← Behind the Numbers: an EMARKETER Podcast
Behind the Numbers: an EMARKETER Podcast
Behind the Numbers: How Amazon Has Made Itself Even More Essential … And How It Hasn’t
00:21:46
Loading summary
Transcript69 lines
- [00:00]
Marcus
In a rapidly changing market, speed to insight is everything. It's almost, it's pretty much everything. AI search is the newest feature on eMarketer Pro Plus. Helps you streamline research, deliver context driven answers in seconds. No more endless searching, just relevant insights to power your strategy. Sounds good to me. Stay ahead with AI search exclusively on Pro Plus. You can learn more on our website eMarketer.com hey gang. It's Monday, March 3rd. Rachel, Jeremy and listeners, welcome to behind the Numbers Any Marketer video podcast. I'm Marcus and today we'll be discussing Amazon. For that conversation, we're joined by two people. Let's meet them. We start with our analyst who covers retail for us, based in New York, it's Rachel Wolf.
- [00:46]
Rachel Wolf
Hey, thanks for having me.
- [00:47]
Marcus
Of course, of course. Said that really fast. And also we're joined by senior director of briefings, living in New York as well, it's Jeremy Goldman.
- [00:55]
Jeremy Goldman
Great to be with you. I cannot believe it's March.
- [00:58]
Marcus
I know. Shocking. I said March 3rd. I don't really know what the date is. It's probably. That might be right. Anyway, today's fact. Cows. I've done a lot of these recently, but they're fascinating creatures. Can suffer from depression and display signs of mood disorders when isolated from their herd, according again to my hometown college, University of Northampton. So, cattle. You're asking what the hell happened with this experiment? Don't worry, I've got it here. Cattle were held in an isolation arena for 30 minutes and the heart rates were measured at 15 second intervals according to a BBC article. So a bunch of really smart researchers or putting these poor animals in cow timeout to study them. This university is out of control. Do some actual research.
- [01:59]
Jeremy Goldman
But why are they so depressed? Is it because they have a lot of beefs?
- [02:05]
Marcus
Yes.
- [02:06]
Jeremy Goldman
Sorry, sorry. Or is this just an excuse? It's better. It's better to eat them, to put them out of their misery.
- [02:12]
Marcus
Oh, no, that's not the message.
- [02:14]
Jeremy Goldman
Okay, sorry.
- [02:16]
Rachel Wolf
Part two of the experiment.
- [02:17]
Jeremy Goldman
Yeah, okay.
- [02:19]
Marcus
How would you know though, that they're depressed? They always look a little down, don't they? I've never seen a cow and thought, they appear to be having a great day.
- [02:27]
Jeremy Goldman
I would not be psyched. I was a cow.
- [02:29]
Rachel Wolf
And how do you know they, like, get on with all the other cows? Like, it could be a great respite for them. Who knows?
- [02:35]
Marcus
Well, so apparently they do have best friends. That was also research done by this shockingly unprestigious university that I grew up near. Why they do it. Anyway, today's real topic, the pieces of Amazon that are working and the ones that aren't. So in today's episode, we're talking Amazon. Let's start with their performance. Top line, how are they doing? Amazon grew total net sales nearly 11% in Q4. That's down a few ticks from the previous Q4 as growth tends to do. Slice of pie is what we're playing for this first question. Rachel's going to create a pie chart for us as to the reasons 3 max why Amazon grew total revenue 11% year over year in Q4.
- [03:27]
Rachel Wolf
First piece of the pie going with 40% here. So, you know, pretty sizable chunk decent, I would say just down to a strong holiday season overall. I mean, we saw this across the board with plenty of retailers. I mean even struggling retailers like Target had a good quarter and overall people were just really enthusiastic about spending this year either because there was just a whole lot of deals out there for them to take advantage of and it was a shorter holiday season. So there's also that sense of urgency. But you know, Amazon called this out themselves. They said they had a record breaking Black Friday and Cyber5, which you kind of have to take with a grain of salt given that they had a much longer sales period this year than they have had in the past. But even taking that to account, it was a good quarter for them.
- [04:14]
Marcus
40%. Just the overall market doing good things. Okay, what else do we have?
- [04:20]
Rachel Wolf
So the other big chunk, another 40% I'm giving to convenience and I've said this in the past, I think for the past three or four quarters, but it's still true. You know, people want things fast and Amazon is better equipped than pretty much any other retailer to make that happen.
- [04:37]
Marcus
Yeah, I mean they want things fast, but. But Amazon is making themselves very essential. Right. The everyday essentials category has been growing and growing and so folks who need those essentials like today or at the very least tomorrow, that's the person that they're turning to that Amazon was saying in 2024 they delivered 50% 5 0% more essential IT than the year before. And Rachel, this isn't by accident, Right. Karen Weiss of the New York Times is reminding us that Amazon has been working on its operations to put items close to customers so they're quicker and less expensive to deliver.
- [05:11]
Rachel Wolf
Right. I mean, this has been a huge push for them. It's going to keep being a huge push. I mean, I think they said like there's no downside for them to keep investing in faster and faster delivery.
- [05:21]
Marcus
Yep. And no more.
- [05:22]
Jeremy Goldman
Also, by the way, I'm sorry, I was just going to say that I think that the interesting thing about that is it's making Amazon just more key and crucial to people's lives, which then like, it's these things that Rachel, I think you're talking about, they're not such high margin but they are really habit forming and I think that that's really important to them.
- [05:40]
Rachel Wolf
Yeah, exactly. Like if you run out of toothpaste instead of running to the nearest Walgreens, people are just ordering on Amazon instead.
- [05:46]
Marcus
Yeah, I mean the essential part is really interesting because think about going to Amazon for all sorts, but if they can capture that piece of the market, especially Zach Stambaugh, a colleague was, was writing one in three consumers would prioritize spend essential items if tariffs or a trade war drove up prices on their regular purchases. Was January survey from First Insight. He says Amazon is positioning itself as the go to retailer no matter the economic climate, which I thought was interesting for sure.
- [06:13]
Rachel Wolf
And you know, it also comes down to the fact that a lot of these, you know, pharmacy chains I mentioned, Walgreens are really struggling and the in store experience has suffered. So you know, Amazon is gaining there too because then there is an actual advantage to buying on Amazon as opposed to having to wait online and press the button and wait for an hour for somebody to come give you your.
- [06:33]
Marcus
Toothpaste, chase them through the store. I turn it into a adventure. Rachel, 20% left.
- [06:39]
Rachel Wolf
Yes.
- [06:39]
Marcus
What are we giving it to?
- [06:40]
Rachel Wolf
So my last 20% is ruthless efficiency. So Amazon has done a really good job, I think of just cutting anything that's underperforming in the least, whether that's shutting down Amazon Go stores and I guess we'll talk about this more with the physical retail piece. But you know, even recently they shut down their TikTok like content feed because it wasn't giving them the results they wanted. And that's freed up resources that they can funnel back into their fulfillment, for example, or AI where they're investing a lot more.
- [07:15]
Marcus
Jeremy, how's this pie chart sound to you? Would you change anything?
- [07:18]
Jeremy Goldman
No, I think it's pretty accurate. I mean, I think that there's argument to be made about some of the projects like Inspire. Rachel and I have talked about this offline about how inspired of a feature and launch was it really to begin with, you know, but the, the fact remains you got to give a company a lot of credit for, you know, that whole sunk cost fallacy and saying okay, you know, this isn't working, we're gonna pull and we're gonna reallocate towards something that is more core to our business. So.
- [07:46]
Marcus
Yeah.
- [07:46]
Jeremy Goldman
Yeah.
- [07:48]
Marcus
Okay. So Amazon, they had a good Q4 as I mentioned, and they had a good 2024 as a whole. So their 2024 overall growth for total net sales was 11%. Online stores, net sales was up 7%. That was for 2024. And those numbers were almost identical for Q4 as well. So it had a good end of the year and full year. But they said they anticipate Q1 sales to fall short of analyst expectations by about 3 to 5%. So for January, February and March, if it's 5%, if it's falling short of those expectations by 5%, that will be Amazon's slowest growth since it went public in 1997. So it's a big deal. The retail giant said that foreign exchange rates will be responsible in large part. However, our Zach Stamble, who I mentioned earlier, noting that excluding currency effects, the company would still fall short of expectations, signaling broader challenges ahead. What challenges are we talking about here, gang? Any thoughts?
- [08:48]
Rachel Wolf
Well, I think the big word is tariffs, and in particular, their potential to raise prices for a lot of the goods that people are buying and reignite inflation. And once that happens, it's just going to be a continuation of what we saw over the past few years, where people just either buy less or people buy less. You know, they're to account for those price increases. And, you know, Amazon might be a little more insulated because it does sell more of those essential goods, but overall, you know, like electronic spending, beauty spending, all of these things are likely to be affected pretty heavily by tariffs.
- [09:25]
Jeremy Goldman
And Marcus, by the way, for any clients who have read what Rachel and Zach have been writing for our retail and E Commerce briefing, they would see there's some interesting thing on a lot of different earnings calls where people are calling out the uncertainty, you know, given potential trade wars and tariffs and whatnot. So I think in some ways, I mean, do I think that Amazon believes in what they're saying? Sure. But I also think in some ways there's going to be like a bit of a testing of a. Can you call this out and not get dating that much, like, from a stock perspective? Because a lot of it's like a known quantity. They know that they don't know basically what's going to happen. And as a result, they're hedging a little bit. And I think a lot of players are within the retail space.
- [10:10]
Rachel Wolf
Yeah, I mean, Walmart which is the closest analog to Amazon is also been very conservative about their expectations for the coming year even though Walmart is less technically less exposed to tariffs. So I think a lot of retailers, as Jeremy said, are really just hedging their bets and trying to come to grips with a very, very uncertain economy where it's difficult to know what's going to happen day to day.
- [10:35]
Marcus
Yeah, well, so you mentioned Walmart and yeah, obviously a big competitor of Amazon's in the online space because I think about 9% of all online Sal in the US now is Walmart compared to Amazon's over 40%. But I mean not closest competitors there, but still rivals. And then in the in store space you have Amazon trying to even get a slice of the pie that Walmart has managed to amass since, since its inception. And Amazon Go stores, part of that story, part of that physical retail strategy, if you will. As of last year though, Amazon made just 3% of its revenue from physical store sales. That's the smallest slice to date. So it is getting smaller and smaller. The revenue is creeping up a little bit. A big part of that is because AWS is doing so well. Advertising is doing so well. Some of those other slices are growing, but it's not a great sign. A recent Wall Street Journal piece from Kate King reading Amazon King of online retail can't seem to make its physical stores work. The article pointing out that Amazon has long struggled with its brick and mortar AMB closing its bookstores, fashion outlets, four star locations. Most recently it closed its Amazon Go store in Woodland Hills in California. Amazon's cut its Go portfolio in half since 2023-16 stores in four states. Ms. King writing that instead Amazon is focusing on licensing. It's just walkout technology to other retailers while it focuses its brick and mortar ambitions on grocery stores. However, Rachel Jeff Edison, chief executive of real estate investor Phillips Edison that owns grocery anchored shopping centers, says quote, can you think of any examples where Amazon have done bricks and mortar ret. Well, close quote. So what do you think? Fair or unfair comment? Yeah, what do you think?
- [12:25]
Rachel Wolf
I think it's fair to a certain extent. Right. I think that Amazon has thrown a lot of stuff at the wall in an attempt to reinvent the retail experience. Whether you know, it's like just walk out or you know, their Amazon One Palm payment system. But you know, none of these things have really become mainstream in the retail landscape. Right. And part of that is because they're very expensive. They don't work in a lot of different contexts. You know, at the same time, Amazon is kind of making money off of them. Right. As you mentioned, they are licensing this out. The just walk out to hospitals, to arenas in places where the format actually works.
- [13:04]
Marcus
So about 200 retailers. So a lot of folks.
- [13:07]
Rachel Wolf
So that could be the model for them. Right. Instead of focusing on creating actual retail formats, you focus on retail tech that could power other retailers operations, by the.
- [13:18]
Jeremy Goldman
Way, which makes a lot of sense because that is a little bit kind of, that's more core to their DNA. I also think it's worthwhile. Like we actually talked about Amazon and retail without saying the words Whole Foods, which is interesting. Yeah. I mean, can they get a little bit of credit for not breaking Whole Foods? I mean, I think that there's something to be said there. There's also something to be said for leveraging them in some way for Amazon returns, which is a little bit synergistic and makes sense. But yeah, I mean, ultimately the bottom line is if a company's core DNA is tied to doing one thing really, really well, then chances are they're not going to do another thing as well. And that's really what you've seen with Amazon is at their core, they know a few things and that's where the talent of the company grows and that's where a lot of the attention goes. And that's part of why they haven't been able to make retail totally work.
- [14:07]
Rachel Wolf
And you brought up Whole Foods and they are actually experimenting quite a bit within Whole Foods. They have these new smaller stores, one that just opened up in my neighborhood on the Upper east side and Jeremy's neighborhood. They're also experimenting with ways to kind of mesh the Whole Foods in the Amazon experience so that you can get your Coke or whatever it is that you can't buy in Whole Foods during the same shopping trip. So I think they are kind of starting to use Whole Foods as a jumping off point for experimentation. But again, they are still figuring it out.
- [14:41]
Marcus
Yeah, yeah. I mean, Jeremy kind of touches on what you were saying. But they're almost a victim of their own kind of dominant online shopping success because most other companies making $20 billion a year from physical store sales would be doing pretty well for themselves. But because Amazon has over, as I mentioned, over 40% of online shopping in America.
- [15:00]
Rachel Wolf
Right.
- [15:00]
Marcus
And it's close to 500. Yeah, close to $500 billion there. Exactly right, Rachel. The standards just is way higher. But plans to open more locations for Amazon Fresh. This is mass market grocery concept betting on dash carts as well. So we'll see one very small and seemingly shrinking according to their numbers. Part of Amazon's business, at least in terms of share. But another part that is growing in share and revenue is the advertising portion. Amazon's advertising business grew 20% in Q4, nearly 20% for the full year as well. Now accounting for a 9% slice of Amazon's total revenue. Jeremy's going to create a pie chart for us. Three reasons why Amazon grew ad revenue 20% in Q4 and full year.
- [15:54]
Jeremy Goldman
Sure. First, I'm going to say it's very difficult to record something like this and say pie and Whole Foods and not get hungry. So what's your favorite pie?
- [16:04]
Rachel Wolf
Maybe this should go out on pie day.
- [16:07]
Jeremy Goldman
Yeah, let's push it out. Push it back. Why not?
- [16:09]
Marcus
Unless there's meat in the pie, I don't want to hear about America.
- [16:12]
Jeremy Goldman
Oh, God, no, no, no. Cherry all the way cherry and then apple.
- [16:18]
Marcus
Rachel.
- [16:19]
Rachel Wolf
Banana cream pie. Banana cream pie has to be cut.
- [16:22]
Jeremy Goldman
That Lance, we can't have pecan also. Okay, fine. Anyway, so, so if, okay, so piwise, listen. So, so focus. Sorry. No, no worries. So here's a little bit of context and then I'll tell you, tell you my number. Okay. Amazon's ad revenue was 37.74 billion for the year in 2022. Then it went up to about 46.9 billion and then it went to 56.2 billion. And the reason why I'm saying that is because a lot of people talked about streaming ads on Prime Video and how that's a big portion of their success. But I think really at this point you kind of have to give 70% of the pie towards their retail media flywheel, which is really impactful. You know, you've been able to convince a lot of different third party sellers to get involved in their advertising ecosystem. They've had more major sale days that have, you know, encouraged people to push their goods using retail media advertising. The consumer is getting more and more used to it. Whether or not it diminishes the overall quality of the experience on Amazon is another question entirely. But I think that if you look at it, you really have to give most of that credit towards that retail media flywheel that is encouraging sellers to promote their products. And obviously they're selling a lot on Amazon, but at a lower margin. And this eats into their margin a little bit more. And they're still willing to do it.
- [17:56]
Marcus
Yeah, yeah. Retail media ad revenues expected to reach $70 billion this year. So just, it's showing no signs of slowing down whatsoever. That's the biggest slice. What about the rest of the pie? The chicken pot pie?
- [18:09]
Jeremy Goldman
Yes, exactly. Well, okay, fine, that's, that's, that's, that's a good one. But just to take the cherries out of it, I, I would say that probably 20% has to go to streaming. You know, they just completed the, their first full year of streaming, you know, and prime video with ads, obviously by default, if people don't know by default you're getting ads, you have to pay the, it's not quite protection racket, but you know, you do have to pay in order to opt out of the advertising, which was a different model that they tried. Yeah, it was really smart.
- [18:42]
Marcus
Shocking to think that that was early last year that they turned those taps on and apparently Daniel Konstantinovich, who's one of our colleagues playing, saying they're planning to increase those ad loads this year as well.
- [18:51]
Jeremy Goldman
Exactly. So that's why we say kind of going forward, I think that that can be a bigger reason for it. I think that, you know, you really can't undercount the fact that you can now reach people at different parts of the funnel. Right. You can do brand awareness, you can also do performance marketing through retail media. So the fact that they can reach people, different parts of the funnel through the same player, you know, makes them a very compelling place to park your advertising budget going forward.
- [19:19]
Marcus
Yeah, 10% left.
- [19:22]
Jeremy Goldman
The 10% left. And I know Rachel's also covered a bunch on this, is that they've made a number of different strategic AI investments. Who hasn't? But when you think about the way that they've invested in AI powered tools that will help you get new creative up faster. I mean, ultimately, again, everybody's doing this, you know, all the major players, but they're trying to make it more turnkey for you to put creative up and then to, you know, personalize your ads to measure them on the back end. And the investments that they're putting on that front, again, like they paid dividends in Q4, but I think going forward, that's going to be a really major thing to watch. You know, who can make it more frictionless for the average advertiser to throw more dollars at key platforms, that's really a major thing that we're going to be following throughout the course of the year.
- [20:13]
Rachel Wolf
And I think that's really crucial for Amazon in particular because most of their advertisers are these small sellers. So the easier that you make it for them to just launch a campaign, the more revenue gets into Amazon's pocket.
- [20:25]
Marcus
Yeah, yeah, great point. So growing Slice the Ads Portion over the last three years, Amazon's ad business has grown so gone from accounting for 6% to 9% of total revenue as they become less and less reliant on online net store sales. Even though that number is also going up in dollars, that share is going down. AWS another significant portion Jeremy mentioned. AI AWS has gone from 13% of its business to 17% over that same.
- [20:54]
Jeremy Goldman
By the way. And by the way, the AWS portion, you know, it's important to note expecting slower growth there, which is then just going to help advertising become an even bigger portion of the overall pie.
- [21:07]
Marcus
Yeah, good point. That's what we've got time for for today's episode. Gang, thank you so much for hanging out with me today. Thank you. First to Rachel.
- [21:13]
Rachel Wolf
Thank you. And thank you for your cow facts.
- [21:15]
Marcus
You're welcome. I know you're lying. It pains me. Jeremy, thank you.
- [21:21]
Jeremy Goldman
Thank you for depressing me about the cow facts. This is great though.
- [21:24]
Marcus
Always welcome. Thanks to the whole editing crew. Victoria, John, Lance and Daniel Stewart runs the team and Sophie does our social media. Thanks to everyone for listening in. If you have a second to write us a review, it would really mean the world to us. We really, really appreciate those. We hope to see you on Wednesday for our Reimagining retail show and E Marketer podcast.