In Fashion: Amazon’s Plan for Growth

Amazon is at it again.

The web giant’s stock took a beating on Friday, signaling a weaker profit outlook headed into the holidays.

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But if history is any guide, Amazon is at its most competitive — and dangerous — when it’s not making money.

The always on “Day One” company was a source of derision in certain retail circles as it grew share, but underperformed on the bottom line. (Despite its size, the company posted earnings of more than $1 billion just one time before 2016, when it started to push profits higher — and eventually way higher, as earnings topped $21 billion in 2020).

There was a belief — or maybe a hope — that it was a ride that couldn’t last. But after investing year after year in its business, it crossed over to the other side, becoming not just profitable, but dominant.

Amazon is responsible for something like half of all e-commerce in the U.S. and has become a force of nature and seemingly unstoppable (just as Walmart Inc. seemed when Amazon was racking up its losses).

Andy Jassy, who just took the role of chief executive officer from Jeff Bezos, seems unlikely to fall into any kind of complacency or desire to bow to the profit-loving gods of Wall Street.

Like Bezos before him, Jassy skipped the third-quarter conference call with analysts last week, but he did deliver a splash of cold water for investors in a statement accompanying results, which showed profits were nearly cut in half to $3.2 billion as revenues rose 15 percent to $111 billion.

“We’ve always said that when confronted with the choice between optimizing for short-term profits versus what’s best for customers over the long term, we will choose the latter — and you can see that during every phase of this pandemic,” Jassy said.

One example: The CEO said Amazon had nearly “doubled the size of our fulfillment network since the pandemic began.”

That’s making a giant bigger and it shows in the company’s headcount, which has expanded by 628,000 over the past 18 months, growing to 1.5 million (with another 150,000 planned in the U.S. this year to support the holiday rush).

“In the fourth quarter, we expect to incur several billion dollars of additional costs in our consumer business as we manage through labor supply shortages, increased wage costs, global supply chain issues, and increased freight and shipping costs — all while doing whatever it takes to minimize the impact on customers and selling partners this holiday season,” Jassy said.

Amazon is becoming, well, a bigger Amazon.

“We’ve been chasing, really, demand for the last two years,” Brian Olsavsky, chief financial officer, told analysts. “We are just now getting caught up on space for inventory and inventories being brought in to support the holiday.”

When Morgan Stanley analyst Thomas Nowak asked about the long-term profitability of the retail business, Olsavsky reaffirmed that the company is “very bullish” on retail, which he defined as including Amazon’s own sales, its marketplace and advertising business.

“It’s all, to us, part of a flywheel where we service customers,” Olsavsky said. “We do it in an efficient way, and we earn their trust and earn their future business, and we fight that battle every day. And we look to expand the Prime [membership] program to build that flywheel. We look to add new products and services like grocery and video and music and the list is long.

“When you look at retail, it’s certainly expensive right now, especially with the costs I’ve laid out,” the CFO said. “However, we have other monetization vehicles, including advertising, that, if we do well, becomes a benefit to customers and to advertisers at the same time. That’s what we work on. So that is an important part of our profitability structure. It’s tied directly to happy customers and customers who are engaged in buying things.”

So Amazon is going to keep at it and make money somehow.

And everyone else?

Nowak said in his analysis of the quarter that, while costs are rising at Amazon, the company’s “moats” — advantages that keep competitors at bay — are arguably deepening.

“We would expect smaller — in particular sub-scale — retailers/players to feel the pressure even more,” Nowak said. “And with Amazon’s commitment to delivering items…we may see Amazon take market share.”

Amazon has gotten better at being who it is during the pandemic and that’s trouble for everyone else.

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