Amazon CEO Andy Jassy Says He's Confident He Can Get Costs Under Control in Shareholder Letter

Amazon published the latest annual shareholder letter from CEO Andy Jassy on Thursday.

Amazon

Andy Jassy, CEO

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In his annual shareholder letter, he said he was confident that the e-retailer could get costs under control while continuing to invest in new growth areas.

The full text of Jassy’s letter is below:

Dear shareholders:

Amazon's future has me feeling optimistic and energized as I write my second shareholder letter. We still managed to increase demand despite 2022 being the hardest macroeconomic year in recent history, as well as some of our operating challenges. (On top of the unprecedented expansion we experienced during the first half the pandemic.) In our largest businesses, we innovated to improve the customer experience both short-term and long-term. We made adjustments to our investment decisions, as well as the way we will invent in the future, all while preserving long-term investments we believe could change the future for Amazon's customers, employees, and shareholders.

Amazon's businesses operate under conditions that are conducive to rapid change.

Amazon has undergone constant changes in the 25 years that I have been there. Many of these changes were initiated by us. In 1997, when I joined Amazon, we had a $15M revenue in 1996. We were a books only retailer. There was no third-party marketplace and we only shipped to US addresses. Amazon now sells almost every type of physical or digital product you can think of. Our third-party seller network accounts for 60% our unit sales and we reach customers in nearly every country. In the same way, a cloud-based business model was not clear in 2003, when we began pursuing AWS. It wasn't obvious when we launched our services in 2006, either. When we launched Kindle, in 2007, it was still a "thing" to have virtually all books at your fingertips within 60 seconds. Likewise, a voice-driven assistant, like Alexa, that could be used to control your smart home and shop or retrieve information was not yet a "thing".

We have faced new challenges in the past when operating inefficiencies or macroeconomic conditions have arisen. In the dot-com crisis of 2001, for example, we needed to get letters of credit in order to purchase inventory for the holiday season, reduce costs in order to improve profitability, and still prioritise the long-term experience of customers and the business we wanted to build. (If you recall, we actually reduced prices in many of our categories in that tenuous period of 2001). This type of balancing was evident again in 2008 and 2009 as we suffered through the financial crisis caused by mortgage-backed securities. We implemented several measures to improve the efficiency and cost structure of our Stores, but we also invested in improving customer experiences which we thought could lead to future business with high returns for shareholders. AWS was a relatively small and fledgling company in 2008. It was clear that we had something special, but it required a substantial investment in capital. The company was questioned by many, both inside and outside the organization. Why would Amazon (known primarily as an online retailer at that time) invest so much money in cloud computing? We knew that we were creating something unique, which would create value for both Amazon and its customers in the future. We wanted to get a jump on our competitors and accelerate the pace of innovation. We decided to invest in AWS for the long term. AWS has grown to an annual revenue of $85 billion, and is profitable. It has changed the way customers manage their technology infrastructure, from startups to large companies. Amazon would have been a completely different company had we slowed down our investment in AWS between 2008 and 2009.

The change is always just around the corner. You can invite change in proactively, or it may just knock on your door. When you can see it coming, it is important to be prepared. Companies that have done this over time are usually successful. I am optimistic about the future because I love the way my team responds to the changes that we are seeing.

In the past few months,

We looked at the entire company business by business

We then evaluated each invention to determine if we were confident that it would generate enough revenue over the long term, as well as operating income, cash flow and return on investment. It led us to close certain businesses in some cases. We stopped pursuing concepts such as our Bookstores, 4 Star Stores, and Amazon Fabric, closed Amazon Care, and moved away from newer devices that didn't show a clear path to meaningful return. In some cases, we looked into programs that were not producing the results we hoped for (e.g. We also amended the free shipping offer for online grocery orders above $35. We also reprioritized how we spent our resources which led us to make the difficult decision of eliminating 27,000 corporate positions. We've also made a number other changes in the past few months to reduce our costs. Like most leadership teams we will continue to assess what's happening in our business, and adapt accordingly.

We also examined closely

We showed our employees how we worked together and invited them to return to work at least three times a week.

Starting in May. Our employees did their best to cope with the unexpected circumstances during the pandemic. It was impressive, and I am proud of how our team worked together to overcome unprecedented obstacles for our customers and communities. We don't believe it is the best approach for long-term success. We are convinced that working together in person and sharing ideas is the best way to collaborate and innovate. It's easier to riff on each other's ideas and the energy is more free. Many of the most successful Amazon inventions were the result of people staying after meetings and working out ideas on whiteboards, or carrying on the conversation as they walk home from the meeting. It is not uncommon for inventions to be messy. It wanders, meanders, and marinates. It is helped by serendipitous encounters, which are more common in person than online. When we are in the same office and with our colleagues, it is much easier to learn and practice our culture. In our first 29 years, innovation and culture were incredibly important. I expect that they will continue to be so in the future.

The rising cost of serving in our Stores network is a critical challenge that we have continued to address. The cost of getting a product to the customer from Amazon.

We've made a number of changes we think will improve our fulfillment costs, speed of delivery and quality.

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In the early stages of the pandemic when many stores were closed, our consumer business grew rapidly, increasing revenue from $245B to $434B by 2022. In just two years, we doubled the footprint of our fulfillment centers that we built in the previous 25 years. We also accelerated the construction of a last mile transportation network the size of UPS. It was not an easy task, and Amazonians put in a lot of effort to achieve this. It was not surprising that with such a rapid and massive change, a great deal of optimization was needed to achieve the desired productivity. In the past few months, we have redesigned a number of processes in our fulfillment centers, as well as in the transportation network. This has resulted in a steady increase in productivity and lowered costs. We still have a lot of work to do but are pleased with the trajectory we're on and the positive outcomes that lie ahead.

This was also an opportunity to make structural changes to our business that will allow us to continue to offer lower costs and greater speed in the future. Reevaluating the organization of our US fulfillment network is a good example. Amazon used to have a national US fulfillment network, which distributed inventory across fulfillment centers located all over the country. We would have to ship the product from another part of the country if a local fulfillment centre didn't carry the item a customer had ordered. This increased our costs and lengthened delivery times. As our fulfillment network grew to hundreds of nodes in the past few years, the challenge became even more acute. Inventory was distributed across more locations while the difficulty of efficiently connecting fulfillment centers and delivery stations increased. We began redesigning our inventory placement strategy last year and using our larger footprint of fulfillment centers to transition from a national network model to a network with regionalized nodes. We have made major internal changes, including: We made significant internal changes (e.g. These regions have a wide range of relevant options to enable them to be self-sufficient, but still ship nationwide when needed. The most difficult and important work was optimizing the connections among this vast infrastructure. We continue to improve the advanced machine-learning algorithms we use to predict the needs of customers from different parts of the country so that the correct inventory is available in the right region at the right moment. This regional rollout was completed recently and we are pleased with the results. The shorter travel distances translate into lower costs to serve and less environmental impact, as well as faster delivery of orders. We're thrilled to see more same-day and next-day delivery, and are on track to achieve our fastest Prime deliveries ever in 2023. We remain confident in our plans to reduce costs, improve delivery times and grow a retail business with healthy margins.

AWS, with an annualized revenue of $85 billion, is early in the adoption curve. But at this point, it's important to focus on what will matter most to customers for the long haul.

AWS is facing short-term headwinds, despite its projected growth of 29% on an annual basis (YoY) in 2022, on a base of $62B in revenue. This is because companies are more cautious with their spending due to the current challenging macroeconomic conditions. We're not going to try and squeeze as much money out of customers as possible, because that's not what they want or best for them in the long run. AWS's cloud computing allows you to scale up your business as it grows. If your business shrinks, you may choose to stop paying for that capacity. Cloud computing offers a level of flexibility that is not possible when you have invested in expensive datacenters, networking equipment, and servers on your premises. AWS is no different from other businesses. We don't optimize for a particular quarter or year. We want to build a customer relationship (and business) that will outlive us all. As a result, AWS's sales and support teams spend a lot of time helping our customers maximize their AWS spending so they can better weather the uncertain economy. AWS customers often tell us they are not cutting costs, but rather optimizing them so that they can use their resources to create innovative new customer experiences. This customer-focused and long-term strategy has been well received by customers, and we believe it will benefit both AWS and its customers.

We like AWS' fundamentals, despite the short-term headwinds. As well as our active migrations, we have a robust pipeline of new customers. We find that many companies are using discontinuous periods to determine what changes they want to make. Many enterprises prefer to use AWS because of its agility, innovation and cost-efficiency. AWS is delivering new features and capabilities at a rapid pace. (Over 3,300 new features have been added in the last year alone).