Amazon Faces Stagnating Growth and Rising Costs

US Online Sales in Decline

While online shopping surged during the pandemic, many retailers are now seeing less traffic at their virtual stores. In March, online sales in the US fell 3.3% from the prior year, the first decline since 2013. Meanwhile, physical stores saw sales surge 11.2%.

All merchants are nervously eyeing inflation, which at 8.5% is at its highest level in 40 years. The concern is that as consumers face price increases in everything from fuel to groceries, discretionary spending will be slashed. Amazon (AMZN) joins other retailers feeling the pinch, and just reported its weakest revenue growth in about 20 years.

Inflation Whacks Bottom Line

The tech giant is facing twin troubles of skyrocketing expenses and stagnating growth. Responding to pandemic-turbocharged demand, the company spent billions on labor and logistics, while supply chain disruptions and inflation triggered cost spikes largely out of its control. Rising oil prices have been particularly painful given fulfillment relies on planes and delivery trucks. Over the past two years operating expenses in North America soared 58%. In Q1, revenue was on par with estimates, but the company missed on operating income.

Analysts forecast slowing Prime membership growth, arguing the US market is saturated. Some predict annual growth will slow to 0.2%, down from a high water mark of about 20%.

Competition Big and Small

Some investors remain optimistic, pointing to Amazon’s Web Services cloud computing unit, which posted 37% growth in sales during the first quarter. Also, expansion in its advertising business makes it a strong competitor to Meta Platforms (FB) and others.

Amazon currently commands about 39% of the online shopping market. Falling sales growth may reflect increased competition from large retailers such as Walmart (WMT) and Target (TGT) as those companies build out their virtual storefronts. The tech giant may also be feeling the squeeze from smaller companies like Instacart and DoorDash (DASH), whose simpler infrastructure makes them more nimble in the low-margin food delivery space. Amazon executives have predicted continued weakness over the next two quarters, with its outlook improving in Q4.

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