Episode 60: Have We Reached Peak Amazon.com?

For years Amazon has been an unstoppable ecommerce juggernaut with innovation mojo and an investment thesis that gave them license to spin Bezos’ legendary flywheel so fast that no one could keep up.

But now? That mojo has turned to mush.

Today, Brain explores the complex trap that sets Amazon up for a painful awakening. 

Join Brian as he walks us through:

• Amazon’s private label programs, politics, and antitrust pressure
• The state of offshore third-party marketplace sellers
• The evidence for and against having reached “peak Amazon”

Don’t have time to listen to the full episode? Read on to get a summary from Brian as he dives into each of the “traps” that Amazon has set for itself over the years. 

Have We Reached Peak Amazon.com? 

When it comes to ecommerce, Amazon was considered an unstoppable force for a long time with “innovation mojo,” but that mojo seems to have dried up in recent years. That’s largely because the Amazon.com customer experience has gone from top-notch to below average, with shoppers voicing frustration at search functionality that doesn’t work properly, fake reviews, a ton of ads, knockoff or counterfeit products, and missed delivery dates. All of this has resulted in Amazon receiving its lowest American Customer Satisfaction Index score yet in 2021. 

The Amazon ecommerce experience is now a shadow of what it used to be, and there’s one big reason why the online business hasn’t been able to refocus and regain that bar-raising standard: They’re in a trap of their own making. 

The Amazon “Traps”

As Amazon grew over the years, it ended up setting up various “traps” in the name of business growth that will ultimately shackle and harm the business. The writing’s on the wall for Amazon to come face to face with the dreaded “Day 2” that Jeff Bezos warned about in a 2016 shareholder letter: “Day 2 is status. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death.” 

Let’s take a closer look at how Amazon trapped itself as it grew into the monolith it is today.

Retail Media Advertising 

Amazon’s digital ad business increased by 19% in Q4 of 2022, making it a $38 billion annual business. But with such a high-margin ad business, how do you keep growing it to satisfy advertisers? By selling more ads, of course. 

But for Amazon customers (the shoppers, not the advertisers), that makes for a poor browsing experience. And therein lies the trap — by continually expanding and “improving” its advertising offerings, Amazon will clog up its product listings and alienate customers. 

Offshore Third-Party Marketplace-Sellers

Amazon structures its product pages with ASINs (Amazon Standard Identification Numbers), which ensures that there’s only one product page for each common product. As a result, Amazon gets sellers large and small to compete over the “buy box” — Amazon gets a cut of the revenue, but sellers get to tap into a firehose of traffic, making it easier to start selling directly to consumers. 

Today, 60% of units sold on Amazon.com are from third-party merchants in the marketplace, where Amazon doesn’t carry the inventory but simply charges for storage and fulfillment services. That’s because manufacturers (largely from China) were making products for leading brands and private-label programs, but can now sell directly to consumers for cheap. 

The problem is, as these offshore manufacturers have gotten better at “gaming” Amazon’s system — copy-paste descriptions, fake positive reviews, deceptive keywords, paying to show up on the first page, etc. — they end up bumping out everything else, including what you were probably trying to search for in the first place. The lack of oversight and monitoring for these manufacturers has led to a rapid decline in the customer experience. 

Private Label Programs and Antitrust Pressure

Beyond offshore manufacturers, Amazon’s private label brands — that it uses to sell its own products — are competing with retailers and brands as well. Not only does this clog up search, category pages, and the overall customer experience, but it’s triggered action from antitrust regulators. 

Just recently, it was reported that the US Federal Trade Commission is planning to bring an antitrust lawsuit against Amazon. While the lawsuit will likely take years to play out (and may not even lead to anything), it will still impact public perception of Amazon and potentially erode market share. Some of the brands that sell on Amazon may even decide to sell direct or go through an alternative marketplace. 

AWS 

Amazon Web Services (AWS) saw a big boost in sales in 2022, up 29% to $80.1 billion with an operating income of $22.8 billion. That’s in contrast to the ecommerce side of Amazon, which lost money both in North America and internationally. 

With Amazon holding onto a 38% market share of the public cloud market, Amazon faces a growing internal dilemma — should Amazon spin off AWS so that it can better focus on each part’s core competencies? How does that affect resourcing and talent if there are two entities? 

The War for Talent 

Amazon has a reputation for being a tough place to work — where salaries are modest and titles are kept low — but it’s also a great way to build up your resume and earn valuable RSUs. But Amazon has also taken PR hits for its highly competitive, winner-take-all work culture that sacrificed work-life balance (whether that’s true or not is highly variable — I had an overall good experience when I worked there, but have heard different takes from others). 

But if the stock stalls or stumbles, then what? If the company is asking for personal sacrifice for not a lot of upside, it’ll have trouble attracting the talent it needs to stay competitive and relevant in the long run. What was once a tough but beneficial trade-off may soon become a trap that prevents Amazon from adequately future-proofing its business. 

So What’s the Verdict? 

Have we reached peak Amazon.com? The short answer is: Yes, I think we have. Even though Amazon is still an ecommerce goliath, accounting for an estimated 39.5% of all US retail ecommerce sales in 2022, the fact remains that the customer experience is declining. 

While Amazon isn’t going anywhere anytime soon, that below-average customer experience is indicative of the need for Amazon to fix things fast if it wants to hang onto that huge market share (much less grow it). But the intricate traps that Amazon has set for itself means the door is open for competitors to focus on the principles that got Amazon to where it is in the first place and grab some of that market share for themselves: great products, seamless product discovery, a focus on long-term customer relationships, and delivering (and exceeding) your promises.

And hey, Amazon might be able to recapture that early ecommerce magic by focusing on providing a highly relevant and trustworthy experience. However, I’m not optimistic — the traps the company set for itself are simply too good.