Amazon takes on Temu and SHEIN

As a global e-commerce giant, Amazon has recently taken a series of countermeasures in response to the low-price strategies of competitors such as Temu and SHEIN. From launching the "low-price store" project to adjusting its own cost structure, Amazon has demonstrated its strong competitiveness in the e-commerce field and flexible market response strategies. This article will deeply analyze Amazon's response strategies and their impact on the market.

As of the close of July 2, Amazon's stock price reached $200, with a market value of $2.08 trillion. In the past month, Amazon's stock price has risen by more than 10.5%.

Faced with this wave of gains, some brokerages believe that Amazon's stock price will continue to rise. Mizuho Securities said on Tuesday that according to a recent survey, Amazon's cloud computing division Amazon Web Services (AWS) is accelerating, so Mizuho Securities maintained its "overweight" rating and $240 target price for Amazon.

But AWS's growth may be masking the pressures Amazon's e-commerce business is facing.

On June 26, when Amazon's market value exceeded 2 trillion US dollars, Amazon held a low-key closed-door meeting in Shenzhen, with only some invited sellers and suppliers attending. At the closed-door meeting, Amazon introduced its new blockbuster project "Low Price Store" to sellers and suppliers. According to media reports, the project is dedicated to providing white-label, low-priced fashion, home and daily necessities products to foreign customers. It adopts a fully managed model, and the warehouses operated by Amazon in China will be responsible for fulfillment and delivery. It is expected that the products will be delivered directly to foreign customers within 9-11 days.

The project will open for registration this summer and will accept goods for storage in the fall. For this purpose, Amazon has also called out a slogan: "A brand new low-price store, shipped directly from China by Amazon!"

Amazon has long been known for its "quality" and "brand", and has also cracked down on "low-price vicious competition" on a large scale, triggering a wave of store closures. But now, Amazon has raised the "low-price" flag.

This can't help but remind us of the impact of Temu and SHEIN on Amazon. Since the Chinese e-commerce market has been rolling down prices, the US e-commerce market seems to be rolling down prices as well.

However, unlike the Chinese e-commerce market, which has undergone a major reshuffle, Amazon still has a leading position in the US e-commerce market. According to a report released by the authoritative market research organization eMarketer, Amazon accounts for 40.4% of US retail e-commerce sales. According to data from Consumer Intelligence Research Partners, Amazon's Prime subscription service hit a new high of 180 million US shoppers in March, an increase of 8% over the same period last year.

Amazon is still strong and can adjust its strategy in time according to market changes, which Temu and SHEIN cannot underestimate. Amazon is also an old hand in price wars.

01

In July 2021, Amazon founder Bezos officially stepped down as Amazon's CEO and handed over the company's power to Andy Jassy, ​​who created the AWS business. Also in this month, Amazon's market value once reached 1.96 trillion US dollars during the trading session, just one step away from the 2 trillion mark.

Since then, as the U.S. technology industry has been in turmoil, Amazon's market value has plummeted rapidly in 2022. It was not until generative AI created a new trend that Amazon has fully recovered. So far this year, Amazon's stock price has risen by nearly 30%, while the Nasdaq index has risen by about 20% during the same period.

Although it is not as good as Nvidia's new record a day, for a relatively old technology giant like Amazon that has not produced any disruptive results recently, its steady performance is impressive enough.

Amazon's comeback was achieved through ruthless cost control.

Before the great turmoil in the technology circle in 2022, Silicon Valley programmers had a good job that everyone envied, with a relaxed corporate culture, high salaries, and a high degree of freedom in time, and they could basically achieve a balance between work and life.

Of course, there are exceptions. Amazon is one of the Silicon Valley "sweatshops" that is frequently listed on anonymous complaint boards.

Not only is Amazon far behind other large companies in terms of salary and benefits, promotion channels, and work-life balance, but even worse, Amazon often issues PIP warnings to foreign employees who need a job to keep their visas, forcing employees to resign on their own with performance indicators that are only theoretically possible. At that time, Amazon's offer had no appeal to Chinese students who came from Ivy League schools and had the "Silicon Valley dream", and was just a last resort.

In 2022, stock prices in the U.S. technology sector plummeted, and cost control became a top priority for all companies. The best high cost to control in the technology industry is labor.

The wave of layoffs in Silicon Valley has completely shattered the "American Dream" that many international students have worked hard for for many years. Compared with the gap between the previously relaxed companies that suddenly revealed their hideous side, the usually ruthless Amazon's plan of laying off 27,000 people, the largest layoff plan in the company's history, did not cause much waves.

"Change is always waiting around the corner. Sometimes you invite it in, and sometimes it comes to you. But when you see it coming, you have to embrace it." In his open letter, Andy Jassy expressed Amazon's determination to make drastic cost cuts in a light-hearted tone.

People familiar with the matter revealed that in less than two years, Amazon carefully reviewed all of its businesses, cut about 30,000 full-time jobs, and has no plans to restore the jobs.

It has to be said that the layoffs achieved immediate results. In 2023, Amazon's net sales were $574.8 billion, a year-on-year increase of 12%; net profit was $30.4 billion, reversing the decline of $2.7 billion in 2022.

Although revenue and stock prices have been moving in a positive direction this year, Amazon has not stopped optimizing its jobs. Not only have its live streaming sites, audiobooks, and streaming studios, which have had mediocre revenue performance, announced layoffs, but even the sales, marketing, and global service departments of its AWS cloud business, which has resumed rapid growth, have cut staff.

Amazon announced: "In order to better focus resources on key strategic areas and pursue the greatest business impact, we have identified certain target areas in the organization for streamlining."

According to the first quarter financial report of 2024, Amazon's fulfillment expense rate, R&D expense rate, sales expense rate and administrative expense rate all decreased year-on-year. By optimizing the cost structure, Amazon's gross profit margin reached 49.3%, an increase of 2.5% year-on-year.

It seems that Amazon led by Andy Jassy will be even more high-pressure and cost-conscious than in the Bezos era.

02

Because Amazon discovered that the "enemy" had invaded its e-commerce territory.

In 2021, when the epidemic boosted the rapid development of the overseas e-commerce market, Amazon's "banning order" brought down many domestic cross-border leaders overnight, affecting countless Chinese merchants. In order to survive, domestic sellers had to find new positions, and the pain of transformation boosted the rise of new platforms.

In the past two years, the global consumer market has generally been in a downward cycle. Americans, who have always been lavish, have become increasingly sensitive to prices, and low prices are more attractive to consumers than shopping experience.

The US tax-free rule for single packages below $800 has given low-priced white-label products from the Chinese supply chain room to flourish. SHEIN and Temu have made a big splash in the European and American markets with their low prices. In June 2023, Amazon even removed Temu from its price comparison system because it simply couldn't compete. If the Temu price continues to be maintained, it will be attracting traffic to its competitors and boosting transaction rates.

According to sources, the combined GMV of China's cross-border e-commerce platforms currently accounts for nearly 10% of the US e-commerce market and is still growing.

Amazon has had to step out of its comfort zone and raise prices while controlling costs.

Earlier this year, Amazon lowered the sales commissions for some clothing products on its US site, from 17% to 5% for products priced below $15, and from 17% to 10% for products priced between $15 and $20, in an effort to attract sellers back by giving up their profit margins. In April, Amazon announced that it would further expand the scope of commission discounts for low-priced clothing to sites in Europe, Japan, Canada, and other countries.

Recently, Amazon launched the "Low Price Store" on its website, which not only targets white-label, low-priced fashion, home and daily necessities products, but also allows sellers to decide the pricing and categories of products by themselves, which is more free than the authority given to merchants by Temu.

More importantly, Chinese sellers can ship products directly to American consumers from warehouses operated in China, while previously, Chinese sellers had to first send their products to Amazon’s logistics warehouses in the United States before distribution.

The rapid rise of independent websites and domestic cross-border platforms has meant that sellers are no longer completely dependent on Amazon, which is something that Amazon, which monopolizes 40.4% of the market share, is afraid of.

But as the "local boss" in North America, Amazon understands local consumers better in all aspects and knows better how to survive in the US market. Although Amazon needs the huge supply provided by Chinese merchants to remain attractive, Chinese sellers also want to directly reach a larger market. Therefore, even though SHEIN and Temu are growing rapidly, they are still trembling with fear.

After all, Amazon's "blood groove" is too thick. The simple calculation formula for the monetization rate (take rate) in the e-commerce field is revenue/GMV, which is usually used to measure the platform's ability to generate revenue through operational activities. The higher the monetization rate, the more successful the platform's business model. Compared with the same industry, Amazon's rate has always been far ahead. From the data that can be found, Amazon's monetization rate can even reach 35%. In comparison, Taobao and JD.com's data are around 5%.

Amazon's extremely high monetization rate gives it ample room to engage in price wars, which is something that SHEIN and Temu, which are in their growth phase, cannot compare to.

Moreover, Amazon, which is operating in China, has not only the scale advantage, but also the home advantage. In recent years, Chinese companies have encountered too many unfair treatments in the field of going overseas. If Amazon makes a move outside the field, it may cause another wave of bloodshed.

In recent years, although Amazon has not been able to create new growth miracles in cutting-edge fields, each of its sectors has managed to not lag behind, which is enough to demonstrate Andy Jassy's overall control.

03

In addition to cost-cutting, Amazon has also seized this wave of rapid development of AI in terms of open source.

In its latest research report, Goldman Sachs said that generative AI will affect the public's consumption habits, and large cloud providers will benefit the most from the widespread adoption of artificial intelligence by consumers.

Although Amazon's achievements in the field of AI are still not enough to satisfy investors, the rapid development of artificial intelligence has provided more customers for AWS business. For existing technologies, without the cloud as a basic foundation, it is difficult to directly adopt generative AI, so companies that want to use generative AI will rush to the cloud. At present, generative AI can generate billions of dollars in revenue for AWS every year.

In the first quarter of 2024, Amazon's revenue was US$143.3 billion, a year-on-year increase of 12.5%; operating profit was US$15.3 billion, a year-on-year increase of 221%; net profit was US$10.4 billion, a year-on-year increase of 229%. Each figure exceeded market expectations.

Andy Jassy, ​​who created AWS, is even more confident about the prospects of cloud business in the AI ​​era.

In his shareholder letter, he called generative AI "the company's next growth pillar after Marketplace, Prime and cloud computing." Jassy said: "This generative AI revolution will be built on cloud technology from the beginning. The social and business benefits that related solutions can bring will surprise us all."

Earning fees from corporate users for renting cloud services is only the first step. One of Amazon’s biggest advantages is that it has an electronic platform that covers the entire industry chain and directly generates consumer behavior. Generative AI will affect the way consumers interact in cyberspace.

Amazon has nearly 200 million Prime members, and its penetration rate in American households can reach 80%. The complete logistics system means that merchants in the United States can only deliver goods to consumers within two days through Amazon. Therefore, in order to improve their competitiveness, stores will inevitably choose to purchase Amazon's value-added service fulfillment.

In the AI ​​era, the types of value-added services that platforms can provide will be more abundant. Amazon, which controls the cloud infrastructure, has the ability to integrate AI into the entire process of consumer behavior, provide customers with one-stop AI solutions, and further find new growth points at the SaaS level. Amazon's monetization rate is expected to usher in a new wave of increases.

In addition, Amazon announced that it would use generative AI to upgrade its intelligent voice assistant Alexa. It is revealed that Amazon plans to launch a more interactive conversational version of AI and charge users a corresponding subscription fee. Imagine that when users want to buy goods, Alexa will become an intelligent shopping guide to provide consumption guidance.

With this scenario alone, Amazon can create unlimited imagination and charge merchants new value-added service fees.

Of course, all costs will eventually be paid by consumers, and the strength of end-user demand is the key factor in maintaining a high currency rate. The purchasing power of American consumers is still the strongest in the world, which is the basic base of Amazon and the goal of SHEIN and Temu.

Faced with this powerful competitor with almost no weaknesses, when it also launches a "low-price store", a low-price storm in the US market may be another major reshuffle.