In recent years, Amazon.com has spent billions of dollars on new deposits that have slashed the company’s profits, explaining to investors that it had no choice but to meet growing consumer demand.
It turns out that Amazon may have built a lot of warehouses too soon, analysts say.
Amazon, the world’s largest online retailer, on Thursday reported $2 billion in incremental costs due to excess fulfillment and shipping capacity, a dramatic change from just two years ago when the company had to refuse goods from suppliers because it only had room for vital products.
The company is reducing investment plans for 2022, said Amazon Chief Financial Officer Brian Olsavsky. The retailer will spend less on fulfillment projects this year than it did last year, while transportation investments will be flat — or slightly lower.
The new reality began to emerge in mid-2021. Amazon was on its way to doubling its warehouse and delivery network, a necessary step in the adoption of home shopping by consumers during the pandemic. For the first time, space was not the retailer’s main constraint, but manpower. On Amazon’s scale, that meant hiring 270,000 workers in six months.
After the Christmas holiday, consumer demand waned, as usual. Online sales are down from a year ago, Amazon’s results showed, but ordering patterns have remained the same, according to the company.
Amazon will eventually need those deposits, said Michael Pachter, an analyst at Wedbush Securities. But the company’s results provided little solace.
“Didn’t they foresee this when they built all these fulfillment centers?” Pachter asked, noting how Amazon doubled two decades of capacity in just 24 months. “Why not do it in 48 [meses]?”
Amazon’s operating profit 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.