2023 has been a difficult year so far for tech giants. Amazon fired a total of 27,000 people this year, causing anxiety amongst shareholders surrounding the company’s performance and future growth. Despite this, it is important to not disregard the sentiment of strong promise shown by Amazon CEO, Andy Jassy, in his latest 2022 letter to shareholders.
Jassy brings up several reasons for why he feels confident that Amazon will be able to ride out these tough macroeconomic times and continue on its path to growth and success. Here are 7 things I learned from Andy Jassy’s 2022 letter to Amazon shareholders.
1. The eventual discontinuation of work from home. Jassy announced that since May, Amazon’s corporate employees have had to return to the office three days a week. He expressed how collaboration and learning from one another is made more effortless when staff are back in the office, interacting in person. Jassy recollects how some of Amazon’s best inventions had their ‘breakthrough moments’ from employees staying back to discuss ideas on a whiteboard after meetings or dropping by a colleague’s office. Working in person allows for a higher quality of discussion. The growth of ideas occurs more freely, thus allowing for better inventing.
2. A larger and smarter fulfilment network. The increased influx of orders due to the pandemic (and shutting down of physical stores) meant that Amazon’s fulfilment operations had to double in size. Along with this came the re-evaluation of the company’s U.S. fulfilment network, shifting it from a national to a regional model. Typically, if a local fulfilment centre does not have the product a customer orders, it would have to be shipped from other parts of the country, incurring additional costs and delivery times. This became an increasingly large problem during the pandemic induced scaleup, with Amazon having set up hundreds more fulfilment nodes. In order to tackle this issue, the company has improved its machine learning algorithms to better predict what customers from the various parts of the U.S. want. This allows for ‘the right inventory in the right places’ and, hence, reduces shipping costs and delivery times.
3. High growth expected for Amazon Web Services. AWS has faced recent difficulties due to customers being more prudent in spending, given the currently difficult macroeconomic conditions. However, Jassy claims that this is only in the short term. AWS allows for the seamless scaling up and down of business contracts without incurring additional cost (e.g., having to pay for unused cloud storage). This feature allows customers to cost-optimise more efficiently. As such, Jassy reports an increasing number of enterprises switching out of managing their own infrastructure into engaging AWS’s services. Furthermore, he emphasises how AWS is constantly being improved and altered with new capabilities, allowing for the best customer experience. Hence, AWS’s customer base should see an increase in the near future.
4. High growth potential for Amazon’s advertising business. Amazon’s advertising revenue continues to increase year on year. The company uses machine learning algorithms to tailor advertisements to each individual customer based on their shopping behaviours. Jassy states that large investments have been made towards further improving advertising selection algorithms. The integration of advertising into video, live sports, audio, and grocery product platforms may be in the company’s future. These initiatives should aid in increasing the advertising business’ customer base, drawing in larger earnings for Amazon.
5. International expansion. Amazon’s international sales amounted to US$118 billion in revenue in 2022. The company, in recent years, has invested in international expansion into countries including India, Brazil, Mexico, Australia, various European countries, the Middle East, and parts of Africa. Jassy mentions that growth in these newer territories display a similar pattern to that of the company’s growth in North America, alluding to higher revenues of Amazon in the years to come.
6. The success of Amazon Business. Amazon Business allows organisations to easily acquire products such as office supplies and other bulk items at lower cost. Despite some of Amazon’s subsidiaries having struggled in recent times, Amazon Business has flourished. With a customer base of more than six million businesses, Amazon Business drives approximately US$35 billion in gross sales annually. Jassy claims that Amazon Business has only ‘scratched the surface of what’s possible to date’, hinting at significant growth of the subsidiary in years to come.
7. Amazon expanding into new market segments. Jassy shared that Amazon has made several investments including healthcare, broadband internet, and generative AI. Similar to how Amazon invested in AWS years ago, the company sees unique opportunities in these segments and the potential for considerable growth. Jassy highlighted Project Kuiper — which aims to launch satellite systems that deliver high-quality internet services at affordable prices to underserved geographical locations. Hundreds of millions of households and businesses lack access to a reliable internet source and there is a substantially large untapped customer base for such a product.
The fifth perspective
Andy Jassy’s 2022 letter to shareholders paints a confidently optimistic picture of Amazon’s future. Investments into Amazon’s infrastructure and expansion into new markets and territories suggest that current struggles are short term.
Despite this, it is important to be aware of the potential risks Amazon faces. Although expanding into new market segments has yielded results in the past (e.g., AWS), every new venture comes with uncertainty and no guarantee of success. Rival companies may pose significant threats by offering similar products or services, potentially leading to market share erosion or pricing pressure.
Moreover, as Amazon expands its operations into new countries, it accumulates more customer information and becomes subject to varying data protection laws across different regions. Failure to comply with these laws and potential data breaches can harm the company’s brand reputation and lead to substantial costs for rectification. These risks, if realized, could have significant consequences for Amazon. Therefore, it is essential for individuals to fully acknowledge and understand these risks before making investments in the company.
