is a classic case of growing too big too fast. Salvaging a profitable nucleus from a bloated firm is one of the tougher challenges in business.

But given Amazon’s outsized role in North American culture, it is a work in progress worth watching.



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