As Amazon battles record inflation

• In an already volatile environment, record inflation is rattling Amazon’s retail business.
• Amazon’s profit margins have fallen more sharply, demand has slowed and employee turnover has soared.
• Frustration with rising inflation has even angered Jeff Bezos, who tweeted this week.

The day after Amazon reported Disappointing first-quarter financial resultsOn April 29, John Felton, the company’s senior vice president of global distribution services, expressed mixed feelings in an email to his team.

“First of all, I want you to know that I look back on the first quarter as an overall success and am impressed with what was done and how it was done the right way,” Felton wrote in an email to the e-mail. Mail obtained by Insider. “However, like you, I am also disappointed by the earnings we reported.”

High labor costs and capital investment weighed on overall performance. Productivity is improving, but the right balance still needs to be found, he wrote.

Felton added that an “unpredictable inflationary environment” made things more difficult.

“The inflationary environment wasn’t what I expected, but I’m still impressed with the team’s turnaround and continued focus on managing costs, even with some unmanageable headwinds,” Felton wrote. “Until we can expand capacity. , we will continue to face cost challenges.”

Uncertainty over rising costs and consumer prices suggests that even a $1.1 trillion company with a meticulous attention to detail could be plagued by rising global inflation — adding to an already volatile business environment since the financial crisis unwelcome vibrations. The pandemic started more than two years ago.

Internal documents and employees speaking to Insider reveal Amazon’s The current inflation environment. They show dwindling profits in the retail business and reliance on advertising profits; consumer demand is lower than internal expectations; and many attribute it to lower-than-inflation pay raises. The people requested anonymity because they were not authorized to speak to the media.

An Amazon spokesman did not respond to a request for comment.

Chris J. Ratcliffe/Getty Images

Frustration over rising inflation has even angered Amazon founder Jeff Bezos, who rarely posts politically on social media.Bezos over the past week tweet He has repeatedly spoken of high inflation, accused the Biden administration of “misleading” and described its attempts to rein in the economic environment as a “failure.”

“In fact, the government worked hard to inject more stimulus into an already overheated, inflationary economy, and only Manchin saved them from himself,” Bezos said. tweet On Sunday, he was referring to Democratic Sen. Joe Manchin, who voted against a $3.5 trillion stimulus bill. “Misleading does not help the country.”

Advertising is saving profit margins

Rising costs are the most immediate consequence of inflation — a “big talk” internally, said one person familiar with Amazon’s finance team.

Those costs, including higher gas prices, shipping and employee wages, directly impact Amazon’s operations.

In the first quarter, Amazon reported $6 billion in incremental costs related to inflation, declining productivity and overcapacity, Amazon Chief Financial Officer Brian Olsavsky said on an earnings call last month. Overseas shipping costs have more than doubled compared to pre-pandemic freight rates, while fuel prices are 1.5 times higher than a year ago, he said.

As a result, Amazon reported first-quarter operating income of $3.7 billion, 32% below investor expectations. Weak sales and rising costs disappointed Wall Street, with Amazon’s stock falling 14% the day after it reported earnings last month. Biggest one-day drop since 2006.

Market Insider

But it could have been worse had it not been for Amazon’s fast-growing, high-margin advertising business, according to internal documents reviewed by Insider.

One of the filings shows that an internal tracker called “North America Established,” which represents North American retail revenue excluding segments such as advertising, grocery and digital products, posted an operating loss of $2.9 billion last quarter. When ad sales were included in the segment, it had an operating profit of $1.6 billion.

The same goes for “international maturity,” which includes Amazon’s most mature overseas retail markets, such as Germany, the UK and Japan. Without advertising, the category would have lost $653 million in operating income last quarter. Including advertising revenue, it made $755 million in operating profit, the filings show.

Amazon doesn’t disclose these numbers publicly. Without profits from its advertising business, Amazon would have lost about $3 billion in operating income in the first quarter, the filings show.

In response to some of these concerns, Amazon recently raised its Prime membership fee in the US by 17% to $139 a year. Fulfillment costs have multiplied over the past two years, and starting last month, Amazon added a 5 percent fuel and inflation surcharge to sellers using its fulfillment network. Still, Amazon guided second-quarter operating income in the range of a loss of $1 billion to a profit of $3 billion, down from $7.7 billion last year.

Evercore analyst Mark Mahaney wrote in a report last month: “The macroeconomic challenge today is as challenging as it has been at any time in Amazon’s history.”

“Prioritize within limited resources”

Inflation is also slowing demand.

Amazon has grossly overestimated demand this year, causing its warehouses and workforce to miss targets and overcapacity.

Signs of an economic slowdown over the holiday season are already evident. One of the internal documents said that 80% of weekly package volumes in the fourth quarter of last year were “light” compared to internal expectations. In the European market, total package numbers in the fourth quarter were nearly 15% lower than internal estimates, while “peak” packages were 19% to 24% lower than expected, one of the filings showed.

Olsavsky said on an earnings call last month that Amazon overextended itself during the pandemic, leaving the company with more resources than it needed.

This led to cuts across the retail business.

an executive recently said Retail teams are scaling back hiring targets for the year until ‘business acceleration’ hits certain growth targets. After a two-year acceleration period, Amazon also plans to significantly curb the growth of its third-party fulfillment partners this year, It was previously reported by insidersWhile Olsavsky said customer demand remained strong, Amazon announced it would temporarily stop expanding its physical and staffing capabilities.

Gokul Dakshina, vice president of finance and chief financial officer for Amazon’s North American consumer business, wrote in an email: “We fully understand that this is not ideal and that the team had to make some difficult choices to prioritize within limited resources. “Last month, Insider reviewed his team. “Please adjust your hiring ramp accordingly.”

Third-party sellers, who make up more than half of the products sold on Amazon, are also learning to adapt. In an inflationary environment, shipping and fulfillment costs increase significantly, leading sellers to raise prices or accept lower profits, said Juozas Kaziukėnas, CEO of research firm Marketplace Pulse. Data from Profitero shows that consumer prices for online shopping have risen by more than 10% since June 2020.

“This ultimately means shoppers will pay more for the same items,” Kaziukėnas said.

Other large retailers are facing similar problems.Walmart and Target both reported weaker-than-expected quarterly earnings this week, suggesting Significant increase in cost. their stock prices plummeted, drive down Share of other retail brands.

Low wages lead to higher ‘regret’ churn rates

There are concerns about rising wages and staff turnover.

Amazon is known for its low wages relative to its peers. As its share price lags — down 36% this year — employees are finding fewer and fewer reasons to stay put, It was previously reported by insiders.

To address that, Amazon made some improvements to its compensation structure this year.But many employees tell the insider Most raises are well below inflation, prompting them to seek other opportunities.

According to internal data obtained by Insider, Amazon has seen a surge in “regret” attrition, or the portion of employees it doesn’t want to lose. From 2016 to mid-2021, Amazon’s regret churn rate hovered around 5%. But the data shows that from June 2021 to last month, the average regret churn rate more than doubled to 12.1%.

Competition for talent is forcing Amazon to hand out more employee stock awards — increasing its costs. Olsavsky said last month that Amazon is Expected to spend a record $6 billion Stock-based compensation expense in the second quarter was the highest quarterly employee stock-based compensation expense on record, up 66% from a year earlier.

Felton’s email to his team last month ended on a more positive note, highlighting performance improvements. Addressing all of these issues, however, will require a “pivot” from growth and expansion to find the right balance, he wrote.

“Keep working hard because the opportunity is there,” Felton wrote. “We need to strike the right balance between safety, quality, speed and cost.”

Do you work at Amazon? Is there a tip? Contact reporter Eugene Kim via encrypted messaging apps Signal or Telegram (+1-650-942-3061) or email ([email protected]).