• Amazon's most important metric, customer satisfaction, is slipping.
  • Over the past year, there were numerous negative media coverage of Amazon and its leader, Jeff Bezos.
  • Focus on advertising, counterfeits, and a distracted CEO may be the main culprits.

Jeff Bezos began his 2016 letter to Amazon (AMZN) shareholders as follows:

“Jeff, what does Day 2 look like?”


“Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1.”

As the title suggests, this is a negative article on Amazon, and I wrote it as a huge fan of Jeff Bezos and Amazon. Over the years, I've written numerous positive articles on Amazon, including highlighting its AI investments in August 2017 and calling attention to its emerging advertising business in April 2018, among many others. Thus, it brings me no satisfaction to voice my growing concern with the company and its leader, Jeff Bezos.

What Happened To "Obsessive Customer Focus"?

Back to the 2016 letter, Bezos wrote the following: " my view, obsessive customer focus is by far the most protective of Day 1 vitality."

The importance of customer satisfaction cannot be understated for a company that "seek to be Earth’s most customer-centric company" (Amazon 2017 10-K). In his 2017 letter to shareholders, Bezos began with the following observation:

The American Customer Satisfaction Index recently announced the results of its annual survey, and for the 8th year in a row customers ranked Amazon #1.

The United Kingdom has a similar index, The U.K. Customer Satisfaction Index, put out by the Institute of Customer Service. For the 5th time in a row Amazon U.K. ranked #1 in that survey.

However, in the recently released American Customer Satisfaction Index (ACSI), the updated score knocked Amazon down to second place after holding the top spot since 2010. Costco (COST) took the #1 spot. Amazon dropped 4% from last year to a score of 82 and second place, just above the average internet score of 80.

Furthermore, under Amazon's ownership, Whole Foods' ACSI score decreased 2% from 2017.

Earlier in the year, without as much media coverage, it was reported that Amazon slipped to join the 5th place in the U.K. Customer Satisfaction Index when new ethics measures were introduced.

In my opinion, these are big developments, one that isn't sufficiently addressed by investors. What happened?

Why Is Amazon Slipping?

As a long-time Amazon observer, I believe Amazon's ACSI ranking is slipping due to multiple reasons. Over the past year, Amazon has been subjected to multiple negative media coverage, including the company's questionable labor practices, HQ2 circus, and 20% price increase on Prime membership, but for this article, I will focus on three that I think are most important:

  1. Increased focus on advertising might be diminishing the user experience
  2. Unchecked counterfeiting
  3. Jeff Bezos appearing distracted

Advertising = Poor Customer Experience?

In early 2018, I wrote two articles highlighting Amazon’s emerging advertising business: Amazon Advertising: Hidden Gem That Could Drive Shareholder Value and Amazon's Advertising Business: An Emerging Giant. Since then, Amazon continued to aggressively grow its advertising business, including advertising its own brands, AmazonBasics.

I can't quantify this, but as someone who early on realized the potential of Amazon's advertising business, I also noticed a deterioration in the browsing experience. Below, I searched for three randomly chosen generic products such as “cereal,” “batteries” and “shirts.” In each case, the first page is populated with sponsored posting, followed by AmazonBasics. Previously, customers were treated to bestselling and highest rated products – or crowd-sourced recommendations, which I believe is inherently superior to sponsored ads.

Search for “cereal” on a desktop browser – the entire first page consists of sponsored ads:

Search for “batteries” yields the same, with one “Amazon’s Choice” in there:

Search for “shirts” only has one “best seller”:

Unchecked Counterfeiting

I enjoy reading company 10-Ks for changes compared to previous years. In Amazon's latest 2018 10-K, I noticed that the company added the following:

We also may be unable to prevent sellers in our stores or through other stores from selling unlawful, counterfeit, pirated, or stolen goods, selling goods in an unlawful or unethical manner, violating the proprietary rights of others, or otherwise violating our policies.

This suggests to me that counterfeited goods are increasingly becoming a problem for the company, and there appears to be increasing pushback by customers and the media. For example, over the past year, there were several high profile, negative media coverage of Amazon's counterfeit problem. For example:

  • This April 2018 article on The Atlantic, Amazon May Have a Counterfeit Problem, highlights Amazon's rampant and difficult to control counterfeiting.
  • This Inc. article shares the following statistics which I find mind-boggling: "in a study of 321 brands offered for sale on Amazon by third-party merchants, the research firm Gartner found that one-third of their products had received at least one review by a customer reporting it as fake goods. When the U.S. Government Accountability Office made test buys on the websites of five major e-commerce purveyors, including Amazon, for a 2018 report, nearly half of the 47 items it purchased turned out to be phony."

Is Jeff Bezos Distracted?

By now, most people who even loosely follow business news knows all about Jeff Bezos' embarrassing personal problems. I will not go through it blow by blow here, but this NYTimes article is worth a read just in case you are out of the loop. In summary, Jeff Bezos recently announced that he is divorcing his wife of 25 years and is now entangled with the National Enquirer over embarrassing photos and texts which he sent to his mistress.

As an investor, I am not at all interested in the personal lives of company CEOs - unless it becomes a business issue. In this case of Jeff Bezos, I believe the issue is now material, and my concerns are backed by academic research.

According to this 2013 Stanford paper, Separation Anxiety: The Impact of CEO Divorce on Shareholders, a CEO divorce could impact shareholders in three different ways:

There are at least three potential ways in which a CEO divorce might impact a corporation and its shareholders. The first is loss of control or influence. A CEO with a significant ownership stake in a company might be forced to sell or transfer a portion of this stake to satisfy the terms of a divorce settlement. This can reduce the influence that he or she has over the organization and impact decisions regarding corporate strategy, asset ownership, and board composition...

Second, divorce can affect the productivity, concentration, and energy levels of the CEO. According to Wheatley, Vogt, and Murrell (1991), 37 percent of companies report that employee divorce negatively impacts firm productivity... Among 24 CEOs who got divorced between 2009 and 2012, seven (29 percent) stepped down within two years of the settlement...

Third, divorce can influence a CEO’s attitude toward risk. The board of directors designs a compensation program and imposes ownership guidelines on executives to ensure they have incentive to meet company objectives. A sudden change in wealth—through loss of equity in the company they are running or other investments outside the firm—can alter an executive’s risk appetite, and therefore affect decision making.

Of the three reasons given in the paper, at least two are applicable to Jeff Bezos. First, while Jeff is listed as the owner of 16% of Amazon shares, his wife, MacKenzie Bezos, is entitled to half of that. After the divorce, each could potentially own approximately 8% of Amazon shares, raising ownership and control issues. Second, Jeff Bezos' divorce and open fight with a tabloid is unusually high profile, and presumably will also be a major distraction. I am not, however, too worried about the wealth effect of this divorce, as $65 billion is likely enough to continue to fund Jeff Bezos' space ambitions.


For a company whose mission and strategy are to become the most customer-centric company in the world, it is highly unsettling that Amazon's customer experience rankings are slipping. In less than one year after Bezos bragged about Amazon's #1 position in the US and UK in his 2017 shareholder letter, Amazon slipped to #2 in the US and #5 in the UK.

I believe this is due to a number of developments over the past year which I find disturbing. Chief among them are Amazon's focus on advertising, its counterfeiting problem, and a distracted chief executive.

To me, it looks like Amazon is in "Day 2." Amazon needs to refocus on being customer obsessed and go back to "Day 1," or it will be all downhill for here.

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