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Amazon Prime Day comes amid slowing online sales growth

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Amazon is heading into its annual Prime Day sale event on Tuesday in a very different way to 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 subscription, which Amazon recently raised the price to $139 per year from $119 per year. year.

Amazon does not disclose total Prime Day sales, although growth estimates for last year’s event ranged from 7% to 9%. Research firm Insider Intelligence suggests that sales could increase even further this year, in part due to the timing of the event in mid-July, which compared to the June date of last year would allow the company to attract more consumers doing their back-to-school shopping.

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

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

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

It’s quite a reversal from the early days of the pandemic when the e-commerce giant’s profits soared as home 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 has also increased its storage capacity to cope with the avalanche of orders flooding its site. By the end of 2021, Amazon had leased and owned about 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 pandemic subsided. Americans have felt more comfortable leaving their homes and demand has also slowed across the board. U.S. retail sector online sales growth, which reached 36.4% in 2020, returned to more normal growth in 2021 and 2022, registering 17.8% and 9.4% respectively. %, according to Insider Intelligence.

Retail sales figures for June, due out on Friday, will shed more light on how e-commerce is doing. The most recent figures from May showed online sales fell 1% while overall retail sales fell 0.3% from April in a context of galloping inflation.

“This is a time when consumers are much more frugal thinking about how they spend and buy,” said David Niekerk, Amazon’s former vice president of human resources who oversaw operations. “It’s impacting Amazon.”

Brian Olsavsky, the company’s chief financial officer, said many of Amazon’s warehouse expansion decisions were made two years ago, limiting what the company can do to adjust mid-year. That said, Amazon will spend less on warehouse projects this year compared to last year, and transportation investments will be flat or slightly down.

Saunders said excess capacity would likely be a near-term problem for Amazon, which he said continued to take steps to grow its retail business and attract more sellers to its service. In April, it announced it would extend the benefits of a Prime membership to online stores beyond its own site, a move that will allow merchants to tap into the company’s extensive distribution and delivery networks. .

To address its storage issues, CEO Andy Jassy said in May that the company would let some of its leases expire and postpone construction of others. Amazon also sublets warehouses to reduce costs.

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

Yet the closures are already creating problems. A handful of workers at an Amazon delivery station in Bellmawr, New Jersey, recently walked off the job to protest transfers to other locations after Amazon decided to close the facility.

Paul Blundell, an Amazon worker who led the walkout, said some workers wanted to be moved to nearby facilities after being told to travel to sites 20 miles away. They also wanted a $1 per hour raise to compensate for the disruption. Meanwhile, the company says employees have the option to transfer to other locations with better benefits.

Amazon reported that its other problem – overstaffing – emerged after bringing in new hires to replace sick workers when the omicron variant swept the country last year. But when the sick workers returned, Amazon was overcrowded, costing about $2 billion. That’s a far cry from last year, when the company raised pay to $18 to attract hourly workers in a tight job market.

The problem could be solved naturally by the company’s high attrition rate. Saunders said Amazon is also likely to find use for excess labor as the holidays approach, and may be able to get the problem under control by not hiring new workers in places where they are overstaffed.

Either way, analysts are keeping a close eye on how Jassy will attempt to right the ship. A few weeks ago he called on Doug Herringtona 17-year Amazon veteran, to replace Dave Clark, Amazon’s former head of retail who unexpectedly resigned last month after 23 years with the company.

Amazon shares have fallen this year, falling about 39% year-to-date. And Jassy is under pressure to bring profitability back, Nieker said.

“He’s made a commitment to shareholders and others that he’s really going to focus now on getting the business back to profitability,” Nieker said. “And a big part of that is the consumer sector.”