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Amazon Targets Unprofitable Items, With a Sharper Focus on the Bottom Line

16 December 2018

From The Wall Street Journal:

Amazon.com Inc. has trained people to buy everything from major appliances to daily staples online. Now it is having second thoughts about some of those sales because they don’t make money—and is pushing big brands to change how they use its site.

Inside Amazon, the items are known as CRaP, short for “Can’t Realize a Profit.” Think bottled beverages or snack foods. The products tend to be priced at $15 or less, are sold directly by Amazon, and are heavy or bulky and therefore costly to ship—characteristics that make for thin or nonexistent margins.

Now, as Amazon focuses more on its bottom line in addition to its rapid growth, it is increasingly taking aim at CRaP products, according to major brand executives and people familiar with the company’s thinking. In recent months, it has been eliminating unprofitable items and pressing manufacturers to change their packaging to better sell online, according to brands that sell on Amazon and consultants who work with them.

One example: bottled water from Coca-Cola Co.Amazon used to have a $6.99 six-pack of Smartwater as the default order on some of its Dash buttons, a small device that allows for automatic reordering with a single press. But in August, after working with Coca-Cola to change how it ships and sells the water, Amazon notified Dash customers it was changing that default item to a 24-pack for $37.20.

That raised the price per bottle to $1.55 from $1.17. And Coca-Cola will start shipping those orders directly to consumers, sparing Amazon the expense of shipping from its warehouses. Manufacturers shipping from their warehouses is something Amazon has asked more brands to do to cut its own costs.

Amazon told Coca-Cola that it was losing money on the smaller, cheaper shipments, according to people familiar with the matter.

Coca-Cola responds that it works with partners to learn together and constantly evolves its offerings.

. . . .

For big consumer brands, not being on Amazon “is not an option anymore,” said Guru Hariharan, chief executive of Boomerang Commerce, which makes e-commerce software. “They have the power; they have the shoppers.”

Amazon also has greater leeway to curb CRaP items because of the rise of independent sellers on its site. They have added hundreds of millions of items, helping ensure that Amazon’s virtual shelves are stocked with the variety shoppers expect. And those sales tend to be more profitable for Amazon, which typically collects a 15% cut plus fees for warehousing.

. . . .

Mr. Bergstein said his company has developed new product formats that are more profitable to sell online—on Amazon or elsewhere. Amazon is “really clear that they have a profitability threshold,” he said. “We’ve been clear about saying, ‘Let’s make sure what we’re selling is profitable, and we’re not just lining Amazon’s pockets.’”

That has meant selling smaller, lighter laundry products like detergent pods and skipping cheaper paper towels. Instead of promoting a three-pack of dish soap, Seventh Generation recently started advertising a 6-pack for $17.70, and it created a larger, 504-count package of baby wipes for $19.91 for sale on Amazon and elsewhere.

Link to the rest at The Wall Street Journal

As PG has noted previously, ebooks are an ideal online product for Amazon with extremely low storage and delivery costs.

PG suspects the same could be said for ebooks and traditional publishers although, unlike Amazon, publishers share far less of the money they receive from ebook sales with authors than Amazon does.

Of course, traditional publishers opted to fight with Amazon instead of embrace it as a marvelous way of increasing sales without increasing publisher overhead. They bet their money on Barnes & Noble instead.

While PG is rolling, he’ll briefly address an apparently evergreen story that pops up among various traditional and nontraditional media outlets: Amazon’s warehouse workers.

PG speculates that none of the authors of those articles have ever worked in a warehouse.

By virtue of a summer job during his college years, PG can claim familiarity with warehouse work. It was hard work that involved lugging semi-heavy objects (30-60 pounds) around all day. The surroundings were much dirtier than Amazon’s warehouses, if contemporary photos are accurate. Climate control at PG’s warehouse job consisted of opening a bunch of doors to allow air to circulate at ambient temperatures.

PG expects that if he went on an inspection tour of today’s warehouses, he would find a great many that hadn’t changed much since his college days.

Way back when, PG earned minimum wage. A lot of warehouse workers still earn minimum wage.

In virtually every way, Amazon treats its warehouse workers better than warehouse workers are treated by other American businesses, small or large. Amazon workers earn more than minimum wage. Amazon provides medical insurance. Amazon provides opportunities for promotion. Amazon will pay for further education of its warehouse employees, whether the education is in a field that benefits Amazon or not.

So why are Amazon warehouse stories such an evergreen topic?

Amazon doesn’t want labor unions in its warehouses. For reasons that are not difficult to discern, Amazon believes that unionized employees will not increase productivity at its warehouses. In the US, the number of workers working under union contracts peaked in 1980 and has been declining ever since.

Again in the US, companies with unionized workforces are overwhelmingly operating in old-time bricks and mortar industries. Virtually none of the technology companies that have driven so much economic growth in the US for the last 20 years are unionized.

A common tactic of US labor unions when they’re trying to pressure an employer into agreeing to unionize its employees is to spread horror stories about the working conditions inside of the target employer. The bad PR is supposed to pressure the company into agreeing to permit labor unions into its business. Whether the horror stories are true or not is beside the point.

Amazon presently employs more than 600,000 people. Not all of those people are happy every day. Not all of those people love their jobs.  PG gently suggests that unionized Amazon warehouses won’t change that.

 

Amazon, PG's Thoughts (such as they are)

26 Comments to “Amazon Targets Unprofitable Items, With a Sharper Focus on the Bottom Line”

  1. “Amazon.com Inc. has trained people to buy everything from major appliances to daily staples online.”

    Someone should have trained you to check your bias at the door when writing an article and address just the facts.

    FACT: People will buy wherever they feel the best deal is. Sure, some people will favorite a retailer, until it becomes overwhelmingly obvious that retailer is screwing them (BestBuy anyone?) The vast majority of people go where the deals are.

    FACT: Amazon is partially responsible for the decline in tradpub and print. Therefore, few journalists are capable of writing articles about Amazon that aren’t hit pieces.

    FACT: Amazon has warehouses in America.
    FACT: Apple has warehouses in China.
    FACT: There are far fewer articles, almost nill in comparison, about the horrific working conditions in Apple’s Chinese factories. Yet there is an unending avalanche of articles about the evils of working for Amazon in America and the UK.

    I guess China has better labor laws?

    I am only comparing Apple and Amazon because they are both tech companies. One has a plethora of positive articles written about it, the other doesn’t. I’ll let you figure out which is which.

    • I can’t blame Apple for mostly manufacturing in China, US workers are by comparison much more expensive due to The labour protections they require and also the various labour unions still existing in America, and Apple‘s primary responsibility is to their shareholders.
      To be fair to the WallStreet Journal, they have criticised Apple in the past, though I suspect the reason we don’t see much of it here on the passive voice is that Amazon is integral to self publishing, where as Apple is not so articles critical of Apple are not published here, due to them being mostly focused on manufacturing conditions.

      • I read more than TPV. Apple is rarely the target of anything negative. I’m not saying it’s Apple’s fault, it just is.

        • Most of the media companies use Macs and long ago bought into the boring PC vs genius Mac storyline.

          There’s a similar effect in movie reviews: nobody dares criticize Disney blockbusters, especially the Marvel Lightshows but everybody else’s lightshow flicks get nitpicked to death. (Partly it’s because Disney dishes early screening passes according to review record and they can be very vindictive if triggered. Sony, Universal, and WB can’t afford vidictiveness.)

          And in gaming consoles, people who grew up playing Nintendo or Playstation were morally offended Microsoft dared to make their own console. Of course, by now the XBOX has its own tribe that cut its teeth on Halo, Kotor, and Morrowind.

          You don’t see it much these days but there was a time when Ford vs GM or foreign vs domestic were fighting words.

          Tribalism always.

          • Most of the media companies use Macs and long ago bought into the boring PC vs genius Mac storyline.

            And when they did, the storyline was right. Perhaps the choice is left to the people who actually use the machines rather than Tony in purchasing. Is there any reason to think Tony is forcing Macs on them?

          • I was always the poor Chrysler guy who got it from both sides…

            My parents raised me to be looking for best value, whoever had it at the time. Apple IS very good quality – just way too expensive when there are makers with very good quality that are far less expensive.

            • Yes. My first computer was a Mac, but it was during the interregnum when Steve Jobs wasn’t at the helm. Very few stores had had Mac-friendly software in those dark days. There was just this one shelf at CompUSA. But then my parents gave us AD&D for Christmas, which was when my brother and I switched to playing video games on the computer. Which meant switching to PCs. Now I build my own.

              I’ve still used Macs at work, but the idea that a Mac is “the best” is truly just hype. It’s a question of software: if the thing you need to do only has software, or only has good software on the Mac, then get one. Otherwise, it’s just overpriced.

  2. “Amazon presently employs more than 600,000 people. Not all of those people are happy every day. Not all of those people love their jobs. PG gently suggests that unionized Amazon warehouses won’t change that.”

    But robotic warehouses will. 😀

    From the point of view of tech companies, US Unions are really good at two things: raising operational costs and partisan politicking. Neither is something the tech companies want to deal with.

  3. Not to atrempt to one up PG but I spent much of my youth as a butcher, working in what amounts to a giant refrigerator, elbow deep in blood, hauling animal carcasses.

    No one made me do it. It was just a tough job.

    I imagine no one is locked inside the Zon warehouse against their will either

  4. “Amazon presently employs more than 600,000 people. Not all of those people are happy every day. Not all of those people love their jobs. PG gently suggests that unionized Amazon warehouses won’t change that.”

    But robotic warehouses will. 😀

    From the point of view of tech companies, US Unions are really good at two things: raising operational costs and partisan politicking. Neither is something the tech companies want to deal with.

    And the greater the external pressure, the more tempting it is to replace recurring expenses with capital investment.

  5. As a general rule, it has been my experience that companies which attract labor unions, deserve them.

  6. If the apocalypse ever hits, I’d much rather team up with warehouse workers than this author and his university chums.

  7. Aw. ‘The Wall Street Journal’ still has its panties in a bunch because Amazon is again doing things they can’t predict and making their readers question why they bother to read a rag that’s wrong as often as TWSJ is when it comes to companies like Amazon.

    I hate to have to be the one to point it out to the supposedly knowledgeable TWSJ, but “Can’t Realize a Profit.” is everywhere in most every company, though many don’t think up such useful ways of naming it. I myself do it all the time when I look at something like TWSJ and decide it’s not worth wasting my time on (just CRaP in action!)

    As to unions, there are few good ones out there – too many are there to line their own pockets and not help the workers (and if Amazon was really screwing over their workers the unions would have no problem moving in – the fact that they’re having problems getting a foothold suggests to me that Amazon isn’t screwing their workers hard enough.)

    MYMV and you have the type problems Amazon has. (being too good at what you do. 😉 )

    • If a conglomerate doesn’t prune their product tree regularly, they end up like turn of the century Sony, selling high end TVs for tens of thousands, PCs for thousands, old fashioned pocket radios for $10, and lead acid AA batteries for a quarter. And losing tons of money along the way.

      Companies evolve with the marketplace or get left behind as roadkill. And Amazon is well past their 21st birthday; they *should* be rethinking their older businesses before they become a drag on the rest of the conglomerate.

      • As long as a product is making a profit, it should not be considered “a drag on the rest of the conglomerate”.

        You may want to argue that it’s making less money than the same amount of manpower doing something else, but as companies keep re-discovering, people aren’t interchangeable widgets, able to do any job equally well, so you can’t just assign them to something else and have them equally productive, so the companies almost always end up replacing large portions of their staff when they chase the more lucrative product.

        It doesn’t help that Wall Street analysts seem to forget that a company that’s not growing (or growing slowly), but making a profit is _actually_ making a profit, while the cool startup that’s expanding like crazy is not (and is very likely to be part of the 90%+ of businesses that fail and end up being worth nothing in the near future)

        Now, when a product is no longer profitable, that’s a good reason to change things so that it is profitable or kill the product, and that seem like exactly what Amazon is doing here. They are evaluating what products are net losses and looking for ways to keep offering the products, but in a way they don’t loose money on them.

        This is a very healthy thing for Amazon to be doing.

        • The issue isn’t about getting out of marginally profitable businesses or ditching strategic loss-leaders but of getting out of businesses that serve no strategic purpose, eat up resources better devoted to other products, and produced only losses.

          Which is what was happening at Sony.

          They kept those products, losing money in the process, because they were part of the Sony “legacy”. That is how they started out and they couldn’t conceive leaving those businesses. It wasn’t until the company’s very survival was at stake that they finally gave up and sold off the chemical plants, the semiconductor foundries, got out of the outdated businesses and refocused the company on what it had evolved into. It certainly didn’t hurt any to ship somebody else’s cheapie batteries with the remotes for their TVs or buy the (cheaper) memory chips for the Playstation on the open market.
          They put their effort where it added value and started making money for the first time in ten years.

          • you have to watch out, I’ve seen companies outsource ‘everything but their core mission’ and end up finding that there wasn’t a company left ($dayjob is flirting with that now)

            • Everything can be mismanaged, nothing is absolute. No silver bullets.
              But the surest way to collapse is to “keep on doing what we always did” long after the reason to do it is no longer valid.

              Exhibit A: B&N stores.

              Times change, markets change; companies that don’t change appropriately die. Think of it as surfing a really big wave.

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