Stock of the week - Amazon (13.01.2023)

Slowing demand and rising costs

Amazon plans to lay off more than 18,000 workers, almost double the number originally planned. E-commerce giant is facing rising operating costs and weakening consumer demand. Most of the job cuts will take place in retail sales and recruitment departments. The above announcement was made shortly after Amazon announced it had secured an $8 billion unsecured loan, which aims to bolster its business. Implementing drastic job cuts is an attempt to get control over costs that have escalated dramatically after the pandemic, when companies started to expand too rapidly. For example, the company increased its warehouse space to approximately 262 million square feet in 2020 and 2021, according to data from MWPVL International. Growth slowed significantly in 2022, but the company's warehouse space continued to grow, this time by about 52 million square feet, which equals to one-third of Walmart's total warehouse space in the US. According to MWPVL estimates (which are strongly disputed by Amazon), the company currently uses around 65% of its total warehouse space,  compared to 85% in 2019. MWPVL CEO Marc Wulfraat believes it could take two to three years for Amazon to return to pre-pandemic warehouse occupancy levels.

Meanwhile, Amazon has taken a number of actions aimed to reduce its losses, ranging from subleasing excess space, which could allow sellers to hold inventory for longer time periods in its distribution centers, to allowing third-party sellers to access its logistics network and quickly fulfill orders through Buy with Prime. Despite these efforts, the annual revenue growth rate (apart from the record-breaking 2020) began to systematically decrease in recent years.

Source: https://www.insiderintelligence.com/content/storage/f1fb49b382386aedf805200fc2a99e4e/29298_original

Amazon facing government scrutiny 

While Amazon is grappling with a tough economic environment, its business practices have come under fire from lawmakers in Europe and the US. Amazon has reached a settlement with EU regulators under which the company has expanded access to its shopping box, stopped using seller data for its own retail operations, and allowed sellers to use third-party Prime fulfillment solutions - but only in the region. Amazon is facing an antitrust lawsuit from the California Attorney General who accuses the company of using its market advantage to penalize sellers who try to list their products at lower prices on competitor sites. Regulators are also looking at how counterfeiters use places like Amazon to sell stolen or counterfeit goods, which could lead to tighter oversight and more severe penalties.

Conclusions

Despite recent difficulties, Amazon is not afraid of economic uncertainty. According to Insider analysis, there is only a 30% chance that  the US will enter a recession within the next six months. Amazon's current situation is partly dependent on the inability to predict whether and to what extent e-commerce demand will slow down after the COVID-19 restrictions are lifted, but the good news is that the company is preparing for the worst. Nevertheless, there is still a significant risk factor. While Amazon's attempt to cut costs is a necessary step, there is always the risk that excessive thrift could hurt its innovation process, which is one of its greatest competitive advantages.