🤔 Why is Amazon Struggling to Make Profits?
Amazon, one of the world's biggest retailers, is facing profitability issues. Here's why.
"Hey, Alexa. Why is your parent trying to kill you?"
"Showing results for Amazon's Q3 2022 results."
This could be a conversation you could soon be having if you have an Amazon Alexa.
That's because Amazon is currently taking a look at all of its verticals that are not making money and Alexa is one such vertical.
But what has prompted Amazon to review sectors that aren't performing well? ReadOn!
🧐 Amazon in Trouble?
The newspaper headlines have all been screaming, "Inflation is rising, recession is coming."
And rightly so, in September US inflation was a whopping 8.2%!
This has badly impacted the tech sector, which is seeing layoffs after layoffs now.
And Amazon isn't immune from this recession flu.
It started showing symptoms of being affected last month when Q3 results were revealed.
Its operating income has fallen from $4.9 billion last year to $2.5 billion.
It also noted a loss of $0.4 billion in North America, its biggest market!
What's worse, the holiday season outcome looks even worse, as analysts are still not sure whether central banks will be able to reduce inflation.
So, Amazon is following the same prescription that everyone is: layoffs.
Though it hasn't laid off anyone yet, it is planning on laying off 10,0000 people. For this, it is conducting internal reviews to find areas that are draining its treasury.
And one such area is Amazon's Alexa unit, which is losing $5 billion in revenue annually.
But why is Alexa facing losses?
Because while Amazon wants Alexa to be our best friend, our confidante, and even our teacher, Alexa has remained only a humble assistant for most of us.
Confused?
You see, Amazon keeps adding new features to Alexa to make sure customers interact with it. This is essential as user data recorded by Alexa could massively benefit Amazon and help it cater to customers better.
These features include skill developments, where developers through Alexa could teach skills to users, offer them hints for the games they were playing and so on.
However, most customers aren't comfortable with Alexa being such a huge part of their lives. So, they just stick to basic commands like asking what the time is and checking the traffic on their way out. Which is why Amazon isn't getting additional data from them which could be useful for it and could help justify the cost of development of these features.
But aren't other verticals earning enough money to cover these losses?
Sadly, no. Losses at Amazon's North American retail unit have been going on for three whole quarters.
And its moneymaker AWS (Amazon Web Services) is also seeing a slow down. It has already captured a major chunk of the market, so growth is set to decline.
But once again, thanks to recession, companies have reduced spending, so AWS revenues are also down.
And the cherry on the cake? Despite investing over $6.5 billion in India, Amazon has not been able to make profits in its fifth-biggest market! Wondering how that is possible?
🇮🇳 Amazon's India Problems
To many it may seem like Amazon is the go-to shopping app for everyone. But that's not true.
While Amazon does have a majority market share when it comes to electronics and home appliances, it cannot compete with Flipkart, Myntra, Meesho and Ajio when it comes to beauty, personal care and fashion.
Now, the problem is electronics have a very tiny margin, while fashion and beauty usually have a high margin. So, despite making lots of high-ticket sales, Amazon is still not making enough profits.
And then there are India's tough e-commerce rules, which involve not allowing Amazon to sell its products directly to customers. This has also made matters worse for the tech giant. It is losing out to e-commerce companies in the country because it cannot sell its own items that have a higher margin.
Amazon tried to skirt around all of these issues, tried to find new ways to profitability like launching Amazon Foods, but nothing worked out for it.
So, on the whole, the company's outlook is gloomy now. And some people are going to lose their jobs.
Will Amazon completely shut down Alexa? Probably not. But you're not going to be seeing new features anytime soon.
But will Amazon recover from this?
Well, it could if it played its cards right. Unlike other marketplaces, Amazon has Amazon Prime. And the subscription service steadily boosts its revenue (here's an interesting back-of-the-hand calculation about how much Prime earns for Amazon).
Now, Prime users usually spend more on the platform because of the discounts and the free and fast delivery.
Plus, Prime Video also features ads. Right now, advertisements are the biggest earners for Amazon.
Yes, advertisements earn even more for the platform than AWS does.
So, boosting the amount of Prime memberships in India and across the world could help Amazon get back on its path to profitability and growth.
But it faces tough competition in this space as well. Especially in India where there are multiple OTT platforms.
So, this alone will not help. Amazon will have to innovate.
For instance, many marketplaces are using AR/VR trials and live shopping to sell more personal care and fashion products. Amazon could also do something similar.
The point is there's a lot Amazon can do to boost sales. But as Amazon Foods has shown, its execution has been sketchy so far.
So, will Amazon continue to run an unprofitable business in India or will it finally manage to make things right?
⚡In a line: Amazon is the latest company to go for mass layoffs due to profitability issues but if it better leverages its own powers it could avoid a similar situation later on.
💡Quick question: Will Amazon ever shut down or is it too big to fall now?
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