Amazon has too many warehouses and not enough orders, executives said Thursday with the release of the company's first-quarter earnings. The e-commerce giant posted a quarterly loss of $3.8 billion, its first since 2015, and Amazon's stock dropped more than 12% Friday morning.
While a key driver behind the quarterly loss was a $7.6 billion writeoff on Amazon's stake in electric vehicle maker Rivian, the increasing expense of operating the company's massive warehouse network was an additional drag on Amazon's bottom line.
"We have too much space right now versus our demand patterns," Amazon CFO Brian Olsavsky told reporters Thursday, explaining that the company plans to temper new warehouse leasing activity.
But analysts and insiders said the pause on new fulfillment centers isn't a sign that the commerce behemoth is in serious trouble. And in fact, Amazon's excess space could turn into an advantage.
In order to meet the demand created by the pandemic, Amazon doubled the fulfillment network it had built during the 25 years prior to 2020 in just two years, Morgan Stanley analysts wrote in a Friday research note.
The buildout led to an expensive network of warehouses that took a toll on the company's profitability. Margins for Amazon's North American commerce division dipped negative at the end of last year, as rising costs outstripped sales, the company's quarterly earnings report shows. Amazon said that excess capacity, productivity loss and inflation cost the company $6 billion last quarter.
Analysts from Morgan Stanley and Wells Fargo wrote that sales growth would sort out the "overcapacity" by the end of the year. The extra logistics muscle could become a tailwind driving profitability in the upcoming fourth quarter, when Amazon sees its largest sales of the year.
"We'll be really glad we have this capacity in Q3 when Prime Day hits because that's always a big surge of both inventory and orders and then definitely in the holiday season," Olsavsky said Thursday.
'Bullwhip effect'
Amazon's Olsavsky forecasted the pause on new fulfillment centers on an earnings call in February when he said the company's rush to meet pandemic-driven demand while keeping up delivery speeds could lead to "overbuilding," according to a transcript from Sentieo. He said the company would be "moderating" new fulfillment center leases in 2022 on the same call.
"We literally committed to as much as we could to handle the volume that we saw," Olsavsky said Thursday. "We did not want space to be constrained. Even with that intent, it took until the second quarter of last year for us to feel like we had enough space."
Marc Wulfraat, president of logistics firm MWPVL International Inc. and an expert on Amazon's network of warehouses, told Insider the pullback the company detailed yesterday is already underway, and is more dramatic than similar periods in the past. But Amazon is still in the process of adding at least 84 million square feet to its U.S. fulfillment network this year.
"These are multi-year projects and the company cannot stop on a dime because of the significant pre-committed capital," Wulfraat said.
Moreover, excess capacity could be a boon for Amazon, Wulfraat predicted. The company could "eventually sell their excess capacity to generate revenue to subsidize their own operations," he said. Rents for large warehouses rose 16% last year as vacancy rates plunged, according to commercial brokerage CBRE, indicating strong demand for warehouse space generally.
Amazon won't be the only company to find it has built more capacity than it needs this year, said Scott Ruffin, founder of Amazon Air and now CEO of logistic startup Pandion.
"It happens all the time. Building a capital intensive network and matching that with demand you're always risking the bullwhip effect," Ruffin said. "It's kind of like a teenager learning how to drive a car. It's either put on the gas or slam on the break. They'll pull back effectively and then they'll go fast again."
