Following an abysmal first quarter 2023 earnings report, Victoria’s Secret dropped another bombshell announcing it is expanding bra and panty distribution on Amazon. With an ongoing slide in revenues, Victoria’s Secret needs something to jumpstart sales. Yes but apparently, it thinks partnering with Amazon will do the trick. So, it’s launched a branded Amazon Fashion storefront featuring over 4,000 Victoria’s Secret and Pink branded products, including bras, panties, sleep, swim, and loungewear, all available through free Prime delivery. Plus, some styles will be offered through Amazon’s Prime “Try Before You Buy” service.

Second Amazon Launch

This follows the introduction of Victoria’s Secret beauty products and some Pink selections on Amazon last year. “We have continued to expand our assortment offering with Amazon Fashion, and it remains a natural extension of our owned channels,” Greg Unis, Victoria’s Secret chief growth officer, said in a statement. But it feels like the brand is jumping from the frying pan into the fire. It may get some additional sales by entering the “Everything Store,” but more than transactions, it needs to drive demand for the Victoria’s Secret brand. That takes brand building, not transaction loading. What has Amazon ever done to build a brand other than Amazon?

What will unlock growth for the company is to be the first and only brand that customers think about for their intimates solutions. Exposing itself on Amazon surely won’t help accomplish that. Exposing itself on Amazon surely won’t help accomplish that.

Tough Sell

Victoria’s Secret has had a rough ride since May 2021 when it went public as an independent company. Full-year Fiscal 2021 sales were down 9.6 percent compared with 2019, dropping from $7.5 billion to $6.8 billion. Then it dropped another 6.5 percent in fiscal 2022, to $6.3 billion. First-quarter 2023 continued the downward slide with its reported $1.5 billion revenues off five percent and even more alarmingly, net income down to $1 million from $81 million same quarter last year. Based on that result, it revised its full-year 2023 forecast to flat or down low-single digits in revenues and adjusted operating income in the five to six percent range, about half of what it was in fiscal 2021.

“The first quarter continued to be a volatile macro environment for our customer, and as the quarter progressed, business became more challenging,” CEO Martin Waters said in a statement, observing, “Sales performance was particularly challenging in our core categories where there was significant decline in the overall stores and digital intimates market in North America.” But he remained optimistic about the future: “We recognize we are on a journey, and our brand repositioning efforts will take time, and while the environment creates some turbulence, we remain confident in our repositioning efforts and our strategic plans for growth.”

Languishing In Store

More telling than the topline numbers is what sales-store sales reveal. Consumers are not all that enthused about shopping at Victoria’s Secret. Same-store sales dropped 11 percent in first quarter 2023 and 14 percent for brick-and-mortar stores only. This followed an eight percent same-store sales decline in 2022, specific to company-operated North America, as well as its 72 China stores operated under a partnership.

One bright note in the first quarter was direct sales rose 10 percent, up from $420 million previous year to $465 million in 2023. But online direct sales only account for about one-third of its total, and its store sales were off nearly 16 percent. Plus, direct sales didn’t help the company last year when they were down some 13 percent, from $2.1 billion in 2021 to $1.8 billion. It’s safe to say Victoria’s Secret has yet to find the secret to unlocking its growth formula, and I’m pretty sure it isn’t with Amazon.

Backstory

During the company’s investor presentation last October, Unis took the stage to share the company’s growth initiatives, starting with international expansion, where it sees a long runway. In 2022, just under $600 million or less than 10 percent of total revenues were made outside North America. Internationally, it leverages strategic franchise partnerships to “go where the customer is and market like a local,” he explained.

That led to a brief – exceedingly brief – discussion of the company’s goal for channel expansion and wholesale, or as he said, “growing outside our own four walls.” He further described two filters the company would use to choose new channel partners: its promise to bring in new customers and to enhance the brand’s appeal. In a call to VS&Co, it declined to make a comment.

Regarding its early appearance on Amazon, Unis said it proved successful in acquiring new customers through its launch of a beauty assortment and Pink apparel. As for brand enhancement, Amazon may be a good fit for beauty and a secondary brand like Pink, which presents a different image and targets a different customer than the aspirational flagship Victoria’s Secret brand.

In the luxury space, Gucci sees no benefit to opening itself up on Amazon; however, it does offer entry-level perfumes and sunglasses on the site. And luxury-leader LVMH won’t even go that far. “We believe the business of Amazon does not fit with LVMH full stop and it does not fit with our brands,” declared CFO Jean-Jacques Guiony.

All Mixed Up

Victoria’s Secret brand needs to transform its image, to make it hot again. Robin Lewis had much to say about that in his recent piece, “Victoria’s Secret: Is a Turnaround Possible?” observing that the company “has many different siloed business lines that are unaligned, which is confusing … or misleading, to say the least.” Amazon has become another one of its sales silos but a dangerous one. On Amazon, other intimate brands are already mixed into the VSC platform, many of which are look-alike copycats at cheaper prices. In no way does that enhance the brand’s image.

Brand Dilution, Not Brand Elevation

By launching on Amazon, Victoria’s Secret is trading short-term gain for long-term brand building, which is better done through its proprietary channels, especially its stores, and website. “Doing business on Amazon is like putting a band-aid on a bullet wound. It won’t stop the bleeding,” said Paul Friederichsen, founder of advertising and marketing agency BrandBiz. “Sure, it may result in an immediate sales spike, but it’s temporary at best. A brand like Victoria’s Secret can’t sell its way to success on Amazon. That’s a ticket to brand oblivion and commodity hell.”

One thing Unis said in his presentation, which is undoubtedly true about the Amazon marketplace, “Consumers are shopping for solutions, not brands.” But his solutions-first insight applies to challenger brands, not market leaders like Victoria’s Secret where the brand must come first. What will unlock growth for the company is to be the first and only brand that customers think about for their intimates solutions. Exposing itself on Amazon surely won’t help accomplish that. Exposing itself on Amazon surely won’t help accomplish that.

Amazon Prime’s U.S. membership growth ran into a brick wall last year. As recently as 2021, Prime was still growing rapidly in its home market. The program’s domestic subscriber count jumped from around 118 million individuals at the outset of the Covid-19 pandemic in March 2020 to 147 million in March 2021 and 170 million by March 2022, according to survey data collected by Consumer Intelligence Research Partners.

However, Amazon Prime’s domestic subscriber base appears to have peaked in December 2021. Since then, attrition has led to flat or declining subscriber numbers. There were 167 million active Prime members in the U.S. as of March 2023, based on CIRP’s most recent estimates.

For Prime members who aren’t Amazon power users and aren’t interested in ancillary benefits like streaming content, each price increase represents a potential tipping point that could make the cost outweigh the benefits of Prime. The 2022 price increase may not be the only reason why Amazon Prime’s growth in the U.S. has come to an abrupt halt, but it was a big contributing factor.

With profitability and Prime member growth both under pressure, Amazon finds itself caught between a rock and a hard place. To get its mojo back, the company needs to completely rethink the Prime program.

Raising Prices at the Wrong Time

Amazon’s decision to raise the price of an annual Prime membership from $119 to $139 in early 2022 surely contributed to the abrupt slowdown in subscriber growth that began last year.

On its face, the price increase made sense. At the time, delivery costs and other expenses were soaring. Furthermore, Amazon had previously raised the U.S. subscription price for Prime in 2014 and 2018, so the latest price change followed an existing pattern of increasing the price every four years.

However, from a customer perspective, raising the Prime subscription price in early 2022 represented terrible timing. Inflation was roaring out of control, with the CPI increasing 8.5 percent year over year in March 2022. Meanwhile, pandemic-era federal stimulus programs were winding down, putting further strain on household budgets. The price increase made Prime subscriptions an even more inviting target for people looking to reduce their spending.

Making matters worse, Amazon has struggled to deliver items on time in recent years. The ecommerce giant’s inability to consistently deliver on its advertised fast shipping speeds gave consumers another reason to balk at paying more for Prime.

Amazon’s decision to increase subscription prices in the midst of soaring inflation stands in sharp contrast to Costco’s strategy. Historically, Costco has typically raised U.S. membership prices every 5-6 years. The most recent price increase went into effect on June 1, 2017, setting the stage for another increase as early as mid-2022. Yet Costco has held its fire, partly due to the impact of high inflation on members’ finances.

Holding membership fees flat wasn’t just an act of magnanimity by Costco. It has helped the company retain existing members while continuing to recruit new ones. Indeed, Costco’s renewal rate hit a record high last quarter (both in North America and globally), supporting global membership growth of more than 7 percent year over year.

A Flawed Business Model

Amazon’s profit challenges likely influenced its decision to raise the Prime membership price last year despite deteriorating economic conditions.

In the early part of the Covid-19 pandemic, Amazon’s sales and earnings soared as consumers increasingly turned to ecommerce for both necessities and discretionary purchases. That momentum petered out in the second half of 2021, though. By the fourth quarter of that year, Amazon’s sales growth had slowed to single digits, excluding the Amazon Web Services cloud computing business. Moreover, excluding AWS, the company rang up a $1.8 billion operating loss in Q4 2021, compared to a $3.3 billion profit a year earlier.

Amazon’s profitability deteriorated further in 2022. Excluding AWS, it reported a full-year operating loss of $10.6 billion. To mitigate these dreadful results, the company has slashed capital spending, exited unprofitable side businesses, and cut tens of thousands of corporate jobs.

Prime membership fees only cover a fraction of Amazon’s shipping costs, which reached $83.5 billion in 2022. Management may have felt it had no choice but to raise prices last year to help defray these rising costs, despite the potential impact on subscriber growth.

This merely underscores the bind that Amazon has put itself in. The company built its retail empire on the back of the Prime program, but it doesn’t have a sustainable business model for growth. The more that members use their free shipping benefits (particularly for small purchases), the more money Amazon is likely to lose. That puts pressure on Amazon to charge more for Prime. Yet the most profitable Prime members are those who place the fewest orders and thus get the lowest value from the service, making them most likely to cancel.

By contrast, Costco earns most of its income from membership fees, but it also earns a small profit on retail transactions. As a result, Costco makes more money if its members spend more.

A Deteriorating Value Proposition

In his 2015 annual letter to Amazon shareholders, Jeff Bezos wrote, “We want Prime to be such a good value, you’d be irresponsible not to be a member.” At the time, an annual membership cost $99. However, with every price increase, Amazon moves further away from Bezos’ goal.

To be fair, while the price has jumped from $79 a year a decade ago to $139 a year today, Prime remains a great value for subscribers who use all of the benefits included with it. In addition to the core benefit of free fast delivery (as soon as same-day for many items in some cities), Prime also offers free access to a wide selection of video content, ad-free music streaming, online gaming, and a selection of e-books.

But for Prime members who aren’t Amazon power users and aren’t interested in ancillary benefits like streaming content, each price increase represents a potential tipping point that could make the cost outweigh the benefits of Prime. The 2022 price increase may not be the only reason why Amazon Prime’s growth in the U.S. has come to an abrupt halt, but it was a big contributing factor.

After all, Amazon customers can get free standard shipping on orders over $25 without paying any membership fee. And Amazon isn’t the only game in town. Target, for example, offers free 2-day shipping on many items with no order minimum for customers who use its store-brand credit card, which has no annual fee.

Time for a Rethink

Considering the cost of delivering Prime member benefits and how much Amazon has struggled to operate its core retail business profitably, a blanket price cut for Prime subscriptions isn’t a realistic option. However, Amazon could create a multi-tiered subscription structure to better align Prime’s cost with the benefits members actually use. Many subscription-based businesses have multiple tiers of membership with additional benefits available at higher price points, including Costco, Sam’s Club, and Netflix.

For example, Amazon could reduce the base price of a Prime membership while moving all the ancillary benefits like free streaming content into a separate add-on subscription. This would have something in common with Netflix’s decision to separate its streaming video service from its legacy DVD-by-mail business in 2011. That move was painful in the short run but paved the way for rapid growth over the following decade.

Years ago, it made sense for Amazon to offer free video content as a loss leader to attract consumers to the Prime program. Today, Amazon is a mature business that has already captured a big slice of the U.S. retail market, so there aren’t many potential new customers left to acquire. If services like Prime Video, Prime Music, and Prime Gaming still can’t stand on their own, the company should probably shut them down rather than subsidizing them.

Amazon could also consider creating a “basic” tier of Prime that would cost less and offer free 2-day shipping a limited number of times annually. This would give the company an opportunity to keep members who aren’t using their Prime benefits much and would otherwise cancel.

There are doubtless many other ways that Amazon could restructure the Prime program to support profitable growth going forward. Maintaining the status quo, however, isn’t going to cut it as Amazon enters a new era where growth is harder to achieve.

As if Amazon CEO Andy Jassy’s migraine isn’t big enough with the challenge of redefining Amazon’s entire business Jassy to Employees: Redefine Amazon, he now has 14,000 of his employees (so far) who joined a Slack channel, called “Remote Advocacy,” intended to share a virulent pushback on Jassy’s surprise mandate that the majority of employees would be required to come into the office “at least three days per week” starting in May. According to Insider magazine, Jassy’s mandate said, “collaborating and inventing is easier and more effective when working in person.”

An internal Amazon survey from last year, found that 93 percent of respondents said their ability to focus when working from home was good, compared with only 68 percent saying the same about the office…and 80 percent of respondents said they would look for another job if Jassy’s mandate prevailed.

Of course, that’s what Jassy believes. However, a comment on the Slack channel reads, “Let’s prove that you do not have to be in-person to do good work!” Is Amazon’s “every day is day-one” and “out-of-the-box” innovative culture a leading example of a massive workplace shift emerging throughout all of commerce? Are the “worker bees” going to dictate when and where they will work? This is a great example of hubris when a leader is clearly out of touch with his employees. The popular top-down, command-and-control leadership style of the past doesn’t cut it with today’s multi-generational, inclusive workforce.

Is Commercial Real Estate the Canary in the Coal Mine?

As reported in the Wall Street Journal, “Office landlord defaults are escalating as lenders brace for more distress. The growing number of distressed office buildings reflects a recognition by owners and lenders that the robust return to office they had hoped for isn’t likely ever to materialize.”

The article goes on to say “hardly anyone is suggesting that office usage will return to its pre-pandemic rate. In a soon to be released report, commercial real estate services firm, Cushman & Wakefield PLC is projecting that the U.S. will end the decade with a record 1.1 billion square-feet of vacant space, compared with 688 million square-feet in 2019.” Empty office space is indeed a bellwether of a huge shift in how and where we work. It is a nightmare for both the organization and the landlord and an enormous financial burden for both. The canary may be the collapse of the workplace as we knew it. At the end of the day, the increase in empty commercial real estate space is a harbinger of a tsunami-type shift to working at home, and stay tuned, it’s only in its early stages.

Amazon Workers Build a Case

“Remote Advocacy,” according to Insider, was created “to advocate for remote work at Amazon” and seeks “data, anecdotes, and articles about the benefits of remote work.” In fact, Amazonians are creating a petition for the right to choose where they work. And while many of Amazon’s peers, including Apple, Google, and Salesforce, are requiring similar return to office demands, the “Remote Advocacy” does not seem inclined to give up the fight. An earlier version of the petition included a strong commitment statement: “We, the undersigned Amazonians, are responding by petitioning for the right to choose where to work, including remote locations, and presenting the data case against RTO.”

An internal Amazon survey from last year, found that 93 percent of respondents said their ability to focus when working from home was good, compared with only 68 percent saying the same about the office. The petition cited six broad reasons against a return to the office:

• Remote work increases worker productivity.
• Workers prefer location choice.
• Remote work allows for hiring and developing the best.
• Remote work saves money to Amazon and to Amazonians.
• Remote work improves work-life balance.
• In-office work affects parents, minorities, and people with disabilities.

And talk about getting tough, the petition read: “We the undersigned call for Amazon to protect its role and status as a global retail and tech leader by immediately cancelling the RTO policy and issuing a new policy that allows employees to work remotely or more flexibly, if they choose to do so, as their team and job role permits. We ask Amazon leadership to uphold Amazon’s mission to be the Earth’s Best Employer by creating working policies that increase equity and inclusion for all employees.”

Back to the Future

An impromptu Amazon survey found that 80 percent of respondents said they would look for another job if Jassy’s mandate prevailed. This was fueled by a lot of anger and confusion about the abrupt and unexpected delivery of the requirement, as well as the lack of clarity.

It’s back to the future for the tech behemoths. Ironically, the digital workforce is beginning to sound like workers during the Industrial Revolution. The coordinated and tenacious pushback by workers of the largest retailer in the world is reminiscent of the activity of the unions in the middle of the last century. The unions prevailed then and won many of the demands they were fighting for. The renaissance of unions is gaining traction, which is yet another headache for Jassy. To be an effective CEO today requires a special breed of charisma, empathy, foresight, critical thinking and a healthy dose of humility to recognize that not everyone thinks the way you do. I for one am fascinated, watching from the sidelines as Amazon trudges forward redefining itself from the inside out.

I’m not going to do an “I told you so” (but I just did). Actually, I’m sharing a leaked recording that a very alert Insider Magazine scooped up, catching Amazon’s CEO Andy Jassy delivering a brutally honest and provocative challenge for employees to redefine the company.

What’s in a Name?

According to Insider, Jassy urged employees to band together as the company tries to get through an unusually challenging time. He said there’s a lot of work to do to make progress across Amazon’s existing businesses, new businesses, teams, and the company’s culture. That will take “many months” and some of the company’s moves will be “misunderstood.” But he promised employees that the progress they make will “redefine” Amazon and better position the company going forward.

Jassy’s coaching urged employees to work as a team, as it’s usually a “series of things” — not one big invention — that make companies grow.

Yes, he said “redefine.” From the relatively new CEO that would be a big “wow” for casual observers. Amazon operates on a vast, conglomerated playing field – so redefining it is a serious business. However, I recently wrote an article that predicts this radical move in terms of Amazon’s retail business. Walmart Checks Another Box that Amazon Can’t. It bears repeating that Jassy is hitting speed bumps that he inherited from his predecessor. The long and mountainous challenge facing him is how to grow out of being a distribution platform. The future of retail is a 21^st century online and offline integrated platform including a multitude of product categories and services. Essentially, this is how archrival Walmart has been sprinting forward as Amazon has been “tweaking” its less than stellar strategic experiments.

Play It Once Again

As I have weighed in, Amazon has wasted the past several years and billions of dollars fiddling around with testing physical stores of all types and failing (a couple of Amazon Style stores are still breathing). It also over-predicted growth following the pandemic and retreated by shedding thousands of jobs and cancelling the planning and construction of unnecessary DCs. And Walmart marches on.

Here’s a lesson that keeps on giving: Visionary and genius entrepreneurs like Jeff Bezos can “parachute in” from some imaginary futuristic world that we common folks could not even begin to comprehend. They lay their magical “golden egg,” it hatches, and the world of finance goes wild. And if they’re lucky, they get sucked into the money funnel which quickly swirls upward, past Unicorn status, to, well, Amazon’s speed of light. But be careful, speed kills.

The real tricky thing for these entrepreneurs is to know when the meteor they are riding on is reaching the height where it needs to be reined in before it burns out. That means being disciplined, organizationally structured, and strategically planned for long term profitable growth. Timing is everything and if the entrepreneur is smart, he or she steps aside, eases into the board or leaves. If not, the brilliant, visionary business model can flame out as fast as it scaled. And there have been so many of those in this tech era we are living through. Whether or not Mr. Bezos stepped aside soon enough remains to be seen. His successor, Andy Jassy seems to be the professional businessman Amazon needs to define a new model going forward. We will watch closely for what his physical retail vision is once he stabilizes many wobbly parts throughout the rest of the enterprise.

Jassy Pulls No Punches

With Jassy’s very clear mandate to his employees, it should be clear to the marketplace that he understands it’s not business as usual. And this encompasses all of Amazon’s business lines. He was encouraging in his tone that while it will take many months, maybe longer, he said “if everyone works together as a team, Amazon will get through it stronger.” He also emphasized that while cutting costs was a necessity, (having laid off 18,000 workers and shutting down a number of long-term projects), Amazon would continue investing in areas of opportunity.

He said that “Amazon made sure to save the resources needed to pursue long-term, key strategic bets that could change broad customer experiences.” He mentioned a long list of investment areas including grocery; international markets; entertainment (music and video streaming); the Alexa voice assistant; personal devices; Zoox autonomous vehicles; Project Kuiper broadband satellites; and healthcare.

I must take a pause here to observe that grocery was the only retail entity mentioned as a long-term key strategic bet. He did not mention Amazon Style or any other retail model. However, Jassy did have this to say about his strategic bets: “The investment areas that I just mentioned is a breathtaking set of innovations that we’re pursuing. I don’t really know any other company that’s pursuing a set of innovations like that.” I wouldn’t bet on that Mr. Jassy . Are you watching Walmart? I assure you they have been watching Amazon and have capitalized on all of Amazon’s missteps and failed steps.

Every Employee Needs to Do Three Things

Jassy’s coaching urged employees to work as a team, as it’s usually a “series of things” — not one big invention — that make companies grow. He said every employee should do the following three things to help Amazon be successful:

• Focus: Amazon is not hiring as many people anymore. Jassy said with the focus we have with the workforce we have, “There’s so much that we can get done.”
• Be customer obsessed: Customer obsession has always been at the heart of Amazon’s culture, but it’s particularly important now. “These are uncertain and hard times. So, you have an opportunity to reprioritize and rethink what matters most for customers,” he said.
• Be an owner: Take ownership and be passionate about your work. He added at times of uncertainty, companies need to work closer as a team, stressing the need to be frugal to lower costs. “The competition is hard enough, and we need to work together as a team. Think about how we can be speedy and insurgent,” he said.

Go Team

There is a challenging path ahead, as well as hard decisions to make and yet to be made, Jassy said. “And you know what, that will not be the first time it’s happened, and it will not be the last time it happens. If we focus squarely on delivering for customers and realizing, all of us as owners, that we all have a piece of making this happen, and being part of the solution, I’m quite confident that we’re going to deliver an immense amount and redefine what it is to be Amazon. I feel really strongly that our best days are unquestionably in front of us, and I look forward to making that happen with all of you,” he added.

This is great coaching and an example of rallying the team. But honestly, what does it mean? Sure, every organization needs to iterate and refresh to stay competitive and a step ahead of customer preferences. But a full-scale redefinition? That’s ambitious by any measure. Retail is just one part of Amazon’s puzzle, but in my opinion, the roadmap is sitting in front of them hidden in plain sight. Just drive no more than 10 miles from Amazon’s headquarters and Jassy will see the future of retail staring at him in the face, and he can thank Doug McMillon for the preview of things to come.

Amazon just announced it was shutting down its charitable-donation platform AmazonSmile, effective February 20. Launched in 2013, AmazonSmile allowed customers to donate 0.5 percent of their purchase price to the charity or nonprofit of their choice.

Shortfall

With some $500 million donated to date, the company, in its infinite wisdom, has determined that AmazonSmile proved ineffective despite its good intentions. To soften the blow, Amazon stated, “ To help charities that have been a part of the AmazonSmile program with this transition, we will be providing them with a one-time donation equivalent to three months of what they earned in 2022 through the program, and they will also be able to accrue additional donations until the program officially closes in February. Once AmazonSmile closes, charities will still be able to seek support from Amazon customers by creating their own wish lists.”

In an email sent to AmazonSmile contributors under the subject line, “Amazon closing AmazonSmile to focus its philanthropic giving to programs with greater impact,” the company explained, “The program has not grown to create the impact that we had originally hoped. With so many eligible organizations—more than 1 million globally—our ability to have an impact was often spread too thin. The company will now focus on five key philanthropic programs: a housing equity fund, STEM education, community food banks, disaster relief and local charities.

Up to now, Amazon cut small checks to many individual charities, as detailed in its “Community Impact Report.”

• $366 million donated to “tens of thousands” of organizations in 2021
• $2 billion “committed” to creating and preserving affordable housing
• 23+ million meals delivered to families in 35 U.S. cities
• 20 million relief items donated after 95 natural disasters
• 600,000 students in 5,000 schools received computer science education through the Amazon Future Engineer Program

Amazon Knows Best

The company has made consumer centricity its hallmark. “The most important single thing is to focus obsessively on the customer. Our goal is to be the earth’s most customer-centric company,” Jeff Bezos said. The decision to end the Smile program challenges Bezos’ statement that “If we can arrange things in such a way that our interests are aligned with our customers, then in the long term that will work out really well for customers and it will work out really well for Amazon.”

My conclusion from this decision is that Amazon decided that its executives and shareholders know better how to distribute charitable giving, leaving its most important and vital stakeholders – Amazon customers – no say in the matter. And I am also cynical about Amazon “walking it’s talk.”

Corporate environmental, governance and social programs (ESG) are all well and good, but they are also the cost of doing business in the 21^st Century. They are no longer a unique point of difference. However, these policies are often nebulous and can border on virtue signaling.

On a stakeholder level, people give to charities because they want to see and feel the differences, they can make to causes they personally care about most. That was the unique point of difference that AmazonSmile provided.

Charities Hit Hard Times

Amazon should seriously reconsider its decision and give its customers, who matter most, a say in giving to the causes that matter most to them. “The bottom line is that discontinuing AmazonSmile is very bad for nonprofits,” shared COO Rick Cohen of the National Council of Nonprofits. “It couldn’t come at a worse time as nonprofits are facing declining donations, increased costs and increased demand for services.”

Giving USA’s most recent philanthropy report notes that in 2021, total giving by individuals, foundations, corporations, and others rose 4 percent in actual dollars, yet it was basically flat after adjusting for inflation (-0.7 percent). “The growth in giving did not keep pace with inflation, causing challenges for many nonprofits,” Laura McDonald, chair of Giving USA Foundation, said in a statement.

Inflation is a double-edged sword for nonprofits, reducing individual contributions just when its services may be most in need. And remember, inflation ended 2021 at 4.7 percent and rose dramatically to 8 percent at the close of 2022. The financial reality makes Amazon’s decision even more miserly.

Small Steps Build Leaps

“While Amazon may not think that the relatively small contributions that were made to many participants in the program make enough of a difference, it’s simply not true,” Cohen continued. “To the people that nonprofit was able to serve because of that small additional number of resources they had, it made all the difference in the world.”

Small contributions can have a big impact on small charities, like my Smile support of Water Street Mission in Lancaster PA, that serves the homeless and dispossessed in the community. “Smile was a nice program,” said Jack Crowley, president of the Christian ministry. “Another way for people to support us in a small way.”

Amazon is all about scale, but scale is relative. Compared to Amazon, which took in $470 billion in revenues in 2021, Water Street’s $12 million in donations and other revenues is chump change. But every dollar counts when you’re serving 400 meals and housing 170+ men, women, and children every day – 365 days per year – plus providing 3,000+ medical and dental visits and countless hours of life skill courses, job-training and counseling annually. And this is just one example of the difference local nonprofits can make in their communities.

Giving USA’s report underscores the power of individual giving to nonprofits. Trailing behind religious donations at $136 billion are education at $71 billion, human services at $65 billion, public benefit organizations, such as United Way and civil rights groups, with $56 billion, and bringing up the rear, environmental and animal organizations, at $16 billion. In 2021, individual giving was 15 times greater than that of corporations, totaling $327 billion. That is nearly 70 percent of the total, compared to the 5 percent of donations given by corporations ($21 billion).

Profits Before People

A truly consumer-obsessed company would increase donations to causes their customers care about. For example, how about matching each consumer’s 0.5 percent donation to their chosen cause to increase impact?

If the amounts AmazonSmile donates are already as low as it claims, such a matching donation would be a mere rounding error for the company but a significant bequest to the receiving organizations.

Former Amazon employee Adam Goldstein, who helped nonprofits claim their donations from the company, told AP News that what the company really cares about is profits, and its charitable giving is all about virtue-signaling. “I only got the sense that it was really just about Amazon’s bottom line, and charitable giving was marketing fodder,” he said and reiterated the value of every AmazonSmile donation to the nonprofits he served.

The moral to this story is the disconnect between what Amazon says and what it does. Sadly, for the consumers and the nonprofits they supported, Amazon appears to know better than their customers where impactful money should go.

The ironies that keep popping up at Amazon, post-Jeff Bezos’ departure as CEO, are truly astounding. And the one that stands out most is Amazon’s closing of all 66 Amazon Books in the U.S. and two in the United Kingdom.

A Vision Lost?

No one would argue that Bezos is a genius. Great entrepreneurs usually are (or they simply come up with a gee-whiz commonsense idea that nobody else had thought of). The only flaw in his greatness, as I have said before, is that he should have departed earlier before Amazon failed in its attempts at rolling out one physical store after another. Or even better, not opening any stores at all and losing billions of dollars for years. He would have avoided the costs of testing the waters in different categories. Amazon stores were doomed from the start in my opinion because Bezos had no one in his senior ranks who had any meaningful legacy retail experience. In short, Amazon is a technology driven distribution platform, not a physical retailer.

Amazon stores were doomed from the start in my opinion because Bezos had no one in his senior ranks who had any meaningful legacy retail experience. In short, Amazon is a technology driven distribution platform, not a physical retailer.

But now we have Andy Jassy who came to the CEO office via Amazon Web Services. I do believe he will trigger new avenues of growth. And, having tested all those waters, if opening more Style stores is a real revenue goal, he would be well-advised to find a successful executive from the “know how to do it” world of legacy retailing. But I digress.

One Big Irony

Let’s take a step back. Amazon Books. Are you kidding me? Think about it. Bezos builds the biggest bookstore in the world online in what might be described as “at the speed of light.” Amazon was crushing local bookstores and even the whales. I wrote about the fate of Borders and Barnes & Noble 12 years ago. Borders Today, Barnes & Noble Tomorrow My takeaway was the power and scale of Amazon, essentially flipping book lovers into a new digital world of instant gratification without ever leaving home. My point was that the old-world bookstores were heading into the dustbin of history, unless they offered book lovers something they could not get on Amazon.

So, let’s go back to 1995 when Amazon opened their first physical store in Seattle. There was a lot of head scratching among the pundits. After turning the book selling industry on its head and proceeding in no short order to wipe out the entire physical bookstore market, why would Amazon want or even need a presence in that channel?

At the time, I thought they were going to use their brilliance to strategically create a model that would be full of experiential delights for book lovers, compelling enough that consumers would flock to Amazon Books for special incentives, just as the fanatics do at Apple stores (personal engagement and a learning experience with the colorful T-shirt outfitted geniuses). An equivalent Amazon model integrated with online sales would have opened a new channel for growth.

But that didn’t happen.

And I totally believed they would use their technological superiority to gather data down to the local level of each of their stores to curate them with consumer preferences for books within a neighborhood trading area. The data could also guide their online business.

That didn’t happen either.

Now an Even Bigger Irony

Amazon Books are closed, and Barnes & Noble is being resurrected. The Brits are coming.

In 2019, UK hedge fund, Elliott Advisors acquired the ailing Barnes & Noble and its 627 stores for $683 million (down from its peak of 726 stores in 2008). At the time, experts were predicting ultimate failure for B&N. But not so fast. Elliott Advisors appointed James Daunt as CEO. Daunt, not a household name over here, had established an independent bookstore chain in London in 1990. In 2011 he was appointed to rejuvenate UK bookseller Waterstones. He did the job and by 2016 the company began to turn a profit.

Daunt was a former banker. So, while not deeply experienced in the bookstore business, his financial acumen was made apparent in the success he had with his own chain, and then turning Waterstone’s business around.

So, what’s Daunt going to do to reposition B&N? An article in Forbes gives us a peek into his early days. Financially he knew what had to be done to costs. He cut in half the number of B&N head office staff and fired 5,000 employees.

When the pandemic hit, Daunt told store managers to take every book off their shelves to “weed out the rubbish” as he put it. He put the store managers in control of inventories that would appeal to their local customers, refurbish stores, reorganize layouts, and reassess stock. According to the article, this overhaul is a strategy that he had deployed many times over the previous decade. Daunt said of the strategy, “One of the advantages of going bust is all of that complacency, that God-given right to exist, is finally punctured.”

Is It Sustainable?

One measure of his turnaround leadership is that B&N opened 16 new bookstores in 2022 and has plans to open another 30 in 2023. And how is this for irony: some of those new stores are in locations abandoned last year by Amazon Books. His plan seems to be working. According to Axios, “for the final full year prior to acquisition, B&N reported $108 million in EBITDA on a $125 million net loss and around $3.6 billion in revenue. A source close to the situation says the bottom line is significantly stronger today than it was then.”

Daunt is also planning smaller footprints. Hey, have you heard about small store strategies somewhere else? Full disclosure: from me. But beyond going local in smaller, more personable stores, there’s some advice I’d like to give him that is as true today as it was in 2011 when I deconstructed Barnes & Noble’s imminent threat from Amazon.

There is absolutely no reason for anyone to go to a bookstore today unless they are assured a compelling experience. The only way Barnes & Noble can avoid a Borders-like implosion is by offering a Starbuck’s café, book signings, education of some sort (how about how to write a novel), or other experiences that will cause the consumer to make an effort to visit. Nobody can survive the disastrous fate that “just selling stuff” assures, even on the internet. Because the exact same stuff, even new stuff, can be found and acquired instantaneously, anywhere, anytime, and for a lower price.Apple does not sell stuff, not even computers. They sell a highly experiential education first, and then it just so happens that they have the most innovative, beautifully designed, and cool digital devices in the world. And guess what, nobody even cares about the price. And guess what else, Apple is the fastest growing, most productive retailer in the entire history of global retailing.

What’s the Point?

I’ve been on this track for years. The customer is in charge and all generations of consumers want a reason to go to a store. If you’re a big box, it’s to solve a problem, for the value and the bonus of finding something as a personal reward. If you’re off-price, it’s the thrill of discovering a find. If you’re a department store, it’s the promise of the predictable at affordable price points. If it’s fast fashion , it’s the confidence that you will look like you know what you are doing trend-wise. If it’s a digital native gone physical, it’s allegiance to a tribe. If it’s a specialty store, it’s for a trusted curation. And if you’re a bookstore, it’s the potential of getting smarter, educating your children, escaping into a great story, and meeting like-minded friends in an environment that makes you feel good.

Whatever your model, if you just think of yourself as a retailer, and your place of business as a store or website, your offerings as transactions, and your pricing is only competitively valued, you will most certainly die.

Amazon’s Anguish

The “defining” pure-play ecommerce behemoth Amazon flourished over its first two decades, despite lacking storefronts and retail real estate. But that was then. The tailwinds that recently propelled Amazon through the pandemic have become headwinds with the cooling of ecommerce along with a distribution and fulfillment migraine that will not quit.

According to recent reports, Amazon’s online retail sales, which include store-based grocery delivery and pickup, dropped for the second straight quarter, falling 4.3 percent in Q2 to $50.9 billion. At the same time, the ecommerce giant’s operating expenses rose 11.9 percent to $117.9 billion, according to a company press release. Amazon made up for its ecommerce decline through fees from Prime customers and marketplace sellers which accounted for 57 percent of all units sold on Amazon in the quarter, the highest percentage ever. This was on top of their reporting a $3.8 billion net loss in the first quarter of Q1 of 2022, the majority coming from investments in more warehouses and staff.

Amazon and Kohl’s have been “distance dancing” for years, with Amazon leading. This began with nearly 90 Amazon pop-up-shops at Kohl’s, Amazon’s purchase of 1.7 million Kohl’s shares and Kohl’s decision to accept Amazon returns chain-wide.

To put Amazon’s distribution dilemma in focus, in 2021 Amazon’s shipping and fulfillment costs added up to $151.8 billion. Shipping, which includes sortation, delivery centers, and transportation costs amounted to $76.7 billion. According to Statista, since 2009 Amazon’s logistics cost, including both shipping and fulfillment, as a percentage of net sales have more than doubled, from 15.6 percent in 2009 to 32.3 percent in 2021. Ouch!

Putting On the Brakes

In recent years, Amazon has been overly aggressive in its attempt to fortify its infrastructure, investing $34 billion in 2020 alone, but it is now slowing that expansion dramatically. As was recently reported in USA Today, 18 additional Amazon warehouses in 12 states have been “paused.” This brings the total number of canceled, closed, delayed, or subleased Amazon warehouses to 40 this year. And while that may temporarily control the bleeding, it does little to address the underlying problem. Amazon has a huge logistics dilemma.

It is undeniable that even with ecommerce tapering a bit, it will continue to grow, and is expected to surpass $1 trillion in 2022, for the first time. That said, a 2021 Forrester report estimated that nearly three-fourths of retail sales in the U.S. will still occur in physical stores in 2024. The critical interplay between online and offline, along the customer’s path to purchase has been firmly established in the world of “new retail.” And while the store will be continuing to morph and evolve, it will remain essential in the customer experience equation.

Advantage Target

Despite the cost of maintaining physical retail real estate, profit margins in physical retailing continue to be superior to that of pure ecommerce, due to the exorbitant cost of moving products from the warehouse, distribution center, or store to our front door.

Amazon’s monster warehouses are strategically located to serve millions of households often hundreds of miles away. Meanwhile, the 4,700+ Walmart’s, 1,900+ Target stores, and the 800+ Costco’s where we shop in person, online, and/or both are located in our very neighborhoods.

Target, whose ecommerce accounts for 18 percent of sales, has been utilizing its 1,900+ stores as mini fulfillment warehouses since 2017. They service more than 95 percent of its online orders from store inventory, which has dramatically saved time and cut fulfillment costs. But in October 2020, during the height of pandemic lockdowns, with digital orders skyrocketing the company opened its first sortation center to evaluate a new way to operate creating more efficiency and further shaving fulfillment costs.

“Rather than team members managing packing and sorting packages in a store’s backroom, sortation centers take on the sorting process, saving our store teams time and space so they can fulfill more orders and reach guests faster at a lower delivery cost for us,” the company said in a blog post.

Target currently has six sortation centers across the country and has just announced plans to add three new centers, two in Chicago area and a new facility in Denver. According to executive vice president & COO John Mulligan Target’s existing six sortation centers handled “4.5 million packages in Q1, a number that’s expected to grow significantly throughout the year.”

Bulk orders are still taken from stores and arrive at sortation centers on pallets. They are then placed on conveyer belts where staffers oversee the delivery logistics. Packages going a short distance are routed overnight and delivered by drivers from Target-owned delivery service Shipt. Those going farther are delivered by a third-party carrier, such as the U.S. Postal Service.

Currently, the prototype Minneapolis sortation center handles orders and goods from all 43-metro area stores and has the capacity to deliver 50,000 packages a day. This is all part of Target’s “stores as hubs” thesis, which Amazon had better pay attention to.

This brings me to the subject that Robin Lewis has extensively covered an Amazon/Kohl’s mashup. As have I!

Amazon Needs Doors, Stores, and Floors

Amazon and Kohl’s have been “distance dancing” for years, with Amazon leading. This began with nearly 90 Amazon pop-up-shops at Kohl’s, which ended in March 2019. Then the Kohl’s chain granted Amazon the right to buy 1.7 million Kohl’s shares — about 1 percent of the outstanding shares in April 2019. That was shortly before the announcement of Kohl’s decision to accept Amazon returns chain-wide in July 2019.

As my Forbes.com colleague Steven Dennis recently reported, “Amazon’s future growth will be increasingly tied to brick-and-mortar retail.” And despite their recent closing all 68 of their U.S. and U.K. non-food Amazon Books and Amazon Four Star locations, they need a physical store presence for three compelling reasons. And both could be facilitated by a Kohl’s alliance.

Back-of-House Needs

Kohl’s would like to reduce its store footprints and has plans for up to 100 smaller, 35,000- square-foot stores, over the next four years. This amounts to about half of the chain’s 80,000- square-foot average unit size. For Amazon to be able to capture and reimagine 40,000-square-feet, neatly sprinkled across 1,100 Prime neighborhoods could solve several painful problems that have contributed to their red ink flow.

Satellite Micro-Distribution Centers

Cutting last-mile costs is essential for Amazon to lift profitability. Additionally, Amazon needs to better segment and localize last-mile distribution. It seems that many smaller, highly mechanized sortation and micro distribution centers located within dense Prime neighborhoods could be just the ticket to cut last-mile costs, while decreasing Amazons’ carbon footprint. Additionally, the move would enable more practical use of both autonomous vehicle and drone delivery.

Showrooms to Boost Fashion Apparel Sales

Complementing the back-of-the-house “pick and pull” centers would be the introduction of new showroom and sales centers to lift Amazon out of the basic blues. Where better than from 1,100 Kohl’s stores?

Amazon has now surpassed Walmart as the nation’s largest seller of clothing. However, the dominant factor for Amazon’s fashion success comes from their third-party sellers. Amazon has been unable to “crack the code” on the more fashionable, and profitable side of private label fashion, as Target’s “Tarjay” alter ego has. Only about nine percent of Amazon sales are private label, and basics at that. AmazonBasics to be more specific. For Amazon to build a private label treasure trove of the likes of Target, they need physical engagement touchpoints, doors, stores, and floors.

This is not lost on Amazon as it is their primary driver behind their AmazonStyle prototype store introduced in Glendale California in late Spring. However, to scale such a concept in a meaningful way would take many years and much money. Doing it at and with Kohl’s would streamline the process.

Heavy Lifting Needed

I recognize the machinations and complexities involved in both streamlining and merging Kohl’s products and their brands with that of Amazon’s private label fashion brands. I also recognize that fact that Amazon’s track record in store-based retail has been less than stellar. But both Kohl’s and Amazon are dealing with major pain points that will continue to hamper their growth and profitability.

I believe combining Amazon’s bankroll and their technology prowess with Kohl’s CEO Michelle Gass’s retail chops, has the makings of brand transformation on multiple fronts. As I’ve stated going back to January 2020, for Amazon to truly build the kind of traction they want and need in fashion, they need to get those products into stores and 1,100 Kohl’s locations would be an ideal place to begin.

Back in the day we called them “knockoffs.” For example, brick-and-mortar retailers would copy a brand’s best-seller summer dress and design a near duplicate for their own private labels. This still goes on, with just enough differentiation to avoid counterfeit status (street vendors selling “Rolexes” and “Louis Vuitton” bags notwithstanding). In China, however, where the word counterfeit does not exist (metaphorically), many manufacturers view “copying” as a compliment to the item’s originator. So, with today’s pragmatic Chinese menu, you get an original Chanel bag from assembly line A and an exact knockoff from assembly line B.

Knocking Off Knockoffs

Now according to a recent WSJ article, under the growing duress of antitrust scrutiny by enforcers and Congress, as well as many of the third-party brands sold on its marketplace, Amazon has been drastically cutting back on the number of items it sells under its private label. While disappointing sales were cited as a reason for doing so, the larger reason are the issues with knockoffs of many winning third-party brands in Amazon’s own private label lines.

To put it bluntly, when wholesale brands and physical retailers operate on Amazon’s digital platform, Amazon owns their data and through the use of precision analytics, can accurately and swiftly identify the winners and losers across a multitude of different brands.

The big difference between how old-fashioned brick-and-mortar retailers knocked off wholesale brands and Amazon copying its third-party brands and retailers, is the ease, accuracy and speed with which Amazon can do the replications. To put it bluntly, when wholesale brands and physical retailers operate on Amazon’s digital platform, Amazon owns their data and through the use of precision analytics, can accurately and swiftly identify the winners and losers across a multitude of different brands. Amazon also prioritizes its own brands in its web search algorithms, so for example, that look-alike Stuart Weitzman sandal shows up at the top of search results. This habitual Amazon copycatting got the House of Representative’s Judiciary Committee’s attention and it referred the matter to the Justice Department for possible criminal conduct. Specifically, the allegation is that Amazon executives lied about the company’s use of seller data and “manipulation of consumers’ search results,” according to Retail Dive.

Uneasy Alliances

One CEO of a major retailer I talked to about all of this said, “Once you sign a deal with Amazon, it’s like dancing with the devil,” referring to Amazon’s access to competitive intelligence and how they manipulate it. “On the other hand,” he said, “Amazon’s global reach and its billions of consumers cannot be ignored.” Dance with the devil or a rock and a hard place. You decide.

Of course, Amazon denies that its interests conflict with the retailers and brands using its marketplace platform. Following a harsh House report, Amazon said, “Amazon and third-party sellers have a mutually beneficial relationship, and our interests are well aligned.” Sounds to me like typical communications department spin. The same report revealed that inside Amazon, third-party retail and brand sellers were referred to as “internal competitors.” Well, so much for putting lipstick on the proverbial pig.

Accordingly, the Federal Trade Commission has been investigating Amazon’s competitive practices as well as the Securities and Exchange Commission is examining its business practices. The article did point out that even if the company gains an advantage from seller data, Amazon’s private labels do not necessarily dominate its site. Marketplace Pulse found that in some categories Amazon’s private labels represent less than one percent of sales, although clothing, shoes and accessories are at nine percent. No surprise here as apparel’s margins are much higher than other basic consumer goods. Amazon’s total private label business is comprised of 243,000 products across 45 different house brands as of 2020.

While top Amazon executives considered they might completely exit private brands due to the constant beating by the government and their own third-party participants, in addition to its small percentage of their overall business, they decided not to take any action except for dumping under-performing brands.

As reported in Retail Dive, Amazon said, “We never seriously considered closing our private label business and we continue to invest in this area, just as our many retail competitors have done for decades and continue to do today.” Sounds like hubris to me. As I mentioned, Amazon has an impressively accurate and speedy intelligence data gathering process to compete with their third parties.

New Marketplaces

Here are a few coming attractions Amazon needs to keep an eye on: new marketplace launches by Walmart, Nordstrom, Macy’s … and most likely, Target. It will be interesting to see how these iconic retailers shape their models, and if they will succumb to the same questionable competitive intelligence data gathering and knockoff methods used by Amazon. Imitation can be seen as the greatest form or flattery, or more realistically in today’s terms, the price of doing business. The ultimate judge will be the customer. Authentic or ersatz? The reputation and trust factor of any retailer or brand is at stake.

Although they say they don’t care about conformity, next-gen consumers sure are thirsty for access to hot ticket brands. H&M is the latest online fashion retailer to heed the call by hosting competing brands on its online marketplaces. Over 13 womenswear labels and 15 menswear labels will be added to nearly 20 existing labels in H&M’s ever-expanding brand portfolio. The rollout is starting in Sweden and Germany, with intent to penetrate into more of the brand’s 54 existing online markets.

So, why the rapacious pace of acquisition? A whopping 66 percent of customers prefer to shop at online marketplaces rather than individual brands. For context, Amazon and Walmart surpassed 100,000 sellers on their online marketplaces back in 2021, while H&M is still closing in on 40. Online marketplaces aren’t an arena that brands and retailers can afford to overlook, as nearly half (48 percent) of online shoppers go straight to a marketplace to do their thing.

Increased revenue is the #1 benefit of selling on an online marketplace. Brands that sell on a single online marketplace see a 190 percent jump in revenue over those that sell on just one channel. But that’s not all. Brands using online marketplaces also benefit from all of the consumer trust from the marketplace they’re selling on.

Core Advantages of Building an Online Marketplace

Increased revenue is the #1 benefit of selling on an online marketplace. Brands that sell on a single online marketplace see a 190 percent jump in revenue over those that sell on just one channel. But that’s not all. Brands using online marketplaces also benefit from all of the consumer trust from the marketplace they’re selling on. This is great for young upstart brands who don’t have the advertising, funds or time to build a reputation.

Potential market domination is the most obvious selling point to creating your own online marketplace. Once you become known as the destination for everything, purchasing becomes automatic. With that said, apparel customers tend to be a little bit more finicky. But if the #1 online behemoth is able to reap market share with all of the negative press, shipping delays, and worker shortages, it makes sense that more retailers are throwing their hat in the ring.

The leading online marketplaces in the U.S. are Amazon, eBay, Walmart, Etsy, and Target, respectively. To put the current success of online marketplace sales into context, Amazon’s online sales now comprise 34.5 percent of all ecommerce fashion sales. Amazon has been building up their private label offering in addition to hosting competing brands. For every item sold on Amazon, the marketplace takes a referral fee that falls somewhere between 8 to 15 percent.

The Other Side of the Coin

Marketplaces grew at 2x the rate of general ecommerce growth last year. But it isn’t all roses and butterflies. As H&M will soon learn, hosting competing brands can get dramatic – and litigious – very quickly. Just take a look at online free marketplaces OfferUp and LetGo, which are being sued after a “verified seller” gunned down two parents of five children who were trying to purchase a SUV for their family. All you need is an email address to become verified on these platforms, which critics argues isn’t enough due diligence to call someone a “verified seller.” So, as you can see, providing customer security is as essential to the longevity of an online marketplace, even a free goods exchange marketplace like LetGo or OfferUp. Customer expectations are even higher when there’s money being exchanged for goods.

Beyond protecting consumer safety, by properly vetting verified sellers and homing in on counterfeiters, marketplace hosts are also accountable for ensuring they offer competitive prices on all of the products being sold on their platform. This has gotten a lot harder recently. The annual inflation rate for the United States is the highest it has been since January 1982, coming in at 7.9 percent for the 12-month period ending in February 2022.

Price is currently a differentiator for many customers out of necessity. But this doesn’t mean they’ve abandoned their values. Today’s customers are searching for the best brands, with the most feel-good ethos, at the most affordable price points, with acceptable shipping and customer service timeframes. When they can’t have it all, many will settle for low prices and fast shipping on CPG. Apparel purchases, on the other hand, are more ethos and excitement driven.

Legacy Brands Lend Credence to Online Marketplaces

Variety is the spice of life, but legacy brands give customers something even better – a product they can trust. A few things happen when a legacy brand like Crocs or Levi’s partners with an online marketplace. The marketplace benefits from the brand’s built-in customer base and it’s elevated by the brand’s presence; whereas the brand is exposed to a new sales funnel, a new customer demographic, and may be able to establish a presence in areas that the company’s current shipping network doesn’t allow.

H&M is all over this trend, as it puts the company on a fast track to establish lasting notoriety well beyond the current demand for fast fashion. Labels currently hosted under “H&M with Friends” include easily identifiable classic denim labels like Lee and Wrangler. You’ll also find heavy hitters like Fila, Superdry, Crocs, Kangol, and Buffalo.

While this strategy makes sense for a fast fashion giant like H&M, not every brand is cut out to be its own marketplace. Most don’t have the necessary shipping infrastructure in place, or the resources to hire an active customer service team. Expanding into an online marketplace should always be part of a strategy to increase customer satisfaction, rather than just growing for growth’s sake.

In Closing

It’s all about strategy. Any brands a retailer takes on need not only to fit with the existing brand image, but also offer customers something that the brand’s inventory doesn’t provide. Until you get to megalith status, à la Amazon and Walmart, there’s no excuse to host brands that compete with your private label inventory. Start by creating partnerships that bridge the gaps in your existing offerings, then watch as your brand presence evolves.

To nobody’s surprise, the Covid-19 pandemic gave Amazon a huge market share boost. So far, the ecommerce giant has been able to maintain most of its pandemic share gains even as consumer shopping patterns have started to normalize.

However, the combination of surging costs and slowing growth are taking a severe toll on profit margins. The rising pressure on Amazon’s core ecommerce profitability raises serious questions about the financial sustainability of its business model.

Red Ink Piling Up for the Retail Business

In late April, Amazon reported that its first-quarter operating income plunged to $3.7 billion from $8.9 billion a year earlier. Meanwhile, year-over-year sales growth slowed to 7 percent.

Whereas many retailers are benefiting from a channel shift from ecommerce back towards stores (providing a margin tailwind at least partly offsetting cost inflation), Amazon’s lack of brick-and-mortar success and its emphasis on ultra-fast deliveries are aggravating the impact of inflation on its cost structure. That has left the ecommerce leader with no particularly attractive strategic options.

These results fell within the guidance ranges Amazon had provided in early February. But the deterioration in Amazon’s profitability still shocked the market. The company has typically provided very conservative earnings guidance, so many analysts and pundits were expecting much higher profits.

Amazon’s subpar results were particularly surprising because its Amazon Web Services cloud computing business continues to shine. AWS posted a record $6.5 billion segment profit last quarter: up 57 percent year over year. Meanwhile, the rest of Amazon’s business lost nearly $3 billion, consisting of a $1.6 billion operating loss in North America and a $1.3 billion operating loss in the international segment.

The losses in Amazon’s core business last quarter weren’t a fluke, either. Profitability began to deteriorate rapidly in the second half of 2021. By the fourth quarter of last year, the North America and international segments were both losing money. Amazon’s streak of dismal results is set to continue this quarter. Even the high end of its Q2 earnings guidance calls for operating income to fall more than 60 percent year over year to $3 billion.

Fulfillment Costs Are Soaring

Rapidly rising fulfillment and delivery costs largely explain Amazon’s deteriorating profitability. Excluding AWS, Amazon’s revenue increased just 3 percent year over year in the first quarter, reaching $98 billion. But combined fulfillment and delivery costs jumped 18 percent to just shy of $40 billion: an increase of more than $6 billion.

That’s clearly unsustainable. Fulfillment and delivery costs as a percentage of sales (excluding AWS) increased by more than 500 basis points year over year last quarter. This accounted for the bulk of Amazon’s profit decline.

To be fair, Amazon attributed $4 billion of incremental costs to overstaffing and excess fulfillment network capacity. Management sees those as short-term inefficiencies that will fade as the business grows into its current staffing and fulfillment footprint.

Yet even if some of these cost headwinds will soon start to fade, others are ramping up. Labor costs continue to rise, and a unionization drive at Amazon warehouses could add to the pressure there. Meanwhile, fuel prices have increased dramatically compared to January and February, so delivery cost pressures will get worse in the near term.

Boxing Itself In

It’s no secret that the Prime membership program has been the biggest driver of Amazon’s long-term growth. When it introduced Prime in early 2005, Amazon still mainly sold books and other media, and annual revenue was less than $7 billion. Since then, the company has used the allure of fast, free shipping with no order minimum to convince hundreds of millions of consumers worldwide to shift much of their spending across a wide range of product categories to Amazon. That has helped it add hundreds of billions of dollars to its top line.

Yet that growth has come at a cost. At the time of the Prime launch, Jeff Bezos described the program as “expensive for the Company in the short-term.” It is proving even more expensive in the long term. Over time, Amazon has added many bulky products to its merchandise mix while accelerating Prime delivery speeds from two days to next-day or even same-day service, driving up fulfillment and delivery costs.

In effect, Amazon has trained consumers to demand ultra-speedy deliveries, but not to pay for that service (except through an annual fee). In reality, though, delivering goods to consumers’ doorsteps is not free. On the contrary, it’s more expensive than the traditional brick-and-mortar model.

As a result, Amazon loses money on many orders. As a consumer, it’s convenient to be able to order a single $5 item and have it delivered the next day for free. But there’s no way for Amazon to cover its costs on an order that small. That puts it in an awkward situation where it potentially makes less money as Prime members make more purchases on Amazon.

No Easy Solutions

Amazon is already taking steps to offset cost inflation. During the first quarter, it raised the price of an annual Prime subscription from $119 to $139 and the price of a monthly plan from $12.99 to $14.99 in the U.S. In April, it implemented a new 5 percent surcharge for third-party sellers that participate in the Prime program via the Fulfillment by Amazon service.

These moves may help bolster Amazon’s profitability in the quarters ahead. On the flip side, Amazon risks an uptick in subscriber churn by raising prices just as consumers are facing higher costs for basic necessities and the chance of a recession is rising.

Charging sellers additional fees might seem like a better bet. Many third-party merchants selling on Amazon don’t have any viable alternative sales channel. But if they can’t pass their higher costs through to customers, those sellers will ultimately be forced out of business, denting Amazon’s future growth.

This highlights the bind Amazon has put itself in. Whereas many retailers are benefiting from a channel shift from ecommerce back towards stores (providing a margin tailwind at least partly offsetting cost inflation), Amazon’s lack of brick-and-mortar success and its emphasis on ultra-fast deliveries are aggravating the impact of inflation on its cost structure. That has left the ecommerce leader with no particularly attractive strategic options.

Waiting for the Future?

Amazon’s leadership may view today’s concerns about rising costs as transitory. The company has been investing in advanced robotics technology for a decade. Over time, that could make its fulfillment operations less labor intensive. Amazon has also made a big commitment to electric delivery vehicles, which will reduce the impact of fuel prices on its bottom line (not to mention being better for the planet). Finally, as autonomous trucks and delivery vehicles become available, delivering packages will become far cheaper.

However, nobody is producing electric trucks or delivery vehicles at scale today. It will probably take over a decade for Amazon to fully electrify its delivery fleet, simply due to supply constraints. Autonomous delivery vehicles aren’t ready for primetime, either.

Thus, Amazon’s thorny cost problem isn’t going away anytime soon. And the arrival of electric and autonomous delivery vehicles at scale won’t be a panacea, either. Other retailers will have access to the same technology and could use autonomous vehicles to cost-effectively fulfill and deliver ecommerce orders from their existing stores within hours.

Moreover, after reliably generating positive cash flow for many years, Amazon has burned through nearly $20 billion over the past year. For now, it has plenty of cash, but its recent cash burn adds urgency to the company’s underlying need to fix its profitability problem. Amazon’s response to this conundrum (e.g., raise prices further, cut costs, reduce investment, etc.) will have huge ramifications for the broader retail industry over the next decade.