Last week, Amazon announced third-quarter profits of $3.2 billion, a drop of nearly 50 percent from its third-quarter profits of $6.3 billion last year. This badly disappointed Wall Street analysts, who had been anticipating $4.6 billion of profits. In a predictable result, Amazon's share price dropped 5 percent in response to the news.
But this is where the story gets interesting, because Amazon CEO Andy Jassy didn't respond the way CEOs usually do to results like these. He didn't act rueful or contrite. He didn't talk about "lessons learned," and he didn't suggest that the quarter had been an anomaly. Most unusually, he didn't confidently predict that things would get better. He did the opposite, warning analysts that the company's financial performance in the fourth quarter of the year would be even worse.
In other words, he did exactly the right things to do as a business leader, and demonstrated that he's picked up right where Amazon's previous CEO, Jeff Bezos, left off. Here are some of the very good reasons for Amazon's profits to be down.
1. It's protecting customers.
If you've read the news lately--or tried to buy things--you know that the supply chain is suffering from some serious challenges that are very much affecting Amazon's retail business and will continue to affect it in the near future. "In the fourth quarter, we expect to incur several billion dollars of additional costs in our consumer business as we manage through labor supply shortages, increased wage costs, global supply chain issues, and increased freight and shipping costs--all while doing whatever it takes to minimize the impact on customers and selling partners this holiday season," Jassy said in Amazon's statement about its earnings.
A lot of companies say they're passionate about "delighting" customers, but not many are willing to trash their own profit margins to do so. Jassy said, "It'll be expensive for us in the short term, but it's the right prioritization for our customers and partners."
2. It's raising wages.
In Jeff Bezos's last weeks as CEO, Amazon added "Strive to be Earth's best employer" to its leadership principles--a very good idea since the company was facing both criticism of working conditions at its warehouses and unionization efforts, not to mention a very competitive labor market. The company is backing up that new principle with higher wages, which now average just over $18 an hour, according to The Wall Street Journal. It also recently introduced a program to pay college tuition for employees.
3. It's building out bricks and mortar.
Covid-19 drove people out of stores and onto the internet for shopping. But with most people now vaccinated and businesses reopening, people are able to shop in the real world again. Amazon is investing in bricks and mortar with its Just Walk Out technology that allows shoppers to register on an app (or with their hands) when entering a store and then automatically pay for their purchases simply by leaving with them. Amazon appears to have at least discussed a partnership with Starbucks to put Amazon Go cashierless food shops into jointly operated stores. Dependent on a complex network of sensors and cameras, Just Walk Out is not inexpensive to deploy. Nevertheless, Amazon has put this technology into its Amazon Go stores, some Whole Foods stores, and its Climate Pledge Arena in Seattle (home of the new NHL team the Seattle Kraken). It's betting this technology is the way of the future.
4. It's thinking long-term.
"We've always said that when confronted with the choice between optimizing for short-term profits versus what's best for customers over the long term, we will choose the latter," Jassy said in Amazon's statement. He was following in the footsteps of Bezos, who spent nearly a decade ignoring criticism from Wall Street analysts and investors over the company's then lack of profitability. Consider this article published on the Nasdaq site in 2013, in which the author explained that, while he loved shopping at Amazon he had never bought the stock and never would because the company hadn't ever made a profit and seemed unlikely to do so. A share of Amazon is worth more than 10 times what it was when that article was published, so it may be that its author has come to regret taking that position. Amazon's philosophy to plow money back into the company rather than calling it profit has obviously paid off in the long run. Tesla is another company that focused on the long term and was derided by Wall Street for going years without making a profit. I think it's no coincidence that Bezos and Elon Musk are now the two richest people in the world.
Whenever I hear someone say that a CEO's first job is to maximize returns for shareholders, I always want to ask--which shareholders do you mean? Those who plan to hold the stock for a month or those who plan to hold it for a decade? It's clear that Bezos and now Jassy care more about the latter than the former. Every business leader should take the same approach.