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Home » Logistics » Amazon Says Labor, Fulfillment Costs May Wipe Out Holiday Profit

Amazon Says Labor, Fulfillment Costs May Wipe Out Holiday Profit

Amazon’s Van-Buying Spree Delivers a Gift to Auto Industry
Amazon.com packages are piled behind a delivery van. Photo: Bloomberg.
October 29, 2021
Bloomberg

Amazon.com Inc. warned Wall Street that it will have to spend billions of dollars hiring workers, paying them more and even speeding partly empty trucks to their destinations to ensure that supply chain snarls don’t derail the holiday shopping season. 

The massive outlays could wipe out Amazon’s profit during the last three months of the year, executives said. The company also reported third-quarter revenue and earnings that fell short of projections. The shares declined about 4% in extended trading.

Revenue will be $130 billion to $140 billion in the period ending in December, the Seattle company said Thursday in a statement. Analysts, on average, estimated $141.6 billion, according to data compiled by Bloomberg. Operating income could be as low as zero, Amazon said, a step back for the company after reaping billions of dollars in profit each quarter going back to early 2018.

The results reflected the first period under new Chief Executive Officer Andy Jassy, who took the helm of the world’s largest online retailer from Jeff Bezos in July. Amazon shares have gained 5.8% this year, underperforming the broader market, as consumers who turned to online ordering in record numbers during the pandemic began to resume in-person shopping, eating out and traveling. Amazon had signaled that slower sales growth — and high spending in areas such as wages and new warehouses — would persist through the end of the year. 

“Consumers have started to return to prepandemic spending patterns,” Chief Financial Officer Brian Olsavsky said. Amazon is increasingly dispatching partly empty trucks, sending products on more circuitous routes and speeding some shipments to make sure that customers get their items within the company’s promised windows. 

While Amazon earlier this week sought to reassure shoppers and shareholders that its investments left it well prepared to weather the global supply chain woes, Jassy said the expansion would come at a cost.

“In the fourth quarter, we expect to incur several billion dollars of additional 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,” he said in the statement. “It’ll be expensive for us in the short term, but it’s the right prioritization for our customers and partners.”

Ed Yruma, an analyst at KeyBanc Capital Markets, said supply chain and labor pressures may mean Amazon can’t get goods to customers as fast as usual or some hoped-for items may not be available despite the company’s extra spending.

“They’re going to have to step up hiring,” Yruma said. “It’s more expensive. And those ‘out-of-stocks’ are going to be more severe than people expect.”

Amazon employed more than 1.46 million full- and part-time workers as of Sept. 30, a 30% increase from a year earlier. New-hire bonuses and wage increases added $1 billion to the company’s expenses during the third quarter, and that cost will likely double during the holiday period, Olsavsky said.

Third-quarter revenue increased 15% to $110.8 billion, compared with analysts’ average estimate of $111.8 billion. Earnings were $6.12 a share, down from $12.37 a year earlier, the company said. 

John Tomlinson, director of research with M Science, said investors were hoping that conditions would have improved since Amazon’s relatively gloomy outlook in July. 

“I think people were hoping that this quarter was the bottom,” Tomlinson said, referring to the period ended Sept. 30. “It doesn’t seem that’s the case. Some of the challenges they laid out didn’t seem to get worse, but they didn’t get much better, either.”

Amazon Web Services, the cloud-computing unit that brings in most of Amazon’s profit, posted sales of $16.1 billion, up 39%. That’s the division’s fastest growth rate since early 2019.

Revenue from online stores, the company’s main retail business, increased just 3% to almost $50 billion. The “other” category, which is primarily advertising, rose 49% to $8.09 billion, a rapid expansion, but slower than the pace of recent quarters. 

Thursday marks the second time in as many years that Amazon has warned that pandemic-era challenges could wipe out its profit. The first, in April 2020, had Bezos asking shareholders to buckle up. The projection proved too cautious, and Amazon reported its most profitable quarter in company history just three months later. 

“The soft guidance for Q4 would be more concerning if Amazon didn’t have a track record of over-performing during the holiday quarter,” said Andrew Lipsman, an analyst at EMarketer. “Bright spots in Q3 earnings are the acceleration of AWS and continued strength in the ads business, both of which will drop a lot of profit to the bottom line next quarter if the e-commerce business rebounds.”

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