Amazon slashing profits is not weakness, it will make it more dominant than ever

Amazon has been criticised for its response. At first, sellers exploited the company’s marketplace to jack up the price of toilet paper and hand sanitiser. Workers were also put on the job without enough protective gear, leading to protests and, in France, an enforced shutdown.

Coronavirus cases have been reported at dozens of warehouses. Even so, and despite hiring another 175,000 people to cope, customers have seen delivery times slipping, with demand pushed so high that the company stopped receiving anything but essential goods from third-party suppliers at its warehouses.

It now says it has tackled most of these problems. 10,000 sellers have been suspended for price gouging. 100 million face masks have been procured for workers and drivers. Non-essential items are back on conveyor belts.

The market, though, proved reliably indifferent. Amazon shares dropped by 5pc after Bezos’s pledge. 

But while selling is not an unusual response to the prospect of lower profits, in Amazon’s case, history suggests it is a sign of better things to come.

Since it was founded 26 years ago, the company has been defined by its habit of spending, instead of banking, its profits. It has ploughed money into initiatives such as more efficient warehouses, faster delivery, video streaming and new markets. Its retail operations outside of North America have been lossmaking since 2013.

Surprisingly, this has often come as a shock to shareholders. As recently as last October, when the company said its heavy spending on one-day delivery had led to a drop in profits, shares plunged. 

Adapting to Covid-19 is bigger than any of these expensive prior efforts, but the principle is the same. Ray Wang, founder and principal analyst at Constellation Research, described the move as essential to the company’s survival in the short term but as “smart business” in the long term.

“We weren’t expecting them to spend as much money fighting coronavirus. But should they get out of that quarter, who else is going to have the ability to compete with them?” 

Every investment splurge in Amazon’s past has kept profits down, but ultimately made the company stronger, to the extent that it has become the default option for online buyers who might have once shopped around.

Moorfield says Amazon’s success derives from a degree of trust with shoppers – people who know the item they buy will show up on their door within 48 hours, and are willing to let its voice-recognition speakers into their homes – and that the perception it was putting workers at risk would damage this. “Amazon’s biggest asset is trust, this is about does it go up or down,” he says.