Amazon reported stronger-than-expected results this week, driven by stable growth for retail and advertising and a reacceleration in growth in Amazon Web Services. In total, the results pointed to healthy consumer spending and increased corporate spending/activity/investment--all positive indicators for the economy. Profits of $14B were nearly $2B above the top-end of the company's outlook. Looking at just the company's North American retail segment, gross merchandise volume (GMV) growth was stable at approximately 11%, led by third party seller volume (+12%). Subscription fees have slowed (+11%), which is a reasonable measure of membership. Segment margin improved significantly from 1.4% in Q1 2023 to 5.8% in Q1 2024.
To understand the quarterly cadence, we rely on our data for fulfillment center shifts worked data and management’s guidance. Guidance was for slower companywide growth in Q2 2-24 (7%-11% growth year-over-year). The chart below shows that domestic fulfillment center activity in January and February were the strongest months of Q1 and that March slowed. We don’t think that the slower rate indicates a slower underlying consumer; instead, we believe that it reflects comparing to the onset of the pandemic. To understand the influence on that onset, overall e-commerce for Q4 2023 was roughly 100% larger than the pre-pandemic level based upon the Census Bureau’s monthly retail sales report. January and February 2024 (which internalized one more year of growth) were 120% above; March was much stronger at 140%, or a 20-point upswing. Obviously, March 2020 is when the pandemic hit hardest really hit, which is what March 2024 is lapping.
When we compare reported results to our fulfillment center shifts worked signal, we see alignment while also seeing how they are achieving greater profitability. Amazon is moving inventory downstream from the large fulfillment centers (which we are tracking) to regional storage centers which are located closer to the end consumer. The shorter distance and easier to access inventory are saving Amazon money in fulfillment and delivery speed and expense, and improving inventory turns (9 times this year versus 8 times last year). While GMV growth slowed 200 basis points, the fulfillment center savings were greater with expense slowing by 700 basis points; shipping costs slowed similarly. Better placement of inventory is allowing them to get efficiency, which puts more of the volume on day shifts and allowing the company to cut out night shifts. This likely implies a more stable and productive workforce, which on its own creates its own savings.
Keeping inventory closer to the customer also allows Amazon to offer same-day and next-day delivery, which opens consumer considerations for consumables and everyday items. This allows Amazon to put more items in an order, thus lowering the allocated shipping and handling expense, which again is another source of efficiency and margin expansion. Should all this favorability and trend persist, which is what management stated and what we expect, retail margins will continue to climb, or the efficiencies will be reinvested into faster service and lower prices, i.e. more value for the consumer. Amazon CFO Brian Olsavsky said, “Looking ahead, we see several opportunities to further lower cost to serve and improved profitability in our worldwide stores business while still investing to improve the customer experience.”
On grocery, Amazon CEO Andy Jassy said, “We've launched our V2 format in physical stores over the last few months, primarily in Chicago and Southern California. We like the early results a lot. They're really meaningfully better in almost every dimension. It's still early, and there's some things to work through, but we like what we're seeing there. And then we have to decide the best way to roll those out over time...We just launched a Prime benefit for grocery...It's a very valuable offering for our Prime members, and it's off to a great start...In my opinion, we have lots of ways that we can continue to help customers satisfy their grocery needs. And we have some building blocks that I think might also change how people split up their grocery orders over time. But I continue to be optimistic that, that's going to continue to grow for us.” We estimate that the increase in year-over-year change in visits in the V2 locations are 2-3 times that of the market (Recall the market as a whole is up 6%-7% because households are shopping around for the best values. Amazon is clearly aware of that trend and is innovating on ways to get more share by fostering “split up.”)
eBay’s and Etsy’s businesses also experienced a substantial lift from the pandemic, but their lower underlying secular growth has resulted in a longer and more difficult post-pandemic digestion period. For Etsy, the business is more dependent on advertising (28% of sales) to drive growth, which is impacted by Temu’s and Shein’s willingness to pay whatever for ad inventory, as we have frequently written about. Another distinction from Amazon is that the eBay and Etsy marketplaces primarily sell discretionary goods, with eBay increasingly focused on collectors and hobbyists, as well as historically a higher exposure to less-affluent households, the consumer segment that is cutting back spending in 2024 (across a broad set of categories).
eBay’s domestic GMV didn’t grow in Q4, nor Q1, and is not expected to for Q2. Etsy’s GMV was down -5% and is expected to be down similarly in Q2. As shown in the table below, the pandemic was so explosive and atypical to eBay’s and Etsy’s growth that they have been settling lower/normalizing since 2021. In other words, the pandemic was atypical, and it set up an impossibly large base for these brands to grow from.
This takes us back to our view that domestic e-commerce in 2024, and forever more, will remain a single-digit growth category (due to the law-of-large numbers and high penetration levels) with Amazon and Walmart as the ongoing market share takers. This leaves little growth for other brands. Given that dynamic, for most brands and retailers, sales growth is going to come from physical stores along with authentic differentiation, relevant merchandise, inspired visual storytelling, exciting values, excellence in service and store standards, and highly convenient locations.
As it relates to crafters, Etsy’s performance advertising spend for the quarter was up only 2%, as it is redirecting spending to brand campaigns. This, as well as the GMV decline, suggests that for its professional crafters (which sell on Etsy) are still under pressure. In turn, this means that professional crafting suppliers--including Hobby Lobby and Michaels--are still not seeing a lift in sales. When we look at Hobby Lobby and Michaels, we see things are bouncing around, but more stable than last year, which is encouraging.
As it relates to Temu, consumer trends, and the health of the consumer, Etsy CEO Josh Silverman said, ”I think what we're observing...is that consumers feel really pressured in spite of what we're seeing about a generally healthy economy. Consumers feel really pressured and so they are seeking value in deep discounts and deep promotions. And so yes, the Chinese competitors are offering that, but Amazon and Walmart are, too. And it looks like the people that are driving most of the growth in e-commerce are people that are able to offer everyday essentials at very low prices. And there's probably some trip consolidation that's happening there, too. While you go into Walmart to buy your groceries at a cheaper price, you may pick up some other items as well while you're there. So I think that the Chinese competitors are a competitive headwind, no doubt. They've been a headwind to us and to everyone else in e-commerce. It would be great to see them not investing so aggressively in marketing. But I think the root cause of consumers feeling a ton of pressure and, therefore, seeking deep discounts will remain regardless of what the Chinese players do.” Etsy CFO Rachel Glaser shared, “When we look at our household income differentiation between lower household incomes and upper and especially the highest household income, so it was above $200,000. We see continued separation that the higher household incomes are actually growing. The lower household incomes are not.”
