Amazon.com Inc has spent billions of dollars on new warehouses in recent years, slashing earnings while claiming to investors that it had no alternative but to fulfill ever-increasing consumer demand.

According to observers, Amazon may have created too much, too soon.

Amazon revealed $2 billion in additional costs on Thursday as a result of having surplus fulfilment and shipping capacity, a major turnaround from only two years ago, when it had to reject away merchants’ items because it only had place for essential supplies.

According to Chief Financial Officer Brian Olsavsky, the company’s capital spending projections for 2022 have been reduced. This year, Amazon will spend less on fulfilment projects than last year, while transportation investments will remain constant or slightly lower.

Halfway through 2021, a new reality began to emerge. Consumers’ acceptance of at-home shopping to avoid COVID-19 infections in stores forced Amazon to double its warehouse and delivery network, a feat necessary by the company’s plans to quadruple its warehouse and delivery network. For the first time, the retailer’s principal constraint was not space, but rather labour to properly staff facilities. That would entail hiring 270,000 people in six months at Amazon’s scale.

Consumer demand fell after the Christmas break, as it normally does. Amazon’s data showed that online sales were down from a year ago. When the Omicron wave passed, shoppers returned to brick-and-mortar stores, and others were forced to choose between buying products and fueling their cars with high-priced petrol. According to Amazon, order habits have remained consistent.

Nonetheless, according to Olsavsky, the corporation appears to be “overbuilt for current demand.” “Many of the build decisions were made 18 to 24 months ago, so there are constraints on what we can modify mid-year,” he later told analysts.

Extra room was not a problem, according to David Glick, a former Amazon vice president who is now the chief technology officer of the on-demand fulfilment business Flexe.

“Amazon may have gotten a little ahead on fulfillment capacity, but they will grow into that excess capacity over the next year,” he said. A new program for Amazon to store and ship goods that independent merchants directly sell to consumers, known as Buy with Prime, may help, too.

According to Michael Pachter, an analyst at Wedbush Securities, Amazon would eventually require these facilities. However, Amazon’s admission brought little comfort.

“Didn’t they see this coming when they built all these fulfillment centers?” Pachter asked, noting how Amazon doubled over two decades of capacity in just 24 months. “Why not do it in 48?”

In the first quarter, Amazon’s operating income dropped by 59 per cent to $3.7 billion, while the company’s shares in electric vehicle maker Rivian plunged by 59 per cent, resulting in the company’s first net loss since 2015.

(Adapted from EcinomicTimes.com)

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