Leaked recording: Amazon sees a surge in sales of cheaper items

• Amazon's sales of low-cost items are rising, driven by faster delivery speeds, an executive says.
• Sales of key products on Amazon are growing 50% faster than other items.
• The company has regionalized its delivery network to enable faster and cheaper deliveries.

Sales of cheaper items are booming on Amazon.

Amazon Retail CEO Doug Herrington said at a recent internal all-hands meeting that the daily essentials business, which includes health, beauty and grocery products, is growing “50% faster than the average,” according to a record Rest of the business.” The event was obtained by Business Insider.

The growth is primarily due to faster delivery speeds, as people tend to spend more and shop more frequently when orders arrive quickly, Herrington said. Over 50% of daily essentials are now delivered on the same or next day, he added.

“It’s given a real boost to our grocery and essentials business,” Herrington said, citing faster shipping speeds. “And these are primarily the inexpensive everyday items that most households buy every week.”

Amazon has invested heavily to make its warehouse and logistics network more regional. The goal was not only to speed up deliveries, but also to make it more cost-effective for the company to offer faster deliveries.

No longer “CRaP”

Lower costs help Amazon offer cheaper products, which often come with lower profit margins. This is a notable departure from the company's previous strategy of curbing sales of such products. Internally, Amazon previously referred to these products as “CRaP,” or “can’t make a profit,” because shipping was relatively expensive and less profitable.

Amazon's record profits in recent years as well as drastic cost cuts and large layoffs also contribute to the new approach. The change may help Amazon better compete against Chinese e-commerce newcomers Temu and Shein, which are growing rapidly thanks to cheap items. Shein, for example, is expanding to sell more everyday essentials such as toothpaste, skin care and toys, Reuters reported.

Amazon's spokesman declined to comment.

“Perfect placement”

During the recent all-hands meeting, Herrington said Amazon deliveries have become faster and cheaper after the company redesigned its warehouse network to serve smaller regions. Now Amazon has more warehouses nearby for customers, allowing for faster order fulfillment.

This has allowed Amazon to reduce the “cost of processing” each order for two years in a row while achieving the fastest delivery speeds for Prime shipments this year, Herrington added.

“We call this effort perfect placement,” Herrington said.

In October, Amazon CEO Andy Jassy said the company had made a “crazy” attempt to reduce service costs in recent years. That's a real competitive advantage because Amazon can now afford to sell lower-priced items economically, he said.

“We've used the phrase many times over the years that it's easy to lower prices, but it's much harder to afford lower prices,” Jassy said during a call with analysts.

“Really positive”

During last month's analyst call, Jassy added that the growth in cheaper items was “really positive” as it was driven by faster delivery speeds. He said this typically results in an increase in customer loyalty, order frequency and purchase volume.

“We see the opportunity to unlock whole new elements of consumer spending,” Jassy said.

Amazon CFO Brian Olsavsky added that the strong growth in everyday essentials is a positive sign that Amazon is becoming part of consumers' daily shopping habits.

Evercore analyst Mark Mahaney wrote in a recent note that the change is important for Amazon, especially as its most loyal Prime member base grows more slowly.

“While growth in these categories represents a negative mix shift in terms of margins, it increases customer loyalty, shopping frequency and shopping cart size – important as the overall Prime HH member base matures in the U.S.,” Mahaney wrote.

Amazon is redoubling its efforts. Herrington said at the recent all-hands meeting that Amazon is investing in new warehouse robot technology that can further improve packing speeds. The company will also expand its network in rural areas and its drone delivery service, he said.

“The most important thing is that customers love our faster speeds and we know they love it because they shop more,” Herrington said.

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