Amazon.com Inc. says it added 628,000 workers globally over the past 18 months, but labor continues to hamper the company’s efforts to meet demand.
“In Q3, labor became our primary capacity constraint, not storage space or fulfillment capacity,” said Amazon’s
Chief Financial Officer Brian Olsavsky on the earnings call, according to FactSet. “As a result, inventory placement was frequently redirected to fulfillment centers that had the labor to receive the products. This resulted in less optimal placement, which leads to longer and more expensive transportation routes.” The supply chain bottlenecks and labor squeeze forced changes to Amazon’s normally methodical fulfillment system, demonstrating that even one of the largest and most efficient companies in the world faces high hurdles to overcome extraordinary global circumstances. See: Walmart, Target, Home Depot and other large retailers are chartering ships to bypass supply chain problems. Will the strategy save Christmas? “In short, our operations are normally well staffed and optimized to be in stock and to deliver to customers in one to two days,” Olsavsky said. “Labor shortages and supply chain disruptions upset this balance and resulted in additional costs to ensure that we continue to maintain our service levels to customers.” One area where the company says it hasn’t fallen short is in real estate to handle the huge volume of products and services the company provides. “We made strong progress in Q3 to build and open new facilities and as a result for the first time since the pandemic began, we are no longer capacity constrained for physical space in the network,” Olsavsky said. “September alone we brought online more than 100 new buildings in the United States including fulfillment centers, sort centers, and last-mile delivery stations. For the year, we expect our 2021 footprint additions to exceed last year’s buildout, which was also significant.” Amazon missed expectations, reporting a third-quarter profit decline to $6.12 a share while revenue increased to $110.8 billion. The stock fell 3.8% in Friday trading after the earnings announcement. Also: Supply-chain concerns causing shoppers to stockpile gifts just in case, data shows On Monday, the company gave a supply chain update on its corporate site in an effort to reassure customers that the holidays will go off without a hitch. “Our teams have been hard at work for months, focusing on capacity and demand planning to balance our customers’ needs against any supply chain or transportation challenges that may occur,” the post says. “While we are always investing in our supply chain and transportation network, we have done even more this year to ensure we don’t let recent supply-chain constraints impact the Amazon experience for our customers.” Amazon says it has more than 50,000 trailers to haul freight around the world, will have more than 85 aircraft in its Amazon Air cargo fleet later this season, and has increased its entry port network by 50%. Also: Hasbro says most of the $100 million in merchandise that was delayed by supply chain problems in the third quarter has been delivered “With the recently emerging labor shortage in the US, the company is increasingly spending more to add workers, and called out an incremental $2 billion costs from wage inflation, and labor-related productivity losses in 3Q21, particularly in August and September,” Truist analysts wrote in a note. Amazon expects costs to increase towards $4 billion in the fourth quarter. And the company called out inflation and higher costs for materials. “We view these headwinds as macro in nature impacting Amazon as well as peers, yet given its size and scale, and forward-leaning management team, we expect the company’s P&L to be able to comfortably absorb these costs as these labor supply issues wane, and as the company’s fulfillment capacity remains healthy (which is right now),” Truist said. Truist rates Amazon stock buy with a $4,000 price target, up from $3,800. “Management’s biggest challenge heading into Q4 and into 2022 will be its ability to retain talent, which is needed to scale its low-margin but core retail business that serves as perhaps the most important flywheel piece within the company’s overall business,” wrote Wedbush analysts. Wedbush rates Amazon shares outperform, but lowered its price target to $3,950 from $4,300. Don’t miss: ‘It’s like being ripped into two’: Chipotle workers overwhelmed by online orders and furious customers “This year, management is using promotional activity in October to pull forward shopping in order to avoid challenges brought about by an inconsistent stream of workers, including having to redirect inventory placement to better staffed fulfillment centers,” Wedbush said. Not only do the Amazon results impact that company, but GlobalData says they shine a light on what’s to come for other retailers as well. “First and foremost, they show that as comparatives become tougher growth stalls,” wrote Neil Saunders, GlobalData’s managing director. “As a retailer that is, primarily, focused on online, Amazon’s difficult comparatives are coming sooner than many more physically-focused players. However, their turn will come and when it does, they will find it much harder to chalk up revenue gains. That, at a time of exceptionally high cost inflation presents an enormous challenge. Many will face the same issues as Amazon: bite the bullet and take a hit on the bottom line or try to slash costs and maintain profitability.” Amazon stock is up 1.6% for the year to date. The Amplify Online Retail ETF
is down 3.7% for the period. And the S&P 500 index
has gained 22% for the period.