Amazon CEO Andy Jassy has posted his annual letter to shareholders, written at a time when the company is examining a variety of its businesses, laying off 27,000 people, and defining priorities for the company going forward.
In the letter, Jassy concedes that Amazon has not found the grocery format that it believes will drive sales and innovation in that segment, and write that "we must find a mass grocery format that we believe is worth expanding broadly."
Some excerpts from the 5,000+ word letter, which you can read in full here:
• "As I sit down to write my second annual shareholder letter as CEO, I find myself optimistic and energized by what lies ahead for Amazon. Despite 2022 being one of the harder macroeconomic years in recent memory, and with some of our own operating challenges to boot, we still found a way to grow demand (on top of the unprecedented growth we experienced in the first half of the pandemic). We innovated in our largest businesses to meaningfully improve customer experience short and long term. And, we made important adjustments in our investment decisions and the way in which we’ll invent moving forward, while still preserving the long-term investments that we believe can change the future of Amazon for customers, shareholders, and employees.
"While there were an unusual number of simultaneous challenges this past year, the reality is that if you operate in large, dynamic, global market segments with many capable and well-funded competitors (the conditions in which Amazon operates all of its businesses), conditions rarely stay stagnant for long.
"In the 25 years I’ve been at Amazon, there has been constant change, much of which we’ve initiated ourselves. When I joined Amazon in 1997, we had booked $15M in revenue in 1996, were a books-only retailer, did not have a third-party marketplace, and only shipped to addresses in the US. Today, Amazon sells nearly every physical and digital retail item you can imagine, with a vibrant third-party seller ecosystem that accounts for 60% of our unit sales, and reaches customers in virtually every country around the world. Similarly, building a business around a set of technology infrastructure services in the cloud was not obvious in 2003 when we started pursuing AWS, and still wasn’t when we launched our first services in 2006. Having virtually every book at your fingertips in 60 seconds, and then being able to store and retrieve them on a lightweight digital reader was not 'a thing' yet when we launched Kindle in 2007, nor was a voice-driven personal assistant like Alexa (launched in 2014) that you could use to access entertainment, control your smart home, shop, and retrieve all sorts of information."
• "Change is always around the corner. Sometimes, you proactively invite it in, and sometimes it just comes a-knocking. But, when you see it’s coming, you have to embrace it. And, the companies that do this well over a long period of time usually succeed. I’m optimistic about our future prospects because I like the way our team is responding to the changes we see in front of us.
"Over the last several months, we took a deep look across the company, business by business, invention by invention, and asked ourselves whether we had conviction about each initiative’s long-term potential to drive enough revenue, operating income, free cash flow, and return on invested capital. In some cases, it led to us shuttering certain businesses. For instance, we stopped pursuing physical store concepts like our Bookstores and 4 Star stores, closed our Amazon Fabric and Amazon Care efforts, and moved on from some newer devices where we didn’t see a path to meaningful returns. In other cases, we looked at some programs that weren’t producing the returns we’d hoped (e.g. free shipping for all online grocery orders over $35) and amended them. We also reprioritized where to spend our resources, which ultimately led to the hard decision to eliminate 27,000 corporate roles. There are a number of other changes that we’ve made over the last several months to streamline our overall costs, and like most leadership teams, we’ll continue to evaluate what we’re seeing in our business and proceed adaptively.
"We also looked hard at how we were working together as a team and asked our corporate employees to come back to the office at least three days a week, beginning in May. During the pandemic, our employees rallied to get work done from home and did everything possible to keep up with the unexpected circumstances that presented themselves. It was impressive and I’m proud of the way our collective team came together to overcome unprecedented challenges for our customers, communities, and business. But, we don’t think it’s the best long-term approach. We’ve become convinced that collaborating and inventing is easier and more effective when we’re working together and learning from one another in person. The energy and riffing on one another’s ideas happen more freely, and many of the best Amazon inventions have had their breakthrough moments from people staying behind after a meeting and working through ideas on a whiteboard, or continuing the conversation on the walk back from a meeting, or just popping by a teammate’s office later that day with another thought. Invention is often messy. It wanders and meanders and marinates. Serendipitous interactions help it, and there are more of those in-person than virtually. It’s also significantly easier to learn, model, practice, and strengthen our culture when we’re in the office together most of the time and surrounded by our colleagues. Innovation and our unique culture have been incredibly important in our first 29 years as a company, and I expect it will be comparably so in the next 29."
• "Beyond geographic expansion, we’ve been working to expand our customer offerings across some large, unique product retail market segments. Grocery is an $800B market segment in the US alone, with the average household shopping three to four times per week. Amazon has built a somewhat unusual, but significant grocery business over nearly 20 years. Similar to how other mass merchants entered the grocery space in the 1980s, we began by adding products typically found in supermarket aisles that don’t require temperature control such as paper products, canned and boxed food, candy and snacks, pet care, health and personal care, and beauty. However, we offer more than three million items compared to a typical supermarket’s 30K for the same categories.
"To date, we’ve also focused on larger pack sizes, given the current cost to serve online delivery. While we’re pleased with the size and growth of our grocery business, we aspire to serve more of our customers’ grocery needs than we do today. To do so, we need a broader physical store footprint given that most of the grocery shopping still happens in physical venues. Whole Foods Market pioneered the natural and organic specialty grocery store concept 40 years ago. Today, it’s a large and growing business that continues to raise the bar for healthy and sustainable food.
"Over the past year, we’ve continued to invest in the business while also making changes to drive better profitability. Whole Foods is on an encouraging path, but to have a larger impact on physical grocery, we must find a mass grocery format that we believe is worth expanding broadly. Amazon Fresh is the brand we’ve been experimenting with for a few years, and we’re working hard to identify and build the right mass grocery format for Amazon scale. Grocery is a big growth opportunity for Amazon."
• "When we look at new investment opportunities, we ask ourselves a few questions:
"If we were successful, could it be big and have a reasonable return on invested capital?
"Is the opportunity being well-served today?
"Do we have a differentiated approach?
"And, do we have competence in that area? And if not, can we acquire it quickly?
"If we like the answers to those questions, then we’ll invest. This process has led to some expansions that seem straightforward, and others that some folks might not have initially guessed."
• "I’m optimistic that we’ll emerge from this challenging macroeconomic time in a stronger position than when we entered it … there are two relatively simple statistics that underline our immense future opportunity. While we have a consumer business that’s $434B in 2022, the vast majority of total market segment share in global retail still resides in physical stores (roughly 80%). And, it’s a similar story for Global IT spending, where we have AWS revenue of $80B in 2022, with about 90% of Global IT spending still on-premises and yet to migrate to the cloud. As these equations steadily flip - as we’re already seeing happen - we believe our leading customer experiences, relentless invention, customer focus, and hard work will result in significant growth in the coming years. And, of course, this doesn’t include the other businesses and experiences we’re pursuing at Amazon, all of which are still in their early days."
- KC's View:
One thing I immediately noticed about Jassy's letter - best I can tell, the phrase "Day One" never makes an appearance, even though the company's "Today is Day One" philosophy has been a core value informing everything Amazon has done and how it does these things.
To be fair, the term "Day Two" also doesn't appear in his letter. But I wouldn't expect it to. If anyone in Amazon's c-suite ever uses that term, it won't be in a letter, but rather will be imprinted on a white flag that the company will run up a Seattle flagpole.
The letter is worth reading, to get a sense of Jassy's mindset and priorities. His emphasis on advertising and health care as revenue drivers is notable, but to me, the company's ability to deliver on promises is undercut a bit by Jassy's insistence that the Amazon experience is more customer-centric than ever before. I don't know any customers who actually feel that way. I know I don't.
After reading Jassy's letter, read the original shareholder letter written by Jeff Bezos in 1997. And then compare the levels of inspiration offered by the two letters, side by side.
By the way, I was just curious about something and so I went back to Jassy's letter to see if he used the word "obsess" when talking about customers. Best I can tell, he didn't.
These may just be optics, but optics matter. Words matter. They reflect priorities. They reflect mindset. They reflect heart. They reflect soul. And I find myself wondering if the challenges that Jassy identifies in his letter are excluding more important ones that will determine Amazon's future.