Amazon’s net loss prompts query: Has it built too many warehouses?

In recent years, Amazon.com Inc
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.

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It turns out, Amazon may have built too much, too soon,
analysts say.

The world’s largest online retailer on Thursday reported $2billion in incremental costs from having excess fulfilment 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 fulfilment 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 toavoid COVID-19 infections in stores. For the first time, space
was not the retailer’s main constraint; it was labour 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 fulfilment company Flexe,
said extra space was no major challenge.

“Amazon may have gotten a little ahead on fulfilment
capacity, but they will grow into that excess capacity over the
next year,” he said. A new programme 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
fulfilment centres?” 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.