Retail Champions 2020: Amazon

This is the first online installment of the HomeWorld Business 2020 Retail Champions, a special report from the May 18th print edition examining six retailers that will lead the post-COVID-19 retail recovery. View a digital version of the entire May 18 edition by clicking one of these links: Flipbook or PDF.

SEATTLE— Amazon is likely to come out of the COVID-19 pandemic with the most gained as consumers become more reliant on online shopping, the channel it leads, but the company also has been, in many ways, the most challenged retailer in the U.S. as a tidal wave of sales has threatened to overwhelm its systems and its high profile has made it a target of scrutiny.

Amazon’s recently released first quarter revenues reached $75.45 billion with product sales totaling $41.84 billion. But profits slipped year over year, with operating expenses up substantially. In comments on the results, CEO Jeff Bezos warned shareholders about how it is approaching the current market, saying, “You may want to take a seat, because we’re not thinking small. Under normal circumstances, in this coming Q2, we’d expect to make some $4 billion or more in operating profit. But these aren’t normal circumstances. Instead, we expect to spend the entirety of that $4 billion, and perhaps a bit more, on COVID-related expenses getting products to customers and keeping employees safe.”

Rohan Thambrahalli, president and founder of Amazon consultancy UpstartWorks, said some critical assessments of Amazon and how it has operated in the coronavirus-plagued market haven’t been altogether fair. For example, the company has drawn criticism for being slow to address health and safety issues in its distribution centers, although it had been rolling out and enhancing efforts to establish employee practices and sanitation procedures. Yet, if it was slow, Thambrahalli said, it was because executives were especially focused on protecting consumers shopping on its 3P marketplace.

“Early on, they were too worried about price gouging,” he said.

Amazon got some kudos as it shifted to the supply of essential supplies as authorities urged then required consumers to self isolate at home. However, because it stopped accepting many items into its own fulfillment system, some in-demand products sold out of existing inventory, disappointing both shoppers and vendors.

Thambrahalli said Amazon had upset some 1P partners who had developed their entire business around the company’s fulfillment platform. It was hard for Amazon-centric companies to watch marketwide sales in the product categories where they operate multiply dramatically and see their own revenues plummet because they couldn’t move more product into the Amazon fulfilment system. Amazon eventually began allowing demand to influence its formula for determining what might be defined as essential needs, even earlier than it originally conceived.

However, frustration has encouraged some suppliers to look at new platforms they can join, including Walmart.com, and launching or expanding direct to consumer operations, Thambrahalli said. Amazon has been trying to encourage many vendors to move operations out of the 1P system as the company has focused its own auspices on critical brands, and, in the crisis, it actively encouraged vendors that could to initiate or expand their own shipping efforts. Still, Thambrahalli said, how the disruption will play out longer term is difficult to forecast.

Going back to a holiday season about four years ago when Amazon couldn’t push enough product through its massive fulfillment center network to satisfy demand, said John Ghiorso, CEO and founder of Amazon consulting firm Orca Pacific, the company started diversifying its supply chain using various vendor qualification and shipping programs to maintain the customer experience but to avoid creating a bottleneck in the product flow through to customers.

Coronavirus-spurred demand has further demonstrated to Amazon that it has to add more means to move goods to customers, particularly given the impossibility of getting Prime members product in anywhere near the two days they expect in the recent rush.

“I think this is just going to accelerate that,” Ghiorso said. “They were worried about the system breaking long term. All of a sudden the volume has tripled over a two-month period. It broke. They’re working on keeping up and fixing it but, all of the sudden, if someone is paying for a Prime membership, and, instead of two days, they get the product in 30 days, it’s not working the way it’s supposed to. The reason it’s not working is too much volume, even as is, going through their fulfillment network. I see that as a big long-term change.”

Thambrahalli said the fulfillment headaches Amazon experienced as demand from self-quarantined consumers swelled became more severe as Amazon enhanced safety procedures, a process that slowed fulfillment center workflow.

Amazon has tried to find innovative ways to address burgeoning demand. For instance, on the consumer facing side, the company requested that new Amazon Fresh and Whole Foods Market delivery and pickup customers sign on for an invitation to use the services. In that way, Amazon could release delivery windows and let customers know when the next slot might be available. The company also changed its algorithm as regards the BuyBox on its site, a promotional element Amazon generally wins itself. In effect, Amazon set things up so 3P marketplace sellers that could ship the product faster than it would have a better chance of claiming the box, said Chad Zottoli, business manager at Orca Pacific.

With all the challenges it has faced, Amazon should still find itself in a strong position when the coronavirus pandemic fades. Ghiorso said that, beyond this period of social distancing, soft store and strong online sales, effective COVID-19 vaccine or treatments will create a new phase in the current market development characterized by permanent changes in consumer behavior. By then, given that e-commerce will have been a go-to consumer resource for a long span, changed habits will favor channel leader Amazon enormously.

“We’re going to see, we believe due to some previous data trends we’ve looked at, a huge amount of stickiness in terms of a shift from brick and mortar to e-commerce,” Ghiorso said.

Still, Amazon faces another challenge. As the coronavirus crisis proceeded, Amazon’s high profile encouraged renewed discussion about whether the company should face antitrust scrutiny, including consideration of a subpoena for CEO Jeff Bezos to appear before a U.S. House of Representatives panel on the subject.