‘Amazon is feeling the heat from Temu – the question is what to do about it’

Amazon’s latest financial results were lacklustre. Falling short of market expectations for both the reported second quarter and its third-quarter forecasts, the improving economy is not yet translating to increased consumer spend. Amazon reported online store sales for the three months to June up just 5%, compared to 7% in the first quarter. 

Consumer sentiment was one reason for the challenging quarter, with customers trading down and favouring cheaper everyday items such as ambient food, health, beauty and personal care over more margin-friendly discretionary items.

Although not mentioned by Amazon, another huge threat is that Amazon is being disrupted by the growth of Temu, which has flooded key markets in the US and Europe with its gamified app offering insanely cheap prices on imports from China.

Speed versus price

In the first half of 2024, Amazon delivered to customers “at its fastest speeds ever”, regionalising its distribution facilities for efficiency. However, while it may delight Prime members, shipping more loo rolls and deodorant at rapid speeds does not give Amazon much margin to play with.

Chief financial officer Brian Olsavsky told investors that consumers were being “careful with their spend, trading down, looking for lower [average selling price] products, looking for deals”. That trend is expected to continue into the next quarter.

Cheap Chinese imports

Also, it appears that a lot of customers just want to buy cheap stuff.

To further compound Amazon’s issues, China-based Temu is growing rapidly in its main markets in the US and Europe, gamifying the buying experience and flaunting low prices on everyday household items and essentials.

Temu is not the only retailer shipping items from China – there is a flood of Chinese marketplace sellers on Amazon, too. However, while Amazon is focused on speed of delivery, Temu is significantly undercutting on price.

What should Amazon do about it?

This is not the first time that Amazon has had to compete against Chinese rivals. And last time it got burned.

Amazon entered the market in China in 2004 through the acquisition of Joyo.com. Initially, the company invested heavily and gained significant online market share, but it was unable to keep pace with the rapid pace of change and competition from retailers such as Alibaba and JD.com. It was eventually forced to exit in 2019.

As Temu gains traction in the US and Europe, Amazon needs to decide what to do.

Talks were held last month with Chinese sellers, according to CNBC, which reported that Amazon mooted plans to introduce a budget storefront for sellers in China, aiming to ship items to customers within nine to 11 days.

Can Amazon grow margin at the same time? 

The issue is that Amazon is already full of listings from sellers in China. Its point of difference – faster shipping times – leads to higher costs and lower margins.

From its investor call, it is clear that Amazon aims to drive its cost to serve down to enable it to sell lower average selling price stock. But how low can it go and in what quantities?

Chief executive Andy Jassy believes growing margin is something that can only happen over time. He told investors: “I continue and the team continues to believe that we have the opportunity to expand the margin in our stores business [but] it’s not going to happen in one fell swoop, it’s going to take work over a long period of time.”

Change ahead

With the US election in November, it would appear that the best policy for Amazon might be to hold its breath and proceed with caution. The outcome of the presidential race in November may negatively impact Temu’s ability to trade and grow in the US.

The global economy and consumer sentiment will also be affected, positively or negatively, depending on which candidate presides at the White House.

Sometimes when there’s a race to the bottom it’s time to take a breath and do the opposite of everyone else. Amazon is currently at a tipping point but it is also in danger of trying to be all things to all people.