Severe staffing shortages and the mounting costs of keeping its logistics empire running at full speed will throttle Amazon’s earnings for the remainder of the year, the company warned on Thursday.
The ecommerce giant said that “inconsistent staffing levels” within its fulfilment network had led to inventory being inefficiently routed to regions with a more reliable workforce, increasing costs as it heads into the crunch holiday period.
“Labour became our primary capacity constraint in Q3 — not storage space, or fulfilment capacity, which is normally the case,” Brian Olsavsky, chief financial officer, said during an earnings call on Thursday.
The need to move goods to areas with better staffing was leading to persistent issues with “less optimal placement, which leads to longer and more expensive transportation routes”, he added.
With intense competition for workers across the US, Olsavsky said Amazon had received “more than our share” of available labour. But it has come at a heavy price: an additional $2bn in operating costs in the third quarter.
That included “nearly $1bn of inflationary pressure, primarily tied to increased wages and incentives in our operations, and another billion dollars of costs tied to lost productivity and disruption,” Olsavsky said. In the fourth quarter, which spans the holiday season, those costs would approach $4bn, he added.
The unprecedented conditions took their toll in the July-September period, according to figures released on Thursday. Wall Street was left disappointed as total revenues for Amazon came in at $110.8bn, up 15 per cent on the same period last year, but the company’s slowest rate of growth since 2015. Analysts had expected over $111bn.
Net income fell by almost half, year on year, to $3.2bn. Its shares fell more than 5 per cent in initial after-hours trading, recovering marginally later.
Amazon gave bleak guidance for the rest of the year, saying that growth would slow further and telling investors that it expects revenues to come in 12 per cent higher than last year’s Christmas period at best, and at worst just 4 per cent.
Profits during that period could fall anywhere between zero and $3bn, the company said, compared to $6.9bn in 2020.
“We’re choosing to incur higher costs to maintain our service level,” Olsavksy said. There were pressures as well from disrupted global supply chains and the cost of materials, such as steel, and services such as trucking.
Earlier this month, Amazon announced that it was seeking to recruit 150,000 seasonal employees in the US alone, 50,000 more than it did for Christmas last year, and on top of the 628,000 workers added globally over the past 18 months.
The company has boosted its base hourly pay, added overtime incentives, and in some markets offered signing-on bonuses of up to $3,000.
There is no guarantee that Amazon can meet the recruitment target, analysts say, particularly against a backdrop of negative publicity around working conditions at the company, and as other businesses move to increase wages as well.
“There is a tipping point where no matter how much money you throw at the problem you just can’t attract enough people,” said Marc Wulfraat, a logistics analyst who specialises in Amazon. “One of the issues is that temporary people are slower than regular people so you need more of them to do the equivalent work.”
“This will be the year where [Amazon] will have the greatest labour challenge in the history of the company, and it’s anyone’s guess where the chips will fall,” he added.
“We’ve always said that when confronted with the choice between optimising for short-term profits versus what’s best for customers over the long term, we will choose the latter — and you can see that during every phase of this pandemic,” said Andy Jassy, Amazon’s chief executive. The quarter was his first in charge of the retail giant, having taken over from Jeff Bezos in July.
The pattern follows warnings issued by the company earlier in the year, when it said it would be difficult to match the performance of 2020 when surges in online buying led to record-breaking earnings. The impact of the pandemic has steadied somewhat with societies reopening.
The bright spot in Amazon’s third quarter was its cloud-computing division, AWS, which again performed strongly, posting revenues of $16.11bn versus expectations of about $15.5bn. The group again provided the lion’s share of Amazon’s overall profitability, with an operating income of $4.88bn, up almost 40 per cent year on year.
“Let’s not forget, AWS is the [profit] engine,” said Mark Stoeckle, chief executive of Adams Diversified Equity. “I think it is important that AWS continues to be the horse here, because it’s providing a lot of cover for their other businesses.”