Amazon's online business stalls after decades of growth; Has it built too many warehouses?
Amazon’s legendary e-commerce machine, which has grown at breakneck speed for more than two decades, is showing signs of stalling.
The tech giant on Thursday reported its slowest sales growth in roughly two decades. Product sales have flatlined, and revenue at its main online-shopping business segment has stagnated for six months, one of the worst periods of anemic growth in Amazon’s history. And company executives said overall sales might slow down even more.
How Amazon ended up with too much warehouse space — and what it’s planning to do next
Amazon added warehouse space faster than it ultimately needed in response to the challenges of the pandemic, outpacing consumer sales and resulting in an extra $2 billion in costs in the first quarter.
However, given the extraordinary demand and uncertainty Amazon was seeing at the time, there’s not much else the company could have done, even in hindsight, said Brian Olsavsky, Amazon’s chief financial officer, on calls with reporters and analysts Thursday after the company’s quarterly earnings report.
The costs contributed to a quarter that fell well short of Wall Street’s expectations. Amazon’s shares plunged more than 10% in after-hours trading Thursday.
“We’ve come out of a very tumultuous two years,” Olsavsky told analysts. “We are glad we made the decisions we made over the past two years. And now we have a chance to right-size our capacity to a more normalized demand pattern.”
Amazon’s online sales fell 3% for the quarter to $51 billion, as shoppers relied less on the company for critical purchases, with the decline of the Omicron variant of COVID-19 signaling a turning point in the pandemic.
However, Olsavsky said Amazon believes sales will ultimately catch up to capacity. Amazon plans to slow the pace of its warehouse expansions in the meantime.
Amazon’s recent announcement of a “Buy with Prime” program, serving e-commerce sites other than Amazon.com, takes the company further down the path of using its fulfillment and delivery network to offer shipping as a service, generating additional revenue and potentially competing with UPS and FedEx.
It’s similar to what Amazon did with Amazon Web Services, using its online expertise and cloud infrastructure as a starting point for a business that generated $18.4 billion in revenue in the first quarter.
The company has spent the past few years creating its own last-mile delivery network, known as “AMZL,” leveraging a network of dedicated Amazon Delivery Service Partners and reducing its dependence on third-party delivery companies such as UPS and the U.S. Postal Service.
Amazon’s fulfillment network and data center facilities (owned and leased, domestic and international) rose from 272 million square feet at the end of 2019 to 525 million square feet at the end of 2021, according to its annual SEC filings. The filings do not break out fulfillment footprint separately from data centers.
In the company’s earnings release today, Amazon CEO Andy Jassy said the year-over-year growth of 39% that Amazon saw in its consumer business during the pandemic in 2020 “necessitated doubling the size of our fulfillment network that we’d built over Amazon’s first 25 years — and doing so in just 24 months.”
A big part of the challenge, Olsavsky explained, is that decisions for adding new facilities need to be made years in advance. They can’t be put on hold when the company has a better sense for demand.
“We literally committed to as much as we could to handle the volume that we saw,” Olsavsky told reporters. “We did not want space to be constrained. Even with that intent, it took until the second quarter of last year for us to feel like we had enough space. And then we continued to add warehouses for the peak last year in Q4.”
Olsavsky said the capacity will start to better match demand with Prime Day in the third quarter of this year, followed by the peak holiday shopping season in the fourth quarter.
Amazon's net loss prompts query: Has it built too many warehouses?
In recent years, Amazon has spent billions of dollars on new warehouses that cut into profits, explaining to investors that it had no choice but to meet ever-rising consumer demand.
It turns out, Amazon may have built too much, too soon, analysts say.
The world's largest online retailer on Thursday reported $2 billion in incremental costs from having excess fulfillment and transportation capacity, a dramatic shift from just two years ago when Amazon had to turn away merchants' goods because it had room only for vital supplies.
The company is lowering its capital expenditure plans for 2022, its Chief Financial Officer Brian Olsavsky said. Amazon will spend less on fulfillment projects this year than last, while transportation investments will be flat to slightly down.
The new reality began to emerge halfway through 2021. Amazon was on track to double its warehouse and delivery network, a feat necessitated by consumers' embrace of at-home shopping to avoid COVID-19 infections in stores. For the first time, space was not the retailer's main constraint; it was labor to staff facilities fully. At Amazon's scale, that meant hiring 270,000 workers in six months.
After the Christmas holiday, consumer demand dwindled, as always. Online sales dipped from a year ago, Amazon's results showed. Brick-and-mortar stores beckoned shoppers once the Omicron wave subsided, and still others faced a choice between buying goods and filling their cars with high-priced gas. Amazon says order patterns have remained the same.
Nevertheless, Olsavsky told reporters the company appeared to be "overbuilt for current demand." He said Amazon had no regrets, later telling analysts: "Many of the build decisions were made 18 to 24 months ago, so there are limitations on what we can adjust mid-year."
David Glick, a former Amazon vice president who is now chief technology officer of the on-demand fulfillment company Flexe, said extra space was no major challenge.
"Amazon may have gotten a little ahead on fulfillment capacity, but they will grow into that excess capacity over the next year," he said. A new program for Amazon to store and ship goods that independent merchants directly sell to consumers, known as Buy with Prime, may help, too.
Amazon will eventually need these warehouses, agreed Michael Pachter, an analyst at Wedbush Securities. But Amazon's disclosure provided little solace.
"Didn't they see this coming when they built all these fulfillment centers?" Pachter asked, noting how Amazon doubled over two decades of capacity in just 24 months. "Why not do it in 48?"
Operating income fell 59% to $3.7 billion in the first quarter, while a decline in Amazon's shares in electric vehicle maker Rivian resulted in the company's first net loss since 2015. read more
Amazon reports slowing sales growth and indicates slowdown may continue.
Amazon benefited from the coronavirus pandemic as people flocked to online shopping. Now, shoppers’ behavior has shifted.
In the face of a pandemic that appears to be receding and the highest levels of inflation in four decades, Amazon on Thursday posted its slowest quarterly growth in years and its first quarterly loss since 2015.
The company reported $116.4 billion in revenue in the first three months of the year, up 7 percent from a year earlier. That was down from 44 percent growth in the first quarter of 2021. The number of products that Amazon sold in the quarter was flat from a year ago, and its costs to sell those items also increased.
Amazon lost $3.8 billion in the quarter, including a decline of $7.6 billion in the value of its investment in Rivian Automotive, an electric truck maker whose shares have fallen this year. The losses also stemmed from Amazon’s consumer businesses in North America and internationally, though its cloud services division continued to grow and make money.
The results fell far short of Wall Street’s expectations, causing Amazon’s share price to fall more than 10 percent in after-hours trading.
“Our teams are squarely focused on improving productivity and cost efficiencies throughout our fulfillment network,” Andy Jassy, the company’s chief executive, said in a statement. “We know how to do this and have done it before. This may take some time, particularly as we work through ongoing inflationary and supply chain pressures.”
The company’s forecasts for the current quarter of a 3 percent to 7 percent increase in sales indicated its growth could continue to slow. Amazon said Prime Day, its annual deals event, which was held in June last year, would move to the third quarter this year, further reducing sales growth in the current quarter.
Amazon benefited from the coronavirus pandemic as people flocked to online shopping. But as vaccines have become widespread and as inflation hit 8.5 percent in March, behaviors have changed again. According to Commerce Department data released on Thursday, consumer spending on the kinds of nondurable products that people often buy on Amazon was down 0.6 percent in the first quarter compared with the final three months of 2021, when adjusted for inflation.
Brian Olsavsky, the finance chief, said in a call with reporters that the company was “very happy” with how frequently customers were shopping on Amazon and that some of the slowdown reflected the end of pandemic shopping habits. Customers made more frequent, low-cost purchases like masks a year ago, and now they are returning to regular purchasing patterns, he said.
Amazon has also faced rising costs, with operating expenses for its consumer business in North America increasing 16 percent even as sales in the region grew only 8 percent in the quarter. Inflationary expenses added $2 billion in costs, Mr. Olsavsky said, adding that “we expect they will be around for some time.”
Another $4 billion in costs were due to operating inefficiently, he said. Amazon has spent heavily to hire and to double the size of its warehousing infrastructure over the past two years, including opening delivery depots across the country that let its network of contractors quickly bring packages to people’s doorsteps.
Mr. Olsavsky said the company was pulling back on some of its expansion plans so it could more efficiently maximize the spaces it currently has.
“We have too much space right now versus our demand patterns,” he said. Without the unpredictable surges of demand driven by the virus, he said, “we can tighten up our capacity.”
At one point in mid-March, Amazon forced employees at several warehouses to take time off without pay because customer demand was weak.
In response to rising costs, Amazon has increased prices for customers and sellers on its marketplace. The price of its Prime membership program rose in February to $139, from $119, the first increase since 2018. This month, the company announced an additional “fuel and inflation” fee for sellers whose inventory it warehouses and delivers to customers.
Labor shortages have also cost Amazon billions of dollars recently as it has responded by raising wages and offering other incentives. The company barely grew its work force during the quarter, with a total of 1.62 million employees.
The company has faced a surge in labor activism. In April, workers at a warehouse on Staten Island voted to be the first Amazon facility in North America to unionize.
Amazon also had bright spots in its business. Amazon Web Services, its cloud computing business, grew 37 percent in the quarter, to $18.4 billion in sales.
