Tainted Love Cocktail & Have We Reached Peak Amazon.com?
Issue No. 3 - February 17, 2023
Only two issues into the newsletter and it has been great to hear so much encouraging feedback from all of you - thank you. I think anyone who leans into a personal work of art or journalism will agree that hearing from your audience and seeing them share it with their networks is a huge boost for them, and that has certainly been true for me - even at this nascent stage of this project. If you like what I am up to here, please do share it. Thank you in advance.
The top question I have got thus far only two issues in? Are you going to pair the cocktail with the topic? My answer initially was, “No!” (Basically because I am not sure I want to think that hard about it.)
But this week that is exactly what I am doing! (But this is not a promise I always will!)
‘Tainted Love’ is of course well-known as one of the sexiest new-wave songs ever. But - fun musical fact alert! - it was NOT actually written by Soft Cell in the early eighties. It was in fact written by an artist by the name of Ed Cobb, who used to be part of the American band the Four Preps. It was first recorded by Gloria Jones in 1964. Credit to Almond and Ball of Soft Cell, it is a great and honest cover of the song - but of course wrapping it in black pleather and adding a dash of mascara made it a seminal hit when it came out on Non-Stop Erotic Cabaret. It was certainly in heavy rotation on my Walkman back in 1981. (Go ahead, name the band who’s haircut I copied in 1981, my sophomore year of High School. I’ll buy the first person who guesses right a cocktail next time I see them! 1 guess per person! Post on LinkedIn or the comments here.)
‘Tainted Love’ also happens to be a fabulous cocktail - and how I feel about Amazon.com. So that’s where we are headed this week… and this weeks newsletter is a long-read, so fix up a cocktail and settle in.
This Week’s Cocktail: The Tainted Love Cocktail
This week’s cocktail was created by my good friend, former colleague, and fellow cocktail enthusiast Bill Friend. Bill and I got together recently and we mixed one of these up - and I got the picture above in Bill & Val’s beautiful home. The cocktail is fantastic, combining a few of my favorite things - peaty Islay Scotch whisky, Campari, and Crême Yvette. It is a luxurious and sophisticated cocktail. Crême Yvette, if you are unfamiliar, is like a more balanced Crème de Violette - with notes of honey, orange peel and vanilla to complement the violet.
This cocktail takes just a touch of simple prep a day or more ahead of time to infuse the Campari with the coffee beans - but it is well worth it. And that infused Campari is fun to play with in other cocktails too. (Or dry it and make Campari pop-rocks! Something we will probably cover in a future newsletter.)
One tip on the cocktail: The flavor will develop as the cocktail warms, so I like this one up and in an un-chilled glass - but some may enjoy it over a rock too and that is totally fine.
The spec:
1 oz. - Campari (Coffee Infused**)
1 oz. - Crème Yvette
1 oz. - Islay Scotch (Ardbeg 10 Prefered)
4 drops - Bittermens Xocolatl Mole Bitters
3 dashes - Dashfire Ancient Chinese Secret Bitters
Orange peel twist (garnish)
Notes:
**Coffee infused Campari: Add 3 tablespoons of coffee beans to a bottle (750ml) of Campari and let sit for 24 hours, shaking well as often as possible. You may need to pour a bit of the Campari out to fit in the beans … so make a Negroni too! Filter back into the bottle, removing beans after infusion, refrigerate (will keep for 2-3 months in the refrigerator).
The process:
Stir with ice in a cocktail mixing glass (beaker or pitcher for substitute) and then strain into a coupe glass (or rocks glass with a large cube if desired). Garnish with orange peel.
Analysis - Tainted Love: Have We Reached Peak Amazon.com?
I have been thinking and reflecting about Amazon a lot lately. For years Amazon has been an unstoppable e-commerce 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.
The Amazon.com customer experience has gone from bar-raiser to below average. Even the mainstream media has caught on to it - with everyone from The Wall Street Journal to The Intelligencer, to the Atlantic to the New York Times writing about the frustration of search that does not work, fake reviews, bullshit ads everywhere, knockoff products, and routinely missed delivery ‘promise dates’.
Customers are noticing. In 2021, Amazon's CSI score fell to an all-time low on the American Customer Satisfaction Index. Amazon's score decreased to 78/100, its worst performance since 2000 - back when Bezos himself was still pulling shifts with his hair on fire at the warehouse during peak. Amazon now lags behind Costco and Nordstrom. All due respect to my friends who have worked in e-commerce at both, but those two sites are far from great experiences.
What Costco and Nordstrom are is honest - good quality products at a fair price with service standards that matter to them - and their experience is not littered with bullshit ads for fake products that show up later than you told the customer they would.
So in other words, Amazon’s e-commerce experience is now mediocre, and suddenly seems to have developed a very real customer trust problem.
It honestly pains me to say it. I worked there - though I left after a few thousand cups of coffee, a lot of challenging experiences and learnings, and some funny stories I still tell. It feels like I worked there forever since the learnings were so huge - both personally and in how Amazon did things - how Bezos led, how decisions were made, how willing he was to bet on things both big and small, and the smart, hyper-confident (and yes, very competitive) people I was surrounded by. Many of them have remained friends and I respect them a lot.
Oh, and the best story? A strong candidate is one that does indeed involve Jeff Bezos and a rather long story that ends with he and I laughing very, very loudly together in a very small concrete room in the basement of Amazon’s art-deco castle of an office - PacMed. Our laughs achieved some sort of cosmic harmony which had a disabling effect akin to what I swear I remember from an old Star Trek episode. Craig Berman may be willing to verify the bone crippling frequencies we reached, but note that the sound waves also had the effect of erasing all short-term memory, so if he does not remember it, that has no bearing on whether you should believe it happened or not.
But what was not to be forgotten - and what was not to be laughed about - was the expectation of the growing corporate organism - that was Amazon - to differentiate through a maniacal focus on delivering great customer experiences. That was simply non-negotiable.
So why can’t Amazon just get refocused and bring back some of that hair-on-fire passion for the customer that they once had? Why can’t a few “Andy Emails” in the style of “Jeff Emails” kick some people in the butt and get the customer experience sorted? (Say “sorted” in an English accent, and you will hear it like I just did.)
Well, because they are in a trap.
It is a complex trap that sets Amazon up for a painful awakening to a new day in Amazon’s history - where retail market share starts to slip and Amazon increasingly becomes a back end - tech infrastructure and fulfillment - and thus, growth and margin dollars slowly erode. The sun is rising on “Day 2” - Bezos’s much quoted vision for a descent into stasis, mediocrity and “death” which he even wrote about in his 2016 Shareholder Letter. I am not alone in thinking that may be true. For example, John Rossman - also a friend, whom I also met back at Amazon - recently wrote very insightfully about this (You should subscribe to John’s Substack - very smart stuff - or listen to the Geekwire podcast he joined to discuss it.)
As John very smartly recommends, there is a lot Amazon can do to trim expenses and work to try to save the culture too. But it is very hard to escape a trap so well laid by yourself that you have perfectly backed yourself into a corner.
What are the elements of the trap? Let’s explore:
The Trap Part 1: Amazon’s Advertising Trap
In the Q4 ‘22, Amazon's digital ad business grew by 19%, propelling the company to the third spot in the global digital ad market with a 7.3% share and a $38B annual business. While this growth has benefited from Meta’s face-plant (after Apple tripped them on the way to the cigar room) the reality is that Amazon's advantage over all its ad competitors except Google is that its advertising is more effective than poorly targeted display or social ads. Shoppers show very clear intent by searching - on Amazon or Google or your website. Targeting based on that? Money. (And - subtle mention - it is also why Bloomreach’s product discovery is so effective too.)
But how do you keep growing your high-margin ad business? You create more ad slots. Um, in case you have not noticed, Amazon can already feel like it is ALL ad slots. (Ok, that is an exaggeration, but not by much.) I am not vilifying ads - I’m fine with a few - but when you allow merchants to bid on keywords and brands without regard for what the customers are searching for? I don’t even need to answer that, you get it. To make matters worse, every retailer at scale is trying to copy the model and launch retail media networks. The end is nigh!
Amazon will need to continue expanding and “improving” its advertising offerings to keep advertisers (wait, I thought they were merchants a minute ago) happy and spending more while also allocating a larger portion of their budget and resources to the ad platform. In my view this is like chasing your next fix and is not going to help rescue the customer experience - which in many ways is diametrically opposed to it. (I was going to make a snarky comment about bro-Jeff forgetting that on the way to the gym, but then cut it.)
Time for some tough love and for Amazon to kick the ad habit or else, and to be honest I do not think that will be easy.
And it connects into the second part of the trap.
The Trap Part 2: The Offshore Third-Party Marketplace-Seller Trap
You have to admit that Bezos and team made the bold bet to sunset auctions and ‘zShops’ and launch the marketplace model. zShops was such a spectacular failure that Jeff Bezos reportedly quipped that only he and his parents had ever visited a zShop, and the marketplace model would unlock tremendous opportunities for Amazon and value for its shareholders. But unlike eBay, Amazon worked to ensure there was one product page for each common product. An Amazon SKU is called an ASIN - Amazon Standard Identification Number - and a white 16GB iPod is a white 16GB iPod no matter who was selling it. Amazon set up competition over the “buy box” and invited sellers large and small to compete for it by offering the lowest cost and fastest delivery - including competing against Amazon itself. It seems funny to say it now, but that was mind-blowing at the time.
I was still at Eddie Bauer at the time, and remember getting an offer from Amazon to add Bauer’s apparel to Amazon’s new (at the time) apparel marketplace. It was a terrible deal for a retailer - 18% rev share? You are nuts! - but when you could have access to Amazon’s firehose of traffic, it was hard to pass up. Many went for it, especially if they were selling a commodity product or lacked the resources of an established national brand with its own direct channels.
Today, a remarkable six out of ten (60% for you math majors) units sold on Amazon.com are from third-party merchants selling through the marketplace. Amazon does not carry the inventory - instead it charges extra for storage and fulfillment services (FBS) and finds all kinds of ways to gamify “the buy box” and get merchants to spend more with Amazon to eke out sales. This is like a modern form of indentured servitude as these merchants spend money and labor to give more of their margin to Amazon than themselves - all for a sip of that precious traffic.
And which merchants are in the best position to share that margin with Amazon and be happy with it? Manufacturers.
Manufacturers are used to selling their manufactured goods wholesale to western brands and retailers. Why not sell direct through Amazon (and Shopify, eBay, etc., but that’s another story) and get a bit more margin and start to build your own brand.
Pre-pandemic this motion became endemic as Amazon provided a well oiled channel for offshore manufacturers to sell direct to consumers through its marketplace. And by offshore I am primarily referring to China, but not exclusively. But Chinese manufacturers had the advantage of infrastructure and manufacturing hubs to make this model work uniquely well for them. Amazon even invested in technology and services to help them - now two day shipping from China was within reach for these manufacturers to reach the vast hordes of American consumers hungry for inexpensive goods that were essentially knock-offs of the same products those same manufacturers made for leading brands and retailers private-label programs.
I know about this all too well, as my first job out of college (my pre-Internet career, yes, I am that old) was scaling up a private label apparel program for a regional American department store. That was a helluva long time ago. The dirt roads of Guangdong are now paved freeways, the rice paddies of Shenzhen are now skyscrapers, and the factory owners now “live” in Vancouver or London - but the business has not really changed all that much - except that they all want to produce their own brands, and Amazon made it easy. (The New York Times did a great piece on this back in early 2020 - calling out the proliferation of what they called “psuedo-brands” - but it somehow went a little under the radar as people began dying in Wuhan, Milan, Kirkland, etc.)
I have no problem with global trade - other than environmental degradation, I think globalization overall has many benefits to humanity as a whole - as standard of living, gender equity, and education levels tend to rise as a result of global trade. I am also not going to claim that all these products are awful or poorly made (though some certainly are) but what this has led to is a shitty customer experience as these Chinese brands learned to play Amazon’s game very well - deploying legions of young, smart people to ‘optimize’ their Amazon business with copy-paste product descriptions, fake reviews, deceptive keywords and search gamification. This has already gotten even easier to hack with ChatGPT.
These manufacturers also took full advantage of Amazon’s ad programs and paid for all the services that led them to appear on the first search result page or win the “buy box” and bump out everyone else - including what you may have actually been searching for on Amazon. Even in obscure categories, success on Amazon became hugely lucrative for these manufacturers - and of course Amazon and many of their customers benefited as well, even if they had no idea that weird brand that they had never heard of was shipping from China and clearing customs electronically with the help of Amazon on some tarmac somewhere like Riverside, CA or Memphis, TN or Castle Donington, UK.
Of course that optimized process to get goods from China and deliver this at scale and low cost - the pandemic kind of f***ed that up. Suddenly the experience turned to real crap. And the monitoring and reporting systems Amazon built to try to ensure the customer experience did not suffer were no help. It is one of the primary reasons why Amazon’s CSI score cratered in 2020 - missed delivery, and poor service can do that.
The reliance on third-party sellers - many if not most from offshore - and the sheer scale of the program is now a trap, especially paired with the scale of the fulfillment network and ad programs built up around it.
Which leads us to the next trap.
The Trap Part 3 - Amazon’s Private Label Programs, Politics and Antitrust Pressure
A lot has been made about Amazon’s own private label programs competing with retailers and brands on the Amazon marketplace. Amazon now has over 200 of their own private label brands. Yes, that is a challenge for those seeing their products copied by Amazon Basics, Essentials, Mama Bear, Solimo, etc.
Oh, and that “walled garden” that supposedly kept marketplace seller data from Amazon’s own retail merchants and buyers - yep, that was indeed bullshit. But that is frankly smart of Amazon and not anything other retailers have not done before as they launched their own private label programs - even if the anti-trust regulators may feel differently (more on that next). By far the motion that junked up search, category pages, and the overall customer experience on Amazon.
None of that is very new, but Amazon has now become an easy target for politicians of all parties and stripes across the U.S., U.K. and Europe - despite having between one to two hundred lobbyists and spending $169M in 2021 on lobbying in the U.S. alone.
Amazon is now an easy mark for American and European antitrust regulators to show they are on the job - and the pressure is mounting to take a chunk of Amazon’s hide. The Wall Street Journal reported recently that the U.S. Federal Trade Commission is getting set to bring an antitrust lawsuit against Amazon in the next few months. The lawsuit may target a range of the tech giant's business practices as being anti-competitive but number one the list will likely be how Amazon has structured the marketplace and its retail model. Number two and three on the list may be how Amazon leverages the fulfillment (FBS) and cloud (AWS) businesses to in effect subsidize the retail business.
I am no antitrust expert and there may be many aspects of a prospective case that may mean it has low prospects for success, or perhaps does not meet the standard of anti-competitive behavior at all. And any lawsuit will likely take many years to play out, with an expected appeal or two or three. Who wants the over-under on a 2030 verdict? But in any case it will be a PR nightmare and cement the publics’ suspicions that Amazon does not play fair. It will erode their brand, and impact market share. Calls to shop elsewhere will intensify and play into the hands of Amazon’s competitors. The many brands who may still sell on Amazon will be encouraged to drop off and go direct or through the many other alternative marketplaces out there now.
And just as the Cambridge Analytica scandal led to a large number of Facebook users to “delete” their accounts you could see a growing call for Amazon’s Prime members to cancel their subscriptions (probably only to renew when they are on their second ‘Tainted Love’, and their kids want to watch something on Amazon Prime Video).
Amazon is like a body where different interconnected systems converge in a semblance of multi-dependent balance despite the incredible odds. One problem like that can have lots of ripple effects.
Which leads us to the net trap.
The Trap Part 4: The AWS Spin-off Trap
Many have made the argument that Amazon has become a company with two competing narratives. The retail side of the business is struggling to find growth and profitability while the cloud computing side is in the midst of a Battle Royale with Microsoft Azure and Alphabet's Google Cloud.
Overall in 2022, Amazon’s business increased 9% to $514B. In 2022 the retail/marketplace business grew 13% in North America to $316B while the International business decreased 8% to $118B (though per-Amazon it would have been +4% adjusted for FX). Both of these lost money however - with the NA segment losing $2.8B (compared with operating income of +$7.3 billion in 2021) and the International segment losing $7.7B in 2022 (compared with operating loss of $0.9B in 2021). Meanwhile the AWS division's sales increased 29% in 2022 to $80.1 billion with an operating income of $22.8B (compared with $18.5B in 2021).
Gartner is expecting worldwide end-user spending on public cloud services to reach $592B in 2023, up 21% from 2022. Gartner estimated Amazon had a 38% market share of the public cloud market in 2021, capturing a lion's share but growing slower than its competitors and with some relative weaknesses. The acceleration of the hype-cycle about Generative AI and the growing complexity of multi-cloud cloud architectures mean that Amazon has a huge fight on its hands and many will claim that AWS is where the real long-term value really is in the Amazon stock - whether there is antitrust consideration or not. If an independent AWS were valued relatively conservatively for a tech provider - at 10x sales - it would command a market cap of over $800B today. Amazon's current total market cap is just over $1 trillion. That is a pretty strong case.
If Amazon.com needs to pay market rates for a variable cloud computing infrastructure with massive seasonal spikes - or for warehouse space for that matter - expect those losses indicated above to be far greater and for the value of a separate Amazon retail.marketplace business to be valued accordingly and thus have far less capital and resources to work with.
And how about the talent required. What software engineer or hot shot business leader wants to stay with retail and who wants to go with AWS? Whoever is left inside the Spheres last stays! Bloodbath.
Which leads us to the next part of the trap.
The Trap Part 5: The War for Talent Trap
Amazon was once on the short-list of every MBA or Computer Science graduate. It was famously hard to get hired there into a management or role at headquarters. (How I managed to get through the interview loop is still a mystery, but it took two attempts and a hair-raising whiteboard exercise.)
Everyone knew Amazon was a tough place to work, but they wanted that - or thought they did. They also knew salaries were modest and titles were kept low - meaning a manager at Amazon would have been a Director anywhere else, and a Director at Amazon would have easily been a VP or even higher.
The quid-pro-quo was a combo of resume building - if you could make it at Amazon you could make it anywhere - and equity. The RSUs were where it all was at, and as long as the stock was climbing those RSUs could lead to transformational outcomes for nearly everyone who had them. And for top-talent that was even more true. And of course the vesting schedules and follow-on grants would ensure anyone would think twice before they left.
But what happens when the stock stalls or stumbles? It can mean the calculus on staying or joining in the first place can look very different.
And of course Amazon attracted a highly competitive, winner-take-all mentality that took pride in working hard to make a winner - even if for some it came with a price to pay in their personal lives or well-being. To be perfectly honest, I have always defended the work-culture at Amazon. I had what I would say was an overall good experience. But that was not true to all, including friends of mine. When the equation shifts - the upside is not there and you no longer feel the pride of winning - expect Amazon to loose more key talent and have a harder time competing to replace them.
Amazon is at the forefront of automation and computer science, but someone has to write and optimize that software and design the strategies to win in the market. Falling behind in the war for talent will be another trap for Amazon.
So, have we reached peak Amazon.com? Yes, I think so.
Amazon accounted for an estimated 39.5% of all U.S. retail e-commerce sales in 2022, or nearly $2 in $5 spent online. Holy smokes! The next 14 biggest digital retailers make up just 31.0%, with the remaining 29.5% of the U.S. e-commerce pie going to everybody else.
In every Annual Report, Amazon.com founder Jeff Bezos had famously attached a copy of his original 1997 Letter to Shareholders. In that 1997 letter, Bezos outlined the fundamental measures of Amazon’s potential success—relentlessly focusing on customers, creating long term value over short-term corporate profit, and making many bold bets. “This is Day 1 for the Internet,” Bezos wrote, “and, if we execute well, for Amazon.com.”
Those principles have remained consistent for over two decades, and lie at the heart of what has been known at Amazon as a “Day 1” mentality. “Day 1” is even the name of one of Amazon’s HQ buildings so that employees don’t forget.
The steady decline of the consumer experience is the canary in the coal mine telling us Amazon.com needs to fix things fast if it wants to hang onto that kind of market share or grow it. And yet, as we have explored here, Amazon has set a complex trap for itself in trying to rectify the challenges they face and still satisfy Wall Street, their employees, and their egos.
“Day 2” is dawning on Amazon.com. Amazon will remain a hugely important player in the e-commerce landscape and a force to reckon with, but I expect market share and market power to decline versus grow. That is an opportunity for everyone else to execute with common sense and a focus on first-principles - great products, great product discovery, focus on long-term customer relationships, and meeting and exceeding your promises to customers.
Just do yourselves a favor and don’t chase Amazon into corners - like overcooking your marketplace and retail media strategies.
What can Amazon do?
Bezos, and the many others who worked alongside him, built an incredible business with a combination of good old fashioned grit, a focus on simple and clear goals that were based in first-principles, and a long-term vision investors were patient to let play out - because it made sense and they developed credibility through steady progress. (Some might claim Bezos created a reality-distortion field over Wall St. by using Chinese balloons broadcasting his laugh at sub-audible frequencies, but there is a lack of substantiated evidence for me to include that here.)
It is going to be incredibly hard, but honestly the only hope for Amazon.com’s e-commerce experience is to get back to what really matters - a maniacal focus on delivering a highly relevant, trustworthy experience.
It will be incredibly hard to see the ad business and its high margin contribution shrink. It will be incredibly difficult to see selection decrease as the high bar for quality, authenticity, and reliability is re-established. It will be hard to invest in core e-commerce tech that is only for Amazon.com and not somehow leveraged with AWS customers. (Oh, and Amazon as an e-com or retail platform? Hold my beer.)
It would be disingenuous of me to say there is no way for Amazon to get their e-com mojo back, but I do need to be honest here. I am not hopeful. The traps they set were too good. Don’t follow them into them.
Due to length (this post was supposed to be four paragraphs! Fail!), I am splitting off “ICYMI - Links of the Week”, recent podcasts, and some other content into a separate newsletter edition… and another cocktail! Look for that in the next few days.
Now, imagine a cheery Katie Couric announcing it is “Day 2” on the Today Show and then quickly take another sip of your ‘Tainted Love’. (Yes, I know she is not longer on the show, though I probably have not seen it in ten years… blame the cocktails.)
If you are looking for me, you can find me here, here, and here.
Cheers! Be well, and here is to good business! - Brian
Please tell me 1) you have photos of that 80s haircut and 2) you copied Flock of Seagulls