You will be redirected back to your article in seconds
Skip to main content

Amazon Cites ‘Several Billion Dollars’ in Shipping, Labor Costs

Amazon CEO Andy Jassy said that the e-commerce giant expects to “incur several billion dollars of additional costs” during the holiday period, giving an ominous outlook amid weaker-than-expected third quarter sales and earnings. Sales came in at $110.8 billion, a 12 percent increase, but lower than the $111.6 billion projected by analysts surveyed by Refinitiv. Earnings were $6.12 per share as opposed to Refinitiv’s estimated $8.92 per share.

For the fourth quarter, Amazon now forecasts sales between $130 billion and $140 billion, representing annual growth between 4 percent and 12 percent. This falls below the $142.1 billion (13.2 percent growth) initially expected by analysts surveyed by FactSet.

In a Nutshell: Jassy, who did not participate in the Amazon earnings call, said the company would incur the costs “in our consumer business as we manage through labor supply shortages, increased wage costs, global supply chain issues, and increased freight and shipping costs—all while doing whatever it takes to minimize the impact on customers and selling partners this holiday season. It’ll be expensive for us in the short term, but it’s the right prioritization for our customers and partners.”

In the earnings call, chief financial officer,Brian Olsavsky estimated that the cost of labor, labor-related productivity losses and inflation to steel and trucking expenses added approximately $2 billion in operating costs in the third quarter. He expects this number to double to $4 billion in the fourth quarter.

Related Stories

Amazon said earlier this month it plans to hire 275,000 permanent and seasonal employees nationwide, in part to help deal with the holiday shopping rush.

Olsavsky said Amazon saw more than $1 billion of costs tied to lost productivity and disruption in the quarter.

“In the third quarter, labor became our primary capacity constraint, not storage space for fulfillment capacity. As a result, inventory placement was frequently redirected to fulfillment centers that had the labor to receive the products,” Olsavsky said. “This resulted in less optimal placement, which leads to longer and more expensive transportation routes. In short, our operations are normally well-staffed and optimized to be in stock and to deliver to customers in one-to-two days. 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.”

On Monday, John Felton, senior vice president, global delivery services, wrote in a blog post that the company is more than willing to continue investing in its infrastructure amid the supply chain constraints.

“A key example is how we’ve organized our global logistics network to better manage the flow of inventory across the world,” Felton wrote. “We’ve increased ports of entry across our network by 50 percent, doubled our container processing capacity, and expanded our ocean freight carrier network partnerships to secure committed capacity into critical ports within our network.”

Olsavsky noted that the e-tail giant is no longer capacity-constrained for physical spaces. In the September alone, Amazon opened more than 100 new buildings in the U.S., including fulfillment centers, sort centers and last mile delivery stations.

Additionally, Amazon is ramping up its air fleet and is hiring its own flight crews in an effort to bring more product over from China, adding significantly more expense.

Total fulfillment costs in the third quarter increased 50 percent year over year to $473 million, whereas total shipping costs grew 20 percent to $18.1 billion.

In September, Morgan Stanley hinted that Amazon wouldn’t be able to maintain its margins in the future due to the aggressive spending and wage increases, downgrading the company’s stock price target from a then-$4,300 to $4,100. The investment bank estimates combined shipping and fulfillment cost per unit (excluding Covid-related costs) will grow 17 percent to $129 billion in 2021 and 9 percent to $162 billion in 2022.

Free cash flow decreased to $2.6 billion for the trailing 12 months, compared with $29.5 billion for the 12 months ended Sept. 30, 2020. Operating cash flow decreased 1 percent to $54.7 billion in the period, compared with $55.3 billion for the 12 months prior.

The news came as Amazon ended one of its delivery services, notifying Prime users that its Key In-Car Delivery, which delivered packages to the trunks of shoppers’ cars, is being suspended indefinitely. Amazon paused in-car delivery in March 2020 at the onset of the pandemic and planned to resume it, but is now focusing on in-garage delivery and building out additional Key offerings.

Net Sales: Net sales increased 15 percent to $110.8 billion in the third quarter, compared with $96.1 billion in third quarter of 2020. Last year’s third quarter delivered 36 percent growth.

North America sales escalated 10 percent year over year to $65.6 billion from $59.4 billion in the year-ago period. International sales beat North American growth totals with a 16 percent jump to $29.1 billion over the $25.2 billion taken in during the 2020 quarter.

Sales in Amazon’s online marketplaces rose 3 percent from a year earlier to $49.9 billion, while physical store revenue increased 13 percent to $4.27 billion.

Amazon Web Services (AWS) is once again proving to be the most consistent part of the company’s business, boosting sales growth for the fourth straight quarter. Net sales were $16.1 billion, up 39 percent from the second quarter of 2020, when AWS sales were $11.6 billion.

Net Earnings: Third-quarter net income at Amazon dipped to $3.2 billion, or $6.12 per diluted share, compared with $6.3 billion, or $12.37 per diluted share in the year-ago period. Operating income decreased to $4.9 billion in the third quarter, compared with $6.2 billion in third quarter 2020.

CFO’s Take: Olsavsky reiterated Amazon worldwide consumer CEO Dave Clark’s reveal in the second quarter that the company still isn’t back to pre-pandemic one-day delivery levels, but was “getting closer.”

“We have unfinished business on the one-day promise side,” Olsavsky said in the call. “We don’t want to be just as good as we were before the pandemic. We expect that to increase in 2022.”