E-commerce mastodon braced for ‘several billion dollars’ of additional expenses in Q4 including those related to freight and shipping.
Amazon is bracing itself for “several billion dollars” of additional operating costs in the final quarter of the year as it seeks to deal with staff shortages, rising wage costs, global supply chain disruption and increased freight and shipping expenses.
Such issues already weighed heavily on the US e-commerce mastodon’s third quarter (July-September 2021) net profits which were halved on the same period last year to $3.15 billion, in contrast to net sales which increased by 15% to $110.8 billion, reflecting continued dynamic consumer demand.
A surge in operating costs was the main factor in the decline in profitability in Q3. Fulfilment costs increased to $18.5 billion compared to $14.7 billion in the same period last year while shipping costs swelled to $18.1 billion versus $15.1 billion.
Commenting on the results, Amazon CEO, Andy Jassy, noted: “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.”
He underlined this “commitment” has “also driven extraordinary investments across our businesses to satisfy customer needs – just one example is that we’ve nearly doubled the size of our fulfillment network since the pandemic began.”
Looking ahead to the end-of-year peak season, Jassy said: “In the fourth quarter, we expect to incur several billion dollars of additional costs in our consumer business as we manage through labour supply shortages, increased wage costs, global supply chain issues, and increased freight and shipping costs – all while doing whatever it takes to minimise 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 prioritisation for our customers and partners.”
Amazon has also incurred more than $7.5 billion in incremental Covid-related costs in the first three quarters of the year and expects this figure to increase further by approximately $4 billion in Q4, the company’s CFO, Brian Olsavksy, told analysts a conference call last week.
Transportation capacity
Putting some colour on the additional labour and logistics costs incurred in Q3 and in the final quarter of the year, he said: “We opened up more capacity, particularly in our transportation network. First, we hired a lot more people to support the strong customer demand. We welcomed 250,000 permanent full time and part time employees just in Q3 and have already added about 100,000 more in the first month of Q4.”
Olsavksy added: “As I mentioned last quarter, we expect to grow our fulfillment and logistics network square footage by approximately 50% this year which includes significant additions to our fulfillment centres as well as our transportation facilities. The majority of these buildings opened in late Q3 and into Q4. About half of this square footage growth will be on the transportation side” – in the shape of delivery-focused facilities such as sort centres and last-mile delivery stations.
In-house delivery capabilities
Asked to comment on the capacity constraints facing third-party shipping networks during the peak season and whether Amazon’s investment in the expansion of its own in-house delivery capabilities will represent a competitive advantage, Olsavksy replied: “We’ve great partnerships around the globe with third-party shippers (cargo carriers) and we know that their capacity will be tight as well as ours. We do feel good that we’ve invested quite a bit in our own capacity and been able to develop that capability a lot this year because we needed it and we’re going to need it in Q4.
“Having said that, it’s going to be tight for everyone. I think it will all be stretched and it’s advantageous to the customer and probably to the companies (sellers) for people to order early this year. But regardless of the order pattern we’re going to do our best to get the usual excellent service to our customers.”
Global logistics network
Meanwhile, in an online post last week, Amazon’s SVP Global Delivery Services, John Felton, underlined that the company has continued to invest in its transportation capabilities, “creating a supply chain that is built for an environment where safety, speed, and efficiency are of the essence”.
He continued: “We’ve invested in people, aircraft, ships, and buildings to ensure we have more options in the ways to get things from A to B. We’ve also built a network of strong partnerships across the supply chain to give us the flexibility we need to get the right things to the right places when customers need them.
“A key example is how we’ve organised our global logistics network to better manage the flow of inventory across the world. We’ve increased ports of entry across our network by 50%, doubled our container processing capacity, and expanded our ocean freight carrier network partnerships to secure committed capacity into critical ports within our network.”
Felton said another example is the recent expansion of the Amazon Air cargo fleet. “Later this season, we will have more than 85 aircraft in our fleet, ensuring ample capacity to transport customer packages across longer distances in shorter timeframes all season long.”
On the ground, the Amazon Freight network can call upon a worldwide pool of more than 50,000 trailers “powered by tens of thousands of small businesses that collectively employ tens of thousands more drivers to make these shipments possible”.
Felton added that Amazon also has “more than 800 delivery stations globally, employing tens of thousands of people who ready packages for the delivery process. And, our delivery network grew to more than 260,000 drivers worldwide across our Delivery Service Partner programme, supported by hundreds of thousands more Amazon Flex drivers.”
Source: Lloyd’s
