Amazon Prime Day comes amid slowdown in online sales growth

Amazon is heading to its annual Prime Day sales event on Tuesday very differently from how it entered the pandemic.

The company has long used the two-day event — one of the biggest of the year — to lure people into its Prime membership, which Amazon recently raised to $139 a year from $119 a year.

Amazon doesn’t disclose total Prime Day sales, though growth estimates for last year’s event ranged between 7% and 9%. Research firm Insider Intelligence reports that sales could grow more this year in part because of the timing of the event in mid-July, which, compared to June last year, will allow the company to attract more consumers shopping in schools.

Amazon could use boosting amid a slowdown in overall online sales. Once the darling of the pandemic economy, the company posted a rare quarterly loss in April as well as the slowest rate of revenue growth in nearly two decades – at 7%. Inflation added nearly $2 billion in costs.

Amazon has also admitted that it has too many workers and expects its overcapacity from its massive expansion of warehouses during the pandemic to total $10 billion in additional costs for the first half of this year.

“It’s a pain right now, and that pain is huge,” said Neil Saunders, managing director of GlobalData Retail.

It’s a complete reversal from the early days of the pandemic when the e-commerce giant’s profits soared as insider shoppers turned to online shopping to avoid contracting the coronavirus. Demand was so high that Amazon nearly doubled its workforce in the past two years to more than 1.6 million people.

It also increased its warehouse capacity to keep up with the flood of orders that flooded its site. By the end of 2021, Amazon had leased and owned approximately 387.1 million square feet of space for its warehouses and data centers — more than double what it reported in 2019.

Then the worst of the epidemic subsided. Americans felt more comfortable leaving their homes, and demand slowed across the board. Online retail growth in the United States, which jumped to 36.4% in 2020, returned to more natural growth in 2021 and 2022, at 17.8% and 9.4%, respectively, according to Insider Intelligence.

Retail sales figures for June, due out on Friday, will shed more light on e-commerce performance. The latest figures released in May showed online sales down 1% while total retail sales fell 0.3%. From April amid a sharp rise in inflation.

“This is a period of time when consumers are more economical in thinking about how they spend and buy,” said David Niekerk, a former vice president of human resources at Amazon who oversaw operations. “This has an impact on Amazon.”

Brian Olsavsky, the company’s chief financial officer, said several decisions to expand Amazon’s warehouses were made two years ago, limiting what the company could do to adjust mid-year. However, Amazon will spend less on warehouse projects this year than last year, and transportation investment will be flat to slightly lower.

Saunders said that excess capacity is likely to be a short-term problem for Amazon, which he noted has continued to take steps to grow its retail business and attract more sellers to its service. In April, it announced that it would extend Prime subscription benefits to online stores outside of its own site, a move that will allow merchants to take advantage of the company’s extensive fulfillment and delivery networks.

To fix storage problems, CEO Andy Gacy said in May that the company would allow some leases to expire and delay construction on others. Amazon also sub-leasing warehouses to keep costs down.

Preliminary data from real estate market provider Costar Group suggests the company is disproportionately closing its smaller facilities, which tend to have fewer loading docks and parking and are less efficient to operate, said Adrian Bunsen, US director of industrial analytics, Adrian Bunsen.

However, the shutdowns are already creating problems. A few workers at an Amazon delivery station in Bellmore, New Jersey, recently quit their job to protest transfers to other locations after Amazon decided to close the facility.

Paul Blundell, an Amazon worker who led the strike, said some workers wanted to move to nearby facilities after they were asked to go to locations as far away as 20 miles. They also wanted a $1 per hour raise to make up for the outage. Meanwhile, the company says employees are being given the opportunity to move to other locations with better perks.

Amazon pointed to its other problem – overstaffing – that emerged after hiring new employees to fill workers who were sick when an omicron variant swept the nation last year. But when sick workers returned, Amazon had way too many people, adding nearly $2 billion in costs. That’s a far cry from last year, when the company raised wages to $18 to attract hourly workers in a tight labor market.

The problem may be resolved naturally by the company’s high rate of attrition. Saunders said that Amazon is also likely to find a benefit to excess labor as the holidays approach, and may be able to rein in the problem by not hiring new workers in locations with a large number of employees.

Whatever happens, analysts are watching closely how Jassy will attempt to correct the ship. A few weeks ago, he bugged Doug Herringtonan Amazon veteran of 17 years, to replace Dave Clark, the former head of Amazon’s retail business who unexpectedly resigned last month after 23 years at the company.

Amazon shares are down this year, down nearly 39% since the start of the year. Necker said Gacy is under arms to restore profitability.

“He made a commitment to shareholders and others that he would now really focus on getting back to profitability at the company,” Necker said. “And a big part of that is consumer business.”