Amazon (AMZN -1.64%) is having a hard time keeping up with demand these days. It's hired 80,000 new workers in the last few weeks, with plans to hire 20,000 more. It's seeing increased demand for essential categories like groceries, health and household items, baby products, beauty and personal care items, and pet supplies. In fact, Amazon told its third-party merchants it can't accept non-essential items in its warehouses starting in mid-March in order to ensure capacity for more urgent customer needs.
While increased demand for certain items is good, it has some drawbacks. Amazon's Prime Day, which usually takes place in July every year, will likely get pushed back to August at the earliest, according to internal meeting notes seen by Reuters. And with warehouse shelves full of Amazon devices like Kindles, Echo smart speakers, and Fire TV devices, Amazon may have to sell them at a loss. The notes indicate Amazon will likely lose $100 million on about five million devices in excess inventory it expects to hold this summer.
Amazon Echo Dot. Image source: Amazon.
The loss leader with nothing to lead to
Whenever Amazon has a big shopping event, it offers its own devices with steep discounts as loss leaders. The Echo Dot and Fire TV Stick are usually the best-selling items across Amazon's entire marketplace, and customers can usually pick them up for around half their normal retail price during Prime Day.
Amazon is happy to offer steep discounts on those devices for a couple of reasons. First of all, more Amazon device users means more Amazon services users. Fire TV owners are more likely to use Prime Video or view the video display ads Amazon serves up. Echo owners are more likely to subscribe to Amazon Music Unlimited or use their devices to shop more on Amazon's marketplace.
Moreover, device sales do an excellent job of drawing customers to Amazon's website and getting them to buy stuff. They're a classic loss leader. And during Prime Day, when Amazon and its third-party merchants are all offering great sales, they lead to lots of additional purchases. Prime Day consistently breaks Amazon's previous sales record.
The challenge Amazon now faces is that promoting its devices, of which it has a potential excess supply, won't lead to additional sales because it's otherwise supply constrained. There's no room in its warehouses for non-essential items. It's told third-party sellers to stop sending in many of their higher-margin products. And, in some cases, suppliers are constrained and can't produce enough items to stock Amazon's virtual shelves.
Amazon can't delay device promotions because it would cost it more to store the items and give up warehouse capacity for items it can sell with better margins. It would rather take the $100 million hit and make up for it in additional sales.
A Prime Day delay means a Prime signup delay
Prime Day is often a big day for Prime subscription signups. Last year's two-day Prime "day" produced the two single biggest days for signups in company history.
Pushing back the sales event could curb overall Prime signups compared to last summer. Amazon's shift to one-day shipping last year drove new subscribers, and its push deeper into groceries may help support subscriber numbers as shoppers look for ways to order groceries online.
Still, delaying Prime Day will put a dent in subscriber growth, and that'll show up in Amazon's subscription services revenue. Subscription services brought in over $19 billion last year, primarily from Prime subscriptions. Delaying Prime Day will cost about $10 million per million foregone subscribers per month.In other words, if Prime Day in July would've brought in 2 million extra Prime members, but now it's delayed two months to September, Amazon would lose about $40 million in subscription revenue alone.
Overall, the negative effects of delaying Prime Day aren't terrible. They're one-time hits to Amazon's income statement, and the retail company can easily absorb them. It had $32 billion in cash on its balance sheet at the end of 2019, so $100 million to $200 million will only put a minor dent in its operations.
