Dive Brief:
- Amazon will increase its fulfillment network square footage by 50% by the end of the year to keep up with the demand shock brought on by the coronavirus pandemic, CFO Brian Olsavsky said on a Thursday earnings call. The company increased square footage by 15% in 2019.
- The additional space will include fulfillment, delivery and sortation capacity. "We expect the majority of this capacity to come online in late Q3 and into Q4," Olsavsky said. Prime Day will take place in Q4.
- Amazon's net sales in the second quarter increased 40% year over year to reach $89 billion. The company's shipping costs continue to outpace sales growth, increasing 68% year over year in Q2. Despite the increased capacity and spend, Olsavsky did not commit to a timeline for returning to Amazon's pre-pandemic shipping speed.
Dive Insight:
Amazon moved into its flex space usually reserved for peak season to handle the 40% Q2 jump in sales, Olsavsky said. With the slack in the network absorbed, the company is building up supply chain capacity ahead of an online-centric holiday shopping season.
"We need to build the inventory more for Q4, and we’ve run out of space," Olsavsky said.
Amazon is also instituting tighter controls on what fills that space. New restrictions on warehouse space for third-party sellers go into effect Aug. 16, aimed at removing slow-moving inventory from Amazon warehouses.
Amazon's operational costs related to pandemic precautions, including personal protective equipment (PPE), extra cleaning, onboarding and training of 175,000 new workers, went over the $4 billion Olsavsky projected for Q2 back in April. The CFO said changes to 150 established processes were necessary to facilitate social distancing, which also added to the cost. Amazon will spend an additional $2 billion on COVID-19 supplies and mitigation in Q3, according to Olsavsky.
What all that expense hasn't bought is a return to pre-pandemic shipping speeds, and Olsavsky made no promises on that front Thursday.
"We realize that our first priority is to keep our employees safe, and the second is to focus on getting our capacity increased. Once we’ve done that, we are working very hard to get faster shipments," he said. "We don’t think we’re going to be back in the short run, but we will continue to improve it. And hopefully, it’ll be less noticeable for our consumer base."
Amazon's expectations and approach for peak contrast that of UPS, which won't build up capacity for Q4 this year. CEO Carol Tomé said Thursday that the 40,000 new workers the carrier brought on in the first half will get the company through the second — though it may be selective on what volume it takes in order to maintain service quality and pricing.
Amazon went through its own experiment with prioritizing volume in the first half when it temporarily restricted inbound shipments to essentials only. The company's plan to continue building capacity through the end of the year suggests great expectations for Q4 volume and/or a preference for order volume over service level — which, at Amazon, means speed.
