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Amazon cost cuts under Andy Jassy reflect latest reality after 25 years

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Andy Jassy, CEO of Amazon after which CEO of Amazon Web Services, speaks on the WSJD Live conference in Laguna Beach, California, October 25, 2016.

Mike Blake | Reuters

Throughout its first 25 years as a public company, Amazon has operated under a singular mantra, often to the chagrin of Wall Street: growth is more necessary than profits.

Founder Jeff Bezos laid out that strategy in his first investor letter in 1997.

“We’ll proceed to make investment decisions in light of long-term market leadership considerations moderately than short-term profitability considerations or short-term Wall Street reactions,” Bezos wrote.

But with three-quarters of 2022 within the books, it’s clear that the tone has modified. Andy Jassy, who took over as CEO in July 2021, has been in cost-cutting mode to preserve money as Amazon confronts slowing sales and a dark global economy. The stock is down 33% for the 12 months, greater than the 25% drop within the S&P 500 and is on pace for its worst 12 months since 2008.

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The wave of frugality is unfamiliar to Amazon investors and an worker base that swelled to 1.6 million last 12 months from under 650,000 in 2018. In recent months, Amazon has shut down its telehealth service, discontinued a unusual, video-calling projector for youths, closed all but one of its U.S. call centers, axed its roving delivery robot, shuttered underperforming brick-and-mortar chains, and is closing, canceling or delaying some latest warehouse locations. Amazon has also considered drastically reducing the dimensions of its secretive skunkworks lab Grand Challenge, Insider reported.

On the recruiting front, Amazon is freezing hiring for corporate roles in its retail business. And last month’s annual hardware event, which normally showcases a roster of gadgets and robots that will or may not still be around in a 12 months or two, was noticeably constrained in comparison with prior launch events. 

“If we have a look at the whole lot collectively, Amazon seems to care slightly more about margin than they’ve historically,” said Tom Forte, an analyst at D.A. Davidson who recommends buying the stock.

Jassy addressed the recent efforts to rein in costs at Amazon’s global all-hands meeting on Monday.

“Good firms that last a protracted time frame, who’re fascinated with the long run, at all times have this push and pull,” Jassy said on the meeting, in response to excerpts shared with CNBC. “There are some years where they’re expanding really broadly. Some years where they’re checking in and dealing on profitability, tightening the belt slightly bit. And sometimes when you’ve gotten multiple businesses like we do at Amazon, some businesses are expanding at the identical time that others are checking in.”

Amazon is removed from alone in feeling the pinch. Fellow tech giants Meta and Alphabet have also been cutting costs to reflect a difficult macro environment and a dramatic slowdown after a decade of consistent growth. Firms across the tech sector have announced layoffs and hiring freezes or have lowered their hiring targets for the approaching months.

Not that Amazon has put the brakes on all latest spending. The corporate has been on a buying spree in recent months, agreeing to amass primary care provider One Medical for $3.9 billion, Roomba maker iRobot for $1.7 billion and Belgian warehouse robotics company Cloostermans for an undisclosed amount. The corporate also said it might spend about $1 billion over the subsequent 12 months on wage increases and expanded advantages for front-line staff, and it has plans to rent 150,000 employees to assist manage the vacation rush.

“We now have an infinite amount of things that we’re investing in and that may proceed,” Jassy said on the meeting, referencing Alexa, Prime Video and grocery as examples of some areas where Amazon continues to spend. “The trick for us during this time is simply to balance those long-term investments and bets and customer experiences that we consider are the long run of the corporate, together with really specializing in delivering along the best way.”

The recent trend of belt-tightening has raised a longer-term query since it’s coincided with the corporate’s first ever change in leadership at the highest after Bezos’ departure. The change on Jassy’s watch has prompted some analysts and former employees to wonder if there is a everlasting shift in strategy underway or a brief reset reflecting economic uncertainty. 

Bezos built a fame as a fearless entrepreneur willing to make big dangerous bets that would require hefty investment and will not generate meaningful revenue for years, if ever. No wager was greater than Amazon Web Services, the cloud-computing unit that Amazon launched in 2006 and that Jassy led until his promotion last 12 months.

More moderen projects under Bezos included self-driving robotaxis, cashierless stores and delivery drones, all in pursuit of constructing life easier for purchasers.

Bezos ultimately axed loads of products that did not pan out after launch. One of the crucial infamous examples is the Fire Phone, Amazon’s first smartphone that was discontinued in 2015, a 12 months after its debut. Other endeavors with a brief shelf life included a restaurant delivery service, social media feed, a tool designed to replenish items with one click, a ticketing service, an auction site and a web based wine store.

“They’re completely unafraid to kill something that is not working,” said Craig Berman, a former Amazon vp for global communications. “That is never been an issue for them previously.”

As the pinnacle of AWS, Jassy was at the middle of Amazon’s profit engine, which gave the corporate the fuel to speculate elsewhere. But since taking on as CEO of the parent company, Jassy has needed to navigate the most important jump in inflation in 40 years, supply shortages and an aggressive organized labor push that is challenged the corporate’s long-standing anti-union stance.

More cuts could also be coming

He’s setting up cuts at a time when Wall Street has little appetite for the sort of experimental high-risk investing that defined the Bezos era. In July, Amazon reported its third straight quarter of single-digit revenue growth, largely attributable to weakening demand in its core online stores business.

Jassy can also be working to dial back Amazon’s Covid expansion, which left it saddled with an excessive amount of warehouse space and too many staffers. Amazon reduced its headcount by 99,000 people to 1.52 million employees at the tip of the second quarter after almost doubling in size through the pandemic.

More slashing may very well be on the docket.

Amazon is in the midst of its annual planning process, which occurs in two phases, known as “OP-1” and “OP-2.” OP stands for “Operating Plan.” Former Amazon employees Colin Bryar and Bill Carr wrote concerning the process of their 2021 book, “Working Backwards: Insights, Stories, and Secrets from Inside Amazon.”

OP-1 typically begins through the summer and involves months of preparation and planning. Each team puts together a proposal outlining key initiatives for the upcoming 12 months, including any requests for funding or latest hires. OP-1 documents are typically submitted before the beginning of the fourth quarter, which covers the critical holiday shopping period, and are reviewed by Amazon’s senior leadership team, called the S-Team.

The second phase, OP-2, takes place in January. That is when teams finalize their annual plans, potentially tweaking them depending on fourth-quarter performance.

JPMorgan's Jamie Dimon warns U.S. likely to tip into recession in 6 to 9 months

With the danger of recession on the rise, Amazon may very well be further reductions in its investments if the vacation quarter is weaker than anticipated, a former Amazon manager told CNBC. One other ex-manager from the corporate said Jassy could also be more deliberate about what spending requests he approves as a signal for where Amazon plans to focus given the uncertainty. Each former employees requested anonymity with the intention to speak candidly.

An Amazon spokesperson said in a press release that the corporate repeatedly evaluates “the progress and potential of our services and products to deliver customer value, and we repeatedly make adjustments based on those assessments.”

Layoffs unlikely

Still, don’t expect to see mass layoffs from Amazon whilst the corporate curtails spending, or pulls the plug on some projects.

When Amazon winds down a business, it typically offers employees the possibility to use for a job elsewhere in the corporate, several former employees told CNBC. They’re often given a window of 1 to 3 months to look for one more role and have the chance to fulfill with various business leaders during that point.

“Amazon will not be going to let good talent walk out the door,” said Andrea Leigh, a former Amazon executive who spent almost a decade at the corporate across plenty of different businesses.

There can still be job losses. After Amazon announced it was winding down its telehealth service Amazon Care, it said 159 employees may very well be laid off. One other 236 employees will likely be let go from Care Medical, an independent company that was contracted by Amazon to treat Care patients.

One latest invention that Jassy could also be counting on to goose revenue is a second Prime Day sale. Happening Tuesday and Wednesday of this week, it’s the primary time Amazon has had two of its discount bonanzas in the identical 12 months because it launched Prime Day in 2015.

Ahead of its third-quarter earnings report later this month, the multiday shopping event may provide Amazon with an early sneak peek at what’s coming in 2023.

WATCH: CNBC’s interview with Amazon CEO Andy Jassy

Watch CNBC's full interview with Amazon CEO Andy Jassy on first annual letter to shareholders

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