Tuesday, April 11, 2023
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Amazon: Prime Day II is an attempt to fill up empty warehouse space

The most expensive TV series in history is available only to Amazon Prime members. Lord of the Rings: The Rings of Power is an expensive, glossy illustration of the investment Amazon is making in benefits for customers who pay for Prime subscriptions. The decision to add a second Prime Day shopping event, however, is less about subscriber benefits than the need for extra ecommerce revenue.

Amazon has retained its market share of online shopping. According to Insider Intelligence, it accounts for almost 38 per cent of sales in the US. The problem is overall demand is dipping. A combination of rising inflation and return to in-person shopping has resulted in a decline in ecommerce revenue. In the last quarter, online sales (excluding those by third-party vendors) fell 4 per cent on the previous year. The final holiday quarter is expected to be similarly soft. Overall, S&P Global forecasts revenue this year will rise just 11 per cent — a record low.

Slowing sales growth and high spending have resulted in a share price drop that leaves the company trading about a third below its average forward ebitda multiple.

Adding a second Prime Day exclusive shopping event is an attempt to lift sales by turning October into a pre-holiday shopping season. Amazon’s invented online promotion is seven years old. Over time it has become a way to bump advertising revenue alongside ecommerce. Companies pay to promote their goods at the top of the first page of search results. Advertising was the third fastest growing part of the business in the last quarter.

Higher ecommerce sales are needed if Amazon is to balance its oversupply of warehouses. Investment in logistics doubled over the past two years — a decision that led to negative free cash flow last year and the first quarterly net loss in more than a decade. The expansion will lower delivery costs, but only if order numbers keep growing.

The alternative is to keep cutting back on warehouse space. The success of the next Prime Day should determine which is required.

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