Amazon spent around $40 billion on shipping and fulfillment in its last quarter. It’s part of a multi-year expansion plan.
The short-term problem for the e-commerce and web services giant is that it has too much warehouse capacity.
Longer-term, that could wind up being a good problem to have. Here’s why.
The Information’s analysis of company filings, visualized in the above chart, shows how Amazon’s spending on shipping and fulfillment began to climb in early 2020, increasing nearly 70% and 50%, respectively, from the year prior.
For comparison, net product sales increased 46% during that time.
The chart shows operating expenses related to shipping and fulfillment as a percentage of Amazon’s net product sales on a quarterly basis from 2019, when the company first announced its physical expansion plans, to 2022.
Amazon has carried out a massive physical expansion over the last two and a half years, adding more than 200 million square feet of new facilities and doubling its physical footprint as the company accelerated plans to grow its already sprawling distribution network in response to a surge of demand from homebound consumers.
All that spending didn’t translate into more efficiency, though.
Shipping and fulfillment costs now account for 35% of Amazon’s overall operating expenses, up from 28% in 2019, to the tune of roughly $40 billion last quarter.
For comparison, revenue for physical and digital product sales during the same period was around $56 billion.
And with online sales growth slowing following a pandemic-induced boom, Amazon’s hefty investment is turning into a drag on its bottom line.
Amazon invested heavily in warehouse space and shipping capabilities as e-commerce boomed.
But excess capacity and idle workers now mean billions of dollars in extra expenses.
Amazon originally announced its expansion plans in early 2019 as part of a companywide push to shave a day off its marquee two-day shipping for Prime members.
By rapidly growing its physical distribution network and investing in in-house transportation solutions, Amazon hoped to wean itself off the services of big third-party shipping companies and ultimately operate more efficiently.
The expansion was supposed to begin in earnest in early 2020 and gradually increase warehouse capacity, but the pandemic-fuelled surge in consumer demand sent Amazon on a mad dash.
Amazon now has more warehouse space than it needs, and that overcapacity amounted to $2 billion in additional costs last quarter compared to the same period a year earlier, finance chief Brian Olsavsky told analysts in an earnings call last week.
He also said over-hiring at Amazon fulfillment facilities added another $2 billion in costs, and he cited inflationary pressures on fuel and labor as an additional source of pain.
Olsavsky said he expected the costs tied to overbuilding to persist for at least the next several quarters as Amazon grows into its capacity.
In its most recent quarterly earnings. Amazon blamed increased shipping and fulfillment costs for operating losses in both its North American and international retail segments.
And even with all that excess space and workforce, Amazon’s current delivery speeds have only recently begun to approach pre-pandemic levels.
“We have too much space right now versus our demand patterns,” Olsavsky said.
Amazon breaks its net sales into two buckets: product sales, which refers to revenue from the sale of physical and digital products and related shipping fees, and service sales, which mostly refers to third-party seller fees as well as AWS sales, Amazon Prime membership fees and certain digital content subscriptions.
Amazon’s heavy spending helped the company build out a robust network of smaller delivery hubs and warehouses, reducing the distance packages must travel to reach customers.
It has also helped Amazon bring on fleets of independent contractors who transport goods by truck between the company’s warehouses and deliver packages to customers’ doorsteps using Amazon-branded vans and their personal vehicles.
Last quarter, Amazon spent $19.6 billion on shipping, a category that includes costs related to the operation of package sortation and delivery centres, transportation services and inbound and outbound shipping costs.
Fulfillment costs, which include the expenses incurred in operating and staffing fulfillment centres and physical stores, were around $20.3 billion over the same period.
Time could very well fix the problem, though, assuming Amazon continues to grow its e-commerce business.
Editor’s note: The company is also rolling out soon a Buy With Prime feature on third-party retailers websites, which should help alleviate Amazon’s excess warehouse capacity issue.
And with Amazon planning to branch out and offer speedy shipping to merchants who don’t sell on its website, the costs may be justified down the line.
“Growing into existing fulfillment capacity may be one of the easiest problems for Amazon to solve in its history,” wrote Bank of America analyst Justin Post in a research report.