Amazon doubled the size of its operations during the global Covid-19 lockdowns and almost doubled its workforce during the two-year period.
However, now that the pandemic has waned in many parts of the world - although a resurgence has occurred in China and South Africa also seems to be facing a rise in the number of new infections in recent weeks - Amazon is battling with the additional capacity.
Amazon chief financial officer Brian Olsavsky said on Thursday that the firm had recorded $6 billion in added costs in the first quarter of 2022 as it faced excess fulfilment and transportation capacity in addition to less efficient warehouses and inflationary pressures.
“Capacity decisions are made years in advance, and we made conscious decisions in 2020 and early 2021 to not let space be a constraint on our business,” Olsavsky said.
“During the pandemic, we were facing not only unprecedented demand, but also extended lead times on new capacity and we built towards the high end of a very volatile demand outlook.”
However, shopping trends have changed as consumers have slowed down their online shopping spending in recent months.
According to SupplyChainDive, net sales at Amazon’s online stores dropped 3% year-on-year in the first quarter of 2022, while the firm’s fulfilment expenses rose by almost 23%.
UPS, which counts Amazon as its largest customer, reported a surprising decline in home delivery volumes last week, while e-commerce sales decelerated at the slowest pace in three years, according to GlobalData research.
“Amazon aims to right size its massive fulfilment network in response to demand now falling back to pre-pandemic levels. But this process won’t happen overnight. Olsavsky said it would take several quarters for Amazon to grow into the current capacity it has built out. The company expects to take a $4-billion hit in Q2 in connection to lower productivity, overcapacity and inflationary pressures,” SupplyChainDrive reported.
Olsavsky said conditions had changed after Amazon had staffed up to avoid labour constraints.
“We hired more people and then found ourselves overstaffed when the Omicron variant subsided rather quickly, at least from our standpoint in warehouses,” he said. “So, the issue has switched from disruption to productivity losses to overcapacity on labour.”
The war in Ukraine has also added to inflationary pressure, especially the rising price of fuel.
