Jason & Scot Show Episode 291 – Amazon Q1 2022 Earnings

A weekly podcast with the latest e-commerce news and events. Episode 291 is a hot take on Amazon Q1 2022 earnings.

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Amazon released their Q1 earnings for 2022 on Thursday April 29th. In this episode we do a deep dive into all the details.

Key Topics:

• Declining macro economics
• First quarter 1P sales were down year-over-year for the first time in two decades, as it had to comp against a very strong Q1 2021 which was elevated by the pandemic.
• AWS getting a strong boost from the pandemic.
• Ads continue to quietly be a bright spot for Amazon
• Andy Jassy’s first annual shareholder letter
• Amazon’s new “Buy With Prime” offering for DTC sites.

Episode 291 of the Jason & Scot show was recorded on Thursday April 29, 2022.

Transcript

Jason:
[0:23] Welcome to the Jason and Scot show
this is episode 291 being recorded on Thursday April 28 2022 I’m your host Jason retailgeek Goldberg and as usual I’m here with your co-host Scot Wingo.

Scot:
[0:39] Hey Jason and welcome back Jason and Scot show listeners
it is a Thursday in April late April and that means it’s Amazon results so we’re going to take everyone through the results that came out today
talk a little macroeconomic and a little bit of ecom’s if we have time
Jason I wanted your hot take on Ilan buying Twitter are you freaking out.

Jason:
[1:04] I am not freaking out but I’m having to have a lot more conversations with people about it than I might have expected people are super interested in following it closely.

Scot:
[1:14] Yeah I had.
I think I’m not freaking out but I think one because everyone is freaking out they may be looking over a little prick
little kind of idea I had which is if the logic path goes like this the dad model on Twitter hasn’t worked
since they went public that hasn’t really grown or do anything the subscription model is tricky and if you do have Elon doing this he obviously understands e-commerce really well with Aziz.
Help create PayPal yeah I think it could be an interesting experiment
to do a hybrid some kind of a subscription type program but also I think if anyone could take a run at actually doing e-commerce right inside of Twitter building on Marketplace of some kind I think that would be interesting to see him take a run at that
now we could have the whole if you don’t go to a cocktail party to buy stuff
conversation but I do think there is something there where if you are a influencer and you know obviously Instagram is starting to figure this out all the live streams
I think there’s something there that Twitter could monetize so we’ll see that’s kind of what I’m thinking more versus make you know.
That kind of losing my mind.

Jason:
[2:34] I think if you’re a traditional Advertiser that has for what like.
Who benefited from the advertising model like you’re concerned because there’s potential disruption but I’m with you I think there’s the.
The rate of change is likely to increase it Twitter like Twitter had been you know somewhat stagnant for a while so like I’m always excited to see interesting new experiments and trials so
I suspect we’ll see some.
Some clever new ideas at least attempted to be implemented in that and you know some of them I’m sure we’ll be cool side note and I maybe shouldn’t disclose this on the podcast.
I’m a pretty long term user of Twitter I was like in the first million users I’m pretty sure I’ve never seen an ad on Twitter.

Scot:
[3:18] I see him all the time.

Jason:
[3:19] So what I haven’t figured out why it is I don’t see them like I have a verified account and I don’t know if there’s some.
Oily status where like they don’t show as many ads but I also primarily use Twitter through apps and it doesn’t seem like any of the apps show ads do you use a web browser or do you use like.
Tweetdeck course.

Scot:
[3:44] Phone I use that wealth the apps.

Jason:
[3:48] Use the Twitter app.

Scot:
[3:50] Yeah I use the Twitter app the old apps don’t really work anymore because they limited them to like some they’re all hobbled at this point.

Jason:
[3:57] So except for tweetdeck which is owned by Twitter it’s like an alternative a poem by Twitter that I stole.

Scot:
[4:04] Okay I didn’t know that still existed.

Jason:
[4:07] Um yeah so I have like hesitated to Deep dive into why I don’t see ads because I’m grateful that I owe but but.

Scot:
[4:16] Show me Aunt as the chief digital ad officer you should be seeing ads though I do think that’s pretty important.

Jason:
[4:23] Every time I watch a TV show in my wife fast-forward through all the ads I’m like like I say you realize Those ads paid for this house right and.

Scot:
[4:30] Yeah.

Jason:
[4:32] I’m sorry tell the advertisers listening.

Scot:
[4:35] Well I saw on Twitter that you have been spending some time in the meadow verse what’s that all about.

Jason:
[4:40] I have its kind of fun I got invited to a conference that was put on by meta AKA Facebook and
the reason I was interested in it was not necessarily the topic
they were hosting this 800% event in the middle verse so they sent us all their latest headsets which is the.
Used to be called the Oculus quest to now it’s called The Medic West too.
But I hadn’t really looked at their Hardware since the first generation that you and I bought the Oculus Rift which required a,
pretty beefy computer and a bunch of sensors and cables and I was pleasantly surprised by The onboarding Experience like you just take this thing out of the box doesn’t have any cables doesn’t require any external sensors.
And it seems like it works way better and easier than the old Hardware so that was kind of fun and it was kind of fun to see,
the early iterations of how.
Facebook in Visions like 200 people having a virtual meeting in a in the metaverse I’m not sure.
It’s a super exciting or that the experience has been nailed yet this is like very much a 1.0 kind of thing but it’s fun to see you know people inventing new things.

Scot:
[5:57] Cool yeah a lot of those things you just kind of like you fiddle with your avatar for a while then it’s you’re sitting there watching other people you’re like what is going on because their hands are moving all weird as they’re like typing or something.

Jason:
[6:09] Yeah they have a very like accurate looking avatars and I’m like that’s the last thing I want exactly.

Scot:
[6:15] Yeah I want to be Brad Pitt for crying out loud number one reason to go in the meadow Reese’s to look better.

Jason:
[6:21] Indeed indeed well they apparently opted not to do that for this conference.

Scot:
[6:26] Well we we had mentioned doing a web three deep dive and I got a lot of listeners that reach out and said they would really like to see that so we need to put that on our agenda.

[6:42] Yeah yeah yeah you know what I mean Dad request for us to do a podcast.
Your pedantic so you want to kick us off with the little view of what’s going on the macro before we jump into some micro.

Jason:
[7:01] Yeah so in general the macroeconomics are kind of a Debbie Downer and you know I am spending an awful lot of time talking with retailers and brands that are kind of planning for.
Wean sort of next 9 months as a result of that but kind of frame this up.
You know the Marquis – macro is inflation which there’s a bunch of ways to measure it it’s a wildly imperfect thing but the the most popular foot like General inflation number we use,
we’re now at 8.5 4% which is a 40-year high so inflation is very high.
Another one we look at is like various credit worthiness and so like mortgage delinquencies is a good proxy for consumer health.
And mortgage delinquencies aren’t alarmingly High yet but they’re in the last quarter they ticked up.
And so that that is a potential early indicator.
A bigger indicator that we don’t like is to see the savings rate Decline and so historically like for the last 10 years I would say.

[8:20] The average savings rate has been about eight percent so consumers save about eight percent of their income,
during the pandemic we had the highest savings rates ever because consumers got really conservative and they were gifted a lot of extra money in terms of economic stimulus so it like briefly pipe.

[8:38] Spiked over 20% but now it’s back down below the it’s at a 10-year low now so it’s at 6.6 percent so that.
It says that all of that inflation has kind of sucked all the savings out of the the US consumer and we’re starting to see more defaults,
I don’t have data on it but one that I’ve heard is alarming is we’re starting to see a high default rate on all those buy now pay later services that everyone you know has gotten attached to.

[9:07] I’ve been in the housing market lately and for those that don’t know the you know mortgages are starting to to really shoot up so that the.
Traditional 30-year fixed mortgage rate is up at 5.1% now.
It was it that during the pandemic it was down below 3.
And then you know a particularly alarming one is GDP,
which you know we had been kind of growing in that that one to two percent a quarter and you know we just got the the.

[9:45] The Q I want to say I think it’s just Q4,
GDP and it was expected to be up 1% and it was actually down 1.4 percent so the economy shrunk witch.
Was alarming and then you roll all that up.
And you and I have talked about this being a little bit of a mixed bag but there’s these consumer confidence index has and the one I look at is the University of Michigan survey,
and so they have it kind of indexed against a hundred and so right now the the consumer confidence survey is that a five-year low so it’s,
lower right now than at any point during the pandemic and it’s it sixty five point seven and so often.
The consumer confidence our roads before the consumers actual Financial Health our roads but spending tends to correlate with consumer confidence more than.
Then actual economic macro so so that’s a particularly alarming one to the retailers,
the one thing I would say is bright is as I’ve talked about before you know in general retailers did really well in the pandemic and and sales,
um we’re quite a bit higher over the last two years,
and we haven’t really seen them take down there the rate of growth has dramatically slowed so March retail sales versus a year ago was up 5.5 percent.

[11:14] You know that’s up forty percent versus two years ago and q1 of this year was up 10.8 percent versus last year
it’s up thirty percent versus two years ago so retail sales are still strong what you know some people would rightly point out however is what we what’s hard to measure is how much of those.
Of those increases in retail sales and q1 were actually from that inflation right so you know unit sales could have been down significantly because prices were up so much.

Scot:
[11:48] Yeah I just one of our interns handed me a note the GDP is a quarterly so that’s the q1 result they do frequently update those kind of after the fact that they get more data and so but I don’t
usually it’s kind of fractional so I don’t think it’s going to swing to a positive sadly.

Jason:
[12:07] Yeah so you roll all that up and let me just say like we went into two strong years in January and February a lot of people are planning a lot of aggressive.
Investments and I and it feels to me like people are like really curtailing those investment plans as and are starting to hunker down for for potentially rough economic year,
so we shall see.

Scot:
[12:32] Are so when you’re out there talking to clients or few people kind of saying because right now everyone’s maybe they already done it maybe they’re kind of making their fourth quarter planning decisions right so it’s kind of like a very very,
cloudy crystal ball.

Jason:
[12:49] Oh yeah I’ve I’ve already like finished a bunch of holiday campaign plans so I’ve been talking like Christmas toys Non-Stop,
three weeks which is a little weird but yeah and you know they’re like they’re there is a inflation layer to everybody’s holiday plans right now,
you know hopefully we get to use the the optimistic version and not the pessimistic version but everyone’s planning for you know potentially going into Q4 in not great shape.

[13:30] Yeah yeah but I mean you’re going to tell me not to worry about any of that because Amazon made a bazillion dollars right.

Scot:
[13:36] Well want want also not great news on the Amazon front so that part of the setup here is we are lapping q1 2021 where covid will a huge
Tailwind for for Amazon we were still we weren’t shut shut in per se are locked down but there was still you know.
Very little air travel and people weren’t out doing stuff and then also last year there was a prime day and q1 so that’s not this year so that swings the number some to some degree
and then just a blanket statement whenever Jason I cover these things we always go with the data that excludes the,
any changes from Financial currencies what Wall Street would call X FX so so – is the X any any.

[14:25] Currency kind of changes so that neutralizes the currency stuff which is actually been oscillating quite a lot with the the whole Ukrainian Russian thing
so but we take that out so we try to get kind of a neutral currency view of what’s going on
so it was really interesting earnings this year are this quarter because you know we had Netflix coming out and really kind of miss their number and,
you know there’s a family of public companies that everyone thought there was a new normal but it was actually this kind of covid-19,
pull forward that is gone away so Zoom Peloton are in that camp and now it’s looking like maybe Netflix’s there.

[15:11] Yep Shopify shopify’s well I think Shopify has a whole nother world of hurt we’ll talk about here.
The other the other surprising thing of Netflix is just kind of randomly on the call we tasting the co kind of said oh and we’re looking at an ad model and I think I’d like surprise
people inside the company hadn’t even been briefed on this so that’s good for you so so good news I think maybe an ad models coming to Netflix so more more ads for you to go sell and do your thing.

Jason:
[15:39] Yeah but honestly I think no one heard that because he’s right before that he said we’re going to stop letting everybody share passwords I think that’s.

Scot:
[15:47] Yeah it was like what.
So yeah so you can tell they’re they’re scrambling to kind of they’re opening their minds to things they never thought that they would look at before because the subscription actually had a loss of net subscribers
even when you take out the head turned off Russian subscribers don’t even if you take that out it was negative and then Google was really interesting because you and I I think we’re actually
pretty clearly some of the first people to talk about how worried we were about the IDF a some people call this a TT I do
I don’t like to call that I call it the idea phase so the the blanket term will just use as the the Amazon the Apple privacy changes
and Google’s results were interesting because Google has a lot of businesses inside of their Google core is immune from the Apple privacy changes because they are the search partner of Apple.

[16:43] So you just go right in there they have access to all the delicious cookies and all that kind of stuff and then also they you know search is nice because you get this intent in the form of the search term so you don’t have to guess what someone’s trying to do and use all this
add technology to figure it out that being said the YouTube part of the business we got hammered and
reading through because apples a big partner of theirs but also a competitor
you kind of like you had to parse their language really carefully but it seemed like YouTube was hurt hard enough that it really,
really kind of ended up.

[17:23] Putting pressure on the overall business even though the core search business was was pretty resilient through the changes so that was interesting and then you know what’s going to.

[17:34] What’s going to make this even worse just broadly is they are
pretty publicly stating they’re going to bring a lot of those changes to the Android platform so it was kind of an Apple only platform problem but now Androids going to replicate,
many of those no tracking hiding your email all these kinds of things that.
Our overall good for consumers to some degree maybe they’re going a little too far because there is some benefit for having.

[18:02] Good product recommendations in those kinds of things that are I think are going to get hurt from this but yeah so that is all getting worse,
so then Facebook so then I was like oh man
this is gonna be really bad for Facebook but I think what Facebook did is they kind of kitchen sink it last time and they basically said in fourth quarter wow this apple stuffs bad let’s just go ahead and if we’re gonna rip the Band-Aid let’s rip that thing off.
Chest hair in off and they.
They they actually did less worse than everyone expected so that was a relief which is we’re kind of in that market and so I think they had predicted that it would be really really terrible and it was only.
Terrible and then apples revenues were up 9 percent which was in this climate is when it’s very low for Apple but a wind that brings us to Amazon results,
anything from those who wanted to opponent before we jump into Amazon.

Jason:
[18:59] No just I think the apples Apple earnings were today and I would say they were surprisingly upbeat like both.
Like they talked about the macros but they you know what would what you would expect to be particularly acute concerning apple is supply chain given that a bunch of their factories are walk down and closed in China right now,
and Tim Cook seem like quite optimistic that they had a solid supply chain point and go forward so I hope he’s right because I’m gonna want my new iPhone.

Scot:
[19:30] If anyone would have a handle on that I would be Tim Cook so so.

Jason:
[19:34] No I mean I.
He’s credible I wasn’t saying he was wrong I was just pleasantly surprised to hear I don’t hear a lot of people talking about feeling like they have their hands arms around supply chain this year so that was an outlier to me.

Scot:
[19:49] Well they talked about.
He was a year ago diversifying out of China into was it Singapore or Vietnam they may have been Vietnam so I think they’ve got a couple you know they have Diversified there,
they’re manufacturing portfolio across multiple countries so maybe that that’s part of the resilience that they’re seeing there are maybe they think those cities that are locked down in China will get back to it but by the time they have some new iPhone or some.

Jason:
[20:14] Yeah and I do think they have this privilege status where when their factories get walk down they get watered down with workers and them so there is that.

Scot:
[20:22] So productivity is up yet for going to shelter in place you might as well do it on the assembly line making the Apple phones.
Okay so let’s jump into Amazon results and start with Revenue
so the little bit of A Tale of Two Cities here so online product sales when – at minus 1% which obviously isn’t good some Wall Street analysts did the math and they pulled out
the comp,
to the Amazon Prime day and I think that made it basically neutral so not up or down but still you know not something you want to see here I guess if GDP is decreasing,
you know zero is the new wind but but not what you expect from Amazon and clearly one of the you know I would I need to go back and look at 08 and 09 it went – in those years.

Jason:
[21:15] I was going to ask did it because I couldn’t remember it going –

Scot:
[21:18] It did yeah I have a chart in a presentation and it goes e-commerce went like – 20 and Amazon went negative 5
so it was better than always is tracked considerably better than the e-commerce data but it did go – for a period of quarter or two in 08 and 09 I want to say q 4 of 8 and he wanted nine is my memory but I’ll fact.

[21:38] Conversely subscription Services were up 13% and and there is Prime and you know all the things associated with Prime
so that’s interesting and then you had some commentary from the call that you heard around that that I’ll say it for you unit sales were flat and in the commentary on the call they talked about that being due to inflation so you know they’re they’re starting to say
hey we’re seeing the signs of inflation here and we’re fuel is rising and supply chain and they’re starting to kind of.
Throw a lot of these things out there that you know I think.
We’re doing this the evening of the report so I think wall Street’s not going to really like this whole body language coming on Amazon
overall growth when you stroll together all the Amazon business units you get to seven percent growth which is the slowest growth since the recession of 08 09 and if you compare that to Q4
of 21 which it’s your of your growth of Q for 20 that was nine point five percent so a pretty material slow down quarter-on-quarter from the growth rates here that we’re seeing,
they do split out a couple segments so North America was up.

[22:57] 7.6% all in and then where they felt a lot of pressure was International it was down six percent so it feels like you know.
Internationally known us has is actually kind of in a worse slide from a macroeconomic and we’re starting to feel it here as well,
so that was that and then physical retail was up 16% that’s an easy cop because you’ve got people weren’t going to stores largely Whole Foods mix that up,
this is good time you and I haven’t had a chance to talk about it but they did announce that they’re closing a lot of their stores so here we had a was interesting we had just opened a 5-star store,
four star whatever that is and,
and then they closed it like it was literally open for like 45 days I didn’t get a chance to go to it and they’re closing a lot of those bookstores and whatnot and that’s been attributed to the new Co Jassie,
saying hey we’re not going to really pursue that strategy anymore.

Jason:
[23:55] Yeah it was a little surprising because that you know there was a decent Fleet of the book stores they closed them all the five-star stores the,
the stores that were saved were the grocery store so obviously Whole Foods but also these Amazon Fresh has they added like six more so they’re like 46 now if I’m,
I’m counting right and then they have announced a new fashion store that supposed to open this quarter in Los Angeles,
and as far as I know plans are still,
on to do that but yeah it was surprising that the bookstore here in my neighborhood closed as well.

Scot:
[24:35] Cool and then you were watching The Profit side of Amazon what you see there.

Jason:
[24:40] Yeah well the they you know they talked a lot about all of these macro pressures and you know,
those all having an impact on rising cost so labor costs were up fuel costs were up,
and you know overall supply chain was significantly more expensive they talked about shipping expenses reached 38 percent of revenues and like in comparison that normally is about 32%.
What you know fuel being a big factor and all other shipping costs and so roll all that in and they made three point six billion for the quarter which is like a 3.2 percent margin,
and I think the consensus estimate was.

[25:27] 4.6 so a meaningful Miss on the margins and it’s interesting because.
You know normally these – macro things they it’s they can have a weird effect because,
when the mat the inflation is high but consumer confidence is okay it actually,
increases demand because you sell the same amount of stuff and you sell it for a higher price,
but once consumer confidence starts dropping people start buying less right so you know Amazon you can see that demand dropping on the top line so that’s a concern and then all of their costs go up because of all these macros and so the margins.
Take a bigger hit and so that’s a big concern and then in their commentary there was this interesting,
um narrative around Amazon inadvertently ended up with too much capacity so primarily in there there with just X Network so.

[26:28] You know over the last two years they famously have doubled their their warehouse capacity which now I think in total is over 100 billion dollar investment.
And.
They also hired a ton of people during covid they had a lot of people on covid we’ve said they backfield a lot of positions and then all those people came back and they apparently had too much labor so too many warehouses and too much labor equals,
a hit on margins as well and so a lot of their narrative was around,
they’re they’re expected focus on improving the efficiency of that supply chain this next quarter which.
Means they have to either get more Goods in their Network and do more stuff and I you know I think we’re if we have time we’ll talk about some new programs Amazon’s rolling out that my do that and it’ll be interesting to see if they.
Shrink or at least slow the rate of their labor force growth based on some of these comments as well.

Scot:
[27:32] Yeah yeah and.
You know one Wall Street analyst kind of rolled all that together and kind of put a 6 billion dollar number on it which which is kind of yeah wow that’s a
it’s a lot of headwinds that they’re facing there so it’ll be interesting to see do do they read the tea leaves and take that capacity out or do you just kind of keep it in place for a holiday because the cops will get easier through the year right because
you have things were less crazy covid Wise from second half of last year.

Jason:
[28:06] Yeah and I you know I mean they both rightly pointed out like Hey we’re glad we made the Investments we did,
like they put us in a strong position you know as I don’t don’t pay too much attention to year-over-year comps because we’re competing against such a weird year the way to think of this is,
um
That sales are way up in there mostly staying up right so that’s kind of the the management spin on the circumstance but there for sure our head winds and I would say.
If Amazon is feeling head wins the vast majority of other retailers are feeling like a head storms because,
you know Amazon has more levers and more scale to insulate them from a lot of these challenges.

Scot:
[28:54] Yeah so so rough spot on on the cost side how about usually the bright spot is AWS how did that.

Jason:
[29:03] Yeah so that is exactly the opposite like,
I demand you know one of the things they talked about is like a lot of people rethought their their infrastructure needs as a result of covid and it’s greatly accelerated.
People’s migrations to the cloud so it had a good run during the pandemic and it continues to go gangbusters so it was up.
Um 37 percent year over year for Q4 I think it was up forty percent so that that’s a.
A huge highly profitable business that’s continuing to,
um to go well I you know I think their total revenue was like eighteen point for tea.

[29:48] Four billion which was above the consensus and you know I don’t like a lot of the other businesses this is like a 35%.
Gross margin business so that substantially beat the expectations which were like I think just under 30%.
And it’s interesting they didn’t so much cover this in earnings but an indie jassi’s shareholder letter,
he spent a lot of time talking about some of the,
amazing Innovations on silicone and the Amazons rolled out that have dramatically improved their their efficiency on AWS so it seems like they still have.
They feel like a lot of Headroom to keep driving their cars down even as demand for capacity is,
is growing really fast so AWS continues to be a good story I would say though I don’t sleep on the ads and interestingly,
they didn’t talk a lot about ads in earnings they didn’t talk about ads in the,
the shareholder call but they sold seven point eight billion dollars worth of ads in q1 which is up 25% from last year q1 so not growing quite as fast as they WS.

[31:04] That does mean 30 their last 12 months they sold almost thirty three billion dollars worth of ads and so a couple things to bear in mind.
That’s 33 billion dollars at like 75 percent gross margin so.
Pretty you know appealing business even compared to if you call a WS like 75 billion dollar business at a 35 percent gross margin and you know.
Thirty three billion dollars in ads Twitter just sold for forty four billion dollars and they sell less than 5 billion dollars a year in dance so so that that is a,
highly profitable and still strongly growing business.

Scot:
[31:52] Yeah yet kind of doesn’t get enough sunshine I think the how big this is getting.

Jason:
[31:58] Yeah I will say every other retailer has noticed this even if no one’s talking about it and so the if the number one conversation I have with retailers is about inflation right now the number to conversation I have is about retail media networks which is
code for like part of the way we’ll deal with inflation as we’ll get more money from the manufacturers.

Scot:
[32:17] Yeah and again I kind of circle back to those apple changes when when Apple gets rid of all this tracking the companies that are best positioned to,
to benefit from that
have closed loop data which is retail retailers because they have that transactional data and you know I think that Apple change is one of the unintended consequences is going to make
Amazon’s ad business huge at the detriment of Facebook and Snapchat and,
Twitter in those kind of companies but then also a Walmart and Target and anyone that has you know hundreds of millions of people coming in there and and doing closed-loop transactions now is in a better position to build in that ad Network than Facebook who was
so dominant for so long.

Jason:
[33:07] 100% And if any of these social networks like you know really start to lose value because of these challenges like don’t sleep on on seeing a retailer require them right because,
what you do is you swoop in with all that first party data in a choir that Network in China a lot of the big social networks are owned or aligned,
by big retailers and if you remember when B dance was going to have to sell tick-tock,
like it was a bunch of retailers lining up to to be involved in that transaction so yeah you know that,
first party data that the Retailer’s own is very valuable and you can expect they’re going to look for multiple ways to monetize that you did tease one other takeaway from the.

[33:55] The Q and A after the earnings were at least,
was Andy they mentioned that that the rate of prime memberships is is now growing faster than pre-pandemic.
Which that was a surprising bit of good news to me because I think they disclose their over 200 million Prime members now so you would.
Assume like 60 percent of that’s in the US that’s pretty good saturation,
in the US market you would expect the rate of growth to slow and then with all these macros and consumer confidence going down you would expect people to be cutting back on these.
You know kind of optional subscription services and so you know apparently Jack Reacher and The Marvelous Miss maisel are good enough that that Prime is continuing to kill it.

Scot:
[34:47] Jack Reacher’s Beyond good it was excellent.

Jason:
[34:50] Absolutely I saw a few people that said their new use for for Twitter is just proposed changes to propose plots for Jack Reacher season 2 so I think that was funny.

Scot:
[35:03] Cool and then with Wall Street it’s always not what have you done for me today but what’s the future look like and so all eyes were on Amazon’s forward guidance which was kind of a this this quarter in Wall Street that kind of use this would you do this quarter and what’s your projection and this would be
a missing lower kind of quarter which is like,
death quadrant of results so the forwarder forward guidance Wall Street had a consensus of 125 billion for the Top Line.
In Amazon’s range came in well below that their range was 116 to 121 which let’s see it
so 18 and a half kind of in the middle versus Wall Street was expecting 125 as kind of where they thought things would be and then
gaap operating income Amazon said will be minus a billion to 3 billion positive
and Wall Street had a consensus there of 6.7 billion so they basically took down the top line by a good seven,
billion ish and then the midpoint of operating income by another 4 billion so this could begin I’ve mentioned Facebook kind of kitchen sink to it in the fourth quarter if
if you’re the CEO of Amazon and you’re relatively new on the job.

[36:25] This is a good time if you’re going to have a bad quarter you might as well lower expectations and make the rest of your easy for you and I feel like there’s a little bit of that in there but but again you know maybe they also
they see all these things going on macro and it’s also a good time to be really conservative on guidance because you don’t want to
you don’t want to be the one cheery voice out there and then then miss it and and that that’s cataclysmic in the Wall Street world.

Jason:
[36:50] No I think you’re exactly right.

Scot:
[36:52] Yes so having done I don’t know how many ways we’ve been doing this for so we’ve probably done 20 to 30 of these kinds of shows and this is you know this is except for that you know that.
For as long as I’ve been watching Amazon except for those 08-09 years this is this is
this is kind of a rough one so it’s going to be interesting to see how the market reacts tomorrow after hours things were down about nine percent and you know this is a 1.5 trillion dollar market cap company and when it’s down 10% that’s
150 billion dollars so it’s like,
losing three shopify’s kind of to put it in that context so it’s interesting to see how the market reacts tomorrow and if it causes a broader concern Shopify hasn’t reported yet we’re going to talk a little bit about that and then
yeah so yeah it’s going to be interesting to see how Wall Street reacts has.

Jason:
[37:42] Indeed so what what other news did you want to talk about Scott.

Scot:
[37:46] Yeah well it is interesting thing about Shopify because in this world with the Apple privacy.
You and I have talked a long time this may have to go back at my holiday predictions Shaka is in a really rough spot right now so they,
so on one side many of their Merchants were using Facebook to advertise and that was really efficient so that’s been cut off now there’s been articles talking about how Facebook really wants closed-loop data they don’t have it,
so the best way to build it is to,
need to have that close look data is for Facebook to build out a shopping platform there’s a lot of talk about friction between Shopify and Facebook.
You know if your Facebook buying Shopify just makes that easy but Shopify Toby at Shopify has kind of famously never wanted to sell the company and wants to stay independent.
So you could see a day where Shopify is best partner Facebook becomes their biggest competitor so that’s that’s kind of an interesting thing so that’s one,
one attack front Shopify has kind of coming the other one is Amazon and you know I’ve talked on the podcast where for the longest time Shopify has been,
poking the bear at Amazon and you know,
I’ve been at this 27 years and anyone that has ever thumped Amazon on the nose has not really survive that and so so I think that’s coming back to roost here because Amazon seems to have a lot of.

[39:13] Programs targeted at you.

[39:18] Taking the gmv back from from Shopify that’s over there what are the ones I found most interesting is this idea of by with prime now a.
You know skeptic would say Amazon’s tried these buy things for a long time they’ve never worked what they’ve lacked in my opinion is
as a merchant out there having a new payment thing you kind of famously have that NASCAR logo thing that you do and and you know it doesn’t really move the needle at this point there’s so many payment options and there’s already by pay with Amazon,
and this this program isn’t there so I’m kind of reading the tea leaves here a little bit.
But if I’m Amazon and I can go to a small Merchant and say all right if you add this by with Prime.
We are also going to add you into the discovery side and exposure to all of our prime numbers that starts to get really interesting because now you’re bringing me new customers and I think,
I think that’s where Amazon is going to go with this quote-unquote by with prime new thing and that.
That is a perfect this is a perfect time to offer that because if you’ve your Shopify merchants and you’re reeling because you’ve lost all this Facebook traffic.
And then suddenly Amazon throws you a life preserver and you’re going to take that life preserver even if Amazon is going to see some of your data and you know then it’s really interesting because if your Shopify.
Do you block that like do you stop your Merchants from taking this and it’s a it’s a bit of a gordian knot that they’ve put them in here that it’s going to be interesting to watch.

[40:46] One reaction to all this is we talked about it on the show last quarter Shopify announced they were going to spend a billion dollars to really beef up their delivery,
and I kind of mocked that because the Amazon spin.
Like 200 billion so so to think you’re going to compete with Amazon and some material way with a billion dollars is kind of not serious they did acquire a company called deliver which has an extra are I don’t know if how you say it deliver.
And you know that’s interesting but and I think they paid like three billion so they are starting to get pretty serious about this.

[41:19] And I think they now see that Amazon is going to turn their Logistics Network on on them and leverage that side,
the delivery side and the supply side the traffic side to hammer them the thing that makes me nervous about this these networks that are just built on existing 3pl infrastructures out there they’re not going to really solve a lot of problems because,
you know Amazon’s got.
200-plus fulfillment centers and thousands of dsps doing last mile delivery and just building on existing old-school 3pl infrastructures even with a more friendly software
isn’t going to solve the same economic problem that Amazon is yes you may be able to get two day shipping,
but it’s going to be like $12 and Amazon’s going to be at like three dollars at some point and they’ll be able to offer that and they’ll be able to Merchants and say the standards two days do you want to do this deliver Network you thing that shopify’s doing for $12
or do you want to use our Network for three dollars and obviously you know.
The choice is obvious in that room so I think it’s really fascinating to watch these really big,
Titans battling it out in a way that that is changing very rapidly and Amazon is really good using these these downdrafts to really Hammer a competitor and I think I think we’re going to see this cure they’re going to get,
Shopify in a vice and I be interesting to see if shop of I can get out of that.

Jason:
[42:49] Yeah no I think your analysis is spot-on I do want to,
clarify or clean up a couple of things the last I heard they they actually haven’t closed the deal with deliver like so,
you may have more recent information than me but I read like there a lot of reports that they’re in talks and that there’s like a,
a two billion dollar price on the table but I don’t think they actually announced the acquisition yet so maybe you might have you may have called it first.

Scot:
[43:18] It was just yet still rumors at this point I think they’ll do it yeah I’m assuming they’re going to do it.

Jason:
[43:23] So just for listeners that may not be quite as in the deliver is a 3pl so you know you there.
Company you can hire to store your goods for you and ship them for you when you sell stuff and you know part of their value prop is they can,
ship stuff from orders you get anywhere so you get orders on Walmart marketplace they’ll ship them you get orders on Amazon they’ll ship them.
You get orders on your own Shopify special site they’ll ship them and.

[43:52] You know if Shopify serious about building out the logistics Network they need some jump starts off he’s,
3pl so an acquisition would make sense but to put things in perspective the very best 3pls can kind of match Amazon service levels,
and when they do they can be part of this program called,
vendor fulfilled Prime which essentially means we’re going to ship just as fast as if we were in Amazon’s Network and so Amazon’s going to you know offer Prime benefits for that shipment.
Deliver is not a 3pl that has that status so,
like when you talk about even if Shopify acquires them this it’s not going to put them in a position to compete with Amazon I would say you’re absolutely right like not only are they weigh smaller in scale,
they don’t have near you know they don’t have the service level to even get Vineyard fulfilled Prime,
and like almost all 3pls they’re dependent on the traditional parcel carriers to deliver the package and they’re the they’re forced to pay the market rates for those deliveries and.

[45:02] Amazon just has this huge Advantage from being able to deliver their own stuff so.
Not saying it’s not smart for Shopify to acquire some 3pls and I’m sure they’ll be able to leverage them but that definitely is not going to make a fair fight with.
With Amazon and then you were talking a little bit about Amazon’s new offer but I’m not sure we said exactly what it is so last week Amazon announced this new service called by with,
and what essentially it is is it’s taking app Amazon pay and bundling it with.
What Amazon would call fulfillment by Amazon.

[45:43] And I think technically it would be FB am which is it fulfilled by Amazon merchants,
um and so this is a program Amazon hasn’t offered very often and doesn’t offer widely where you put your goods in Amazon’s fulfillment center and you and Amazon will ship goods for orders that didn’t happen on Amazon.

[46:05] So Ernie early you can only put Goods in Amazon’s Warehouse to fulfill orders that happen on Amazon so if you sell something on Shopify.
You have to store those goods somewhere else and you have to have kind of your inventory split but implied in this by with prime is they did this clever bundling of.
Hey we’ll let you fulfill orders that happen elsewhere so that could be on Facebook or on Instagram or Tik-Tok,
or on Shopify and we’ll bundle it with,
um the Apple pay I’m sorry Amazon pay and we’ll give you the badging so it essentially if there’s a Prime member shopping on your website
they’ll see a thing saying hey get the same fast delivery you’re used to you know same day delivery or next day or two day for free
don’t have to type any of your payment information don’t have to pick any of your shipping addresses because we have all that it’s a dramatically lower friction check out and it’s,
it’s going to be super appealing for a bunch of sellers especially if you selling your own site and you sell on Amazon.
It’s going to be really appealing and it’s kind of a deal with the devil because you are giving more data to Amazon and you are making Amazon a stronger potential competitor.

[47:19] I think it’s going to be hard for a lot of people to turn it down I think the only thing that makes it.
I think it’s a death blow to a lot of 3pls out there the only thing that I think makes it not completely devastating is that they will only it will only work for Prime members so.
You couldn’t for example launch your Shopify site and say by with prime is my only checkout flow.
Because you wouldn’t you wouldn’t be able to sell anything to non-prime members so you still need an alternative solution for non Prime members but if.
Amazon ever expanded this program like you know it that that would become.
Super devastating to a lot of the 3pls and and folks that are looking to compete with Amazon in the space and I just.
I think it’s a super scary / clever way to both leverage that excess capacity that we just talked about and you know kind of.
Um pull up the ladder behind you know after that after they kind of use their their fulfillment as a competitive advantage to,
too kind of you know acquired 200 million Prime members now they make it way harder to compete with him bye-bye you know letting letting people use that service wherever they want to shop.

Scot:
[48:38] Yeah you had the one thing I’m still trying to get my arms around is I think deliver started building fulfillment centers and then they decided I think they have one or two and I think the rest of their Network ended up being a network and not
ones that they own and operate so I don’t think they really bring into the world to new delivery capability or capacity.

Jason:
[48:59] Ya know I as far as I’m aware they don’t either so I think we.
Yeah so I do think that’s big news I think there’s gonna be a lot of talk about it 11 kind of Niche use case but you know there’s a lot of established brands that only sell through wholesale and they’re all secretly figuring out how they sell.
How they added direct-to-consumer component and in this this this offering is going to be right in all their wheelhouse right like if.
If you’re a big brand and you suddenly need to figure out how to you and you’re used to shipping pallets to Walmart and you suddenly need to figure out how to fulfill each as and you.
Party have a bunch of inventory at Amazon it’s going to be super appealing they just say what use Amazon for.

Scot:
[49:42] Yeah and then you beat me to the punch and you read the shareholder annual letter I have not had a chance to read that with what was interesting in there.

Jason:
[49:50] Yeah well quick reminder for listeners Jeff Bezos wrote the shareholder letter every year,
the 1997 when was particularly amazing and in fact Jeff agrees with me on that so,
every year since then Kiri copies the the 1997 shareholder letter in it so this was a point of particular interest to me because this was the first shareholder letter written by someone other than Jeff Bezos,
so Andy jassy in the new CEO and I think it very much follows the.
The kind of pattern in the Cadence of the typical Amazon shareholder letters up to and including having the 1997 letter embedded in it at the bottom.

[50:32] I wouldn’t necessarily say there were any huge Revelations or or huge new takeaways.
From from the letter like a lot of the letter talked about.
Kind of the iterative nature of all of these successful Services than Amazon launched so they kind of painted the picture that like people imagine that.
You know Kindle was just born as this amazing fully form business or ews was an amazing business,
and he talked about how the first versions of all those Services were pretty mediocre right and he used this term that a few others have used.
Minimum lovable product and he kind of Paints the picture about how they evolve like how they launch.
Um AWS and it was very rarely useful because they couldn’t offer both compute and storage which most people tend to need and storage was going to take another year and a half so they launch compute without storage.
And then later added storage and then later added their own silicon and how each of those iterative steps made it a much more powerful offering until it reach today’s Juggernaut and.
Similar stories for Alexa and and Prime and a bunch of these other things so he was kind of painting this,
this picture about how things iterate in the back of my mind I’m thinking.

[51:54] My my Alexa is disagreeing with me the.
In the back of my mind I’m thinking he’s setting us up for some of his initial initiatives being kind of mediocre at first I don’t know I don’t know if that’s,
really where he’s going but then he did kind of highlight the autonomous teams principle that we’ve talked about several times on this show he talked about how important it is to,
expect and accept failure that you really you know can’t be successful if you don’t have some failures and well that sounds obvious I can’t tell you how many times I’ve talked to,
potential clients that you know said hey we want to do some crazy Innovation but we can’t afford to fail.
And that you know seems like a recipe for disaster so I do appreciate that advice and then this may be really nitzsche but he did he talked a little bit about there.

[52:47] Their press release and their six-page narrative principle that they use and we’ve talked about this before like so you go to a meeting and you read The six-page Narrative for new idea and at the back of that narrative they have a press release,
that is kind of written to paint a picture of the press release will be able to issue if this initiative is successful so it’s kind of begin with the end in mind idea,
and in this Cheryl the letter he also alluded to the they now make you write they frequently asked questions to go with that press release which I hadn’t heard that before and I thought that was interesting so,
so those are kind of.
The the main recap of the the shareholder letter but you know if you haven’t if you have a few moments I would definitely it’s worth a quick read and checking it out.

Scot:
[53:32] Did he explain why they do the frequently Asked question.

Jason:
[53:35] He did not he just referenced it and maybe maybe one of my Amazonian friends will correct me but I feel like.
Most of the the kind of external stories about that process have focused on the narrative and the press release and I just had never heard.
The Q&A being part of the or the FAQ being part of that that package before so I just thought that was an interesting.
Interesting tidbit.

Scot:
[54:03] Recall any other e-commerce news you want to cover.

Jason:
[54:08] You know there’s always more stuff we could talk about but the good news is we always have more shows and it has happened again we’ve used up more than our lot of time for this episode
so I think we should probably call it quits let everyone get off the exercise bike,
hopefully you write us that that five star review and we’ll pick up some of the other exciting industry news in the next show.

Scot:
[54:31] Thanks everyone and until next time…

Jason:
[54:34] Happy commercing!