Mar 26, 2020
www.fdreports.com – www.creditntell.com
As part of our ongoing coverage of COVID-19, the following Special Analysis examines how the coronavirus has affected Amazon, its sellers, and the U.S. consumer.
- Prioritization of essentials and medical merchandise is dragging deliveries of other more discretionary Prime orders by as much as a month.
- The businesses of third party sellers are at risk as Amazon halts shipments of their product to its fulfillment centers until April 5th (unless it’s an essential product).
- Origination of coronavirus in China already weighed on inventory levels and is leading to product shortages, even as Chinese production begins to return.
- Mass retailers and grocers are better positioned to serve customers’ immediate needs, highlighting the benefit of a brick and mortar strategy.
- Amazon sales post-pandemic will remain strong as more non-Prime customers begin using its service during the quarantine period.
Introduction
The effect of COVID-19 has been significant, with most retailers forced to close stores and, in many cases, their e-commerce businesses. But not all retailers have been impacted at the same rate, with Amazon, mass merchants (Walmart, Target and Costco), dollar stores and grocers likely seeing a boost in their sales as consumers stock up on essentials, such as household staples, medical supplies, baby and pet products, and other high-demand categories. We estimate Amazon, in particular, has seen its sales of essentials merchandise almost double to nearly $1.00 billion per week, as more and more consumers are forced to shelter in place to limit the virus’ spread. However, this has also highlighted pain points in its supply chain and last-mile delivery services. This strain on its fulfillment network is causing delivery delays and unhappy customers, accustomed to fast and seamless service. Below we highlight several key takeaways from Amazon’s efforts to navigate the COVID-19 landscape.
Key Takeaways
Stores Remain Key as Consumers Desire Immediate Gratification
- Amazon’s online business benefits as consumers shelter in place but the business is not nimble enough to pivot to the increase in demand.
- Online out of stocks for necessities forcing consumers to shop competitor brick and mortar retailers, predominantly Target, Walmart, Costco, and grocers, to stock up on essentials including food;
- Whole Foods, Amazon’s grocery platform, isn’t well-positioned for panic buying, given its limited assortment and consumers’ value perception of the brand, but is still seeing out of stocks.
- As brick and mortar retailers selling discretionary items (e.g. apparel and home) have been forced to close stores, Amazon is well-positioned to pick up that business; Amazon’s other service offerings including entertainment will increase long-term customer stickiness as well.
- New customers using Amazon during quarantine could remain as customers post-pandemic, elevating sales
- Amazon offering selection of free family and kids’ program on Prime Video, even to consumers without Prime membership, which will be well received by parents forced to work at home, many without childcare; adds to Amazon’s public image
- Bricks and mortar retailers selling discretionary items have been forced to close stores and are unlikely to get online sales pickup, as consumers shift spend to necessities
- Job losses and layoffs will exacerbate pressures on other already-struggling retailers post-pandemic.
- New customers using Amazon during quarantine could remain as customers post-pandemic, elevating sales
Future Margins Likely Compressed as COVID-19 Highlights Plight of American Workers
- It will be challenging and a public relations issue for Amazon to retract the wage increases and newly expanded benefits it has implemented to maintain workflow during this period of peak demand.
- Petition of warehouse and fulfillment employees requesting paid sick leave and other benefits granted with Company paying employees diagnosed with COVID-19 or put into quarantine for up to two weeks
- Raised wages by $2.00/hour through April
- Pledged to hire 100,000 full and part-time workers to improve fulfillment and delivery efficiency during coronavirus pandemic
- Petition of warehouse and fulfillment employees requesting paid sick leave and other benefits granted with Company paying employees diagnosed with COVID-19 or put into quarantine for up to two weeks
Fulfillment Bottleneck Delays Deliveries to Prime Members
- Massive demand and prioritization of essential goods weighs on Amazon’s ability to fulfill orders by Prime members, who are accustomed to getting merchandise within two days.
- Orders delayed as much as one month
- Rising customer dissatisfaction as delivery windows extended
- Concentration on essentials driven by consumer demand, desire to be “there” for the consumer, and government restrictions; unlikely to lead to churn of existing Prime members, as Amazon’s selection and fulfillment remain superior to most retail rivals.
- Amazon’s focus on necessities and rising benefits to consumers and workers (from free services to paid sick leave) will buoy its public image and have longer-term sales benefits
- Return to normal produce and shipping cadence unlikely until multiple state governors lift lockdown restrictions, which could be at least another 3-4 weeks
- Amazon has the opportunity to capitalize on discretionary rivals’ store and website closures and is likely gaining share, despite focus on essentials, as there is limited competition in those other categories; using Amazon remains easiest for its over 150 million Prime members.
Inventory Shortages, Focus on Essentials Cut into Third-Party Sales
- Third-party sellers of non-essential merchandise, who use Fulfillment by Amazon for product storage and delivery, are unable to use that service until April 5, in order to allow Amazon to improve warehouse productivity and expedite shipments of medical supplies, household staples, and other high demand product.
- Sales for third-party sellers of non-essential merchandise dropped 40%-60% in the last few weeks, according to Steve Yates, CEO of Prime Guidance, an agency to help Amazon sellers, adding further risk to Amazon’s margin, given third party seller sales are higher margin
- Forces third-party sellers to store and fulfill orders on their own and bypass FBA
- Allows sellers to retain Prime eligibility but could require logistics capabilities that might not exist
Rapid Rise of Price Gouging Forces Improved Amazon Surveillance
- High demand for essentials from toilet paper to hand sanitizer and face masks is leading to price gouging, while pressure from Senate and other government officials is forcing Amazon to better manage listings and prosecute sellers who are using the opportunity to gouge consumers or deceive them with false claims and counterfeit product.
- In early March, Amazon removed 530,000 “high-priced offers” from its marketplace and has suspended over 3,500 seller accounts
- Company uses machine learning models to detect price anomalies and recently added human supervision as well
- Also removing and blocking products making misleading or false claims about coronavirus
- President Trump signed an executive order against product hoarding and price gouging targeting individuals and commercial businesses hoarding products with the intent of re-selling at marked-up prices.
Conclusion
The coronavirus has given Amazon a window into what changes it must make to ensure that its supply chain and fulfillment network are even more robust before the next crisis hits, and this includes sourcing diversification for its third-party sellers. It also highlights that when in panic, consumers will pivot to essentials, suggesting that Amazon should be ready to address demand needs, but also needs to be prepared to capitalize on the closure of its discretionary rivals, many of whom will struggle to come out of these types of situations, given ongoing secular pressures. On the demand side, consumers are nervous and uncertain due the rapid pace of change in everyday life. This is, accordingly, an opportunity for Amazon to improve its brand reputation, expand its customer base, and to demonstrate that it can service the needs of its members as well as its brick and mortar customers.
This report is issued to the Subscriber for its exclusive use only. This Report contains the opinions and editorial content based on information available as of publication, compiled from sources which Information Clearinghouse Incorporated, F&D Reports, and/or Creditntell (collectively, “ICI”), do not control and unless indicated is not verified. ICI, its principals, analysts, writers and agents do not guarantee the accuracy, completeness or timeliness of the information provided nor do they assume responsibility for the information reported herein nor for failure to report any matter omitted or withheld. This report and/or any part thereof may not be reproduced, and/or transmitted in any manner whatsoever.