Amazon is experiencing a real estate hangover.
After adding millions of square feet of warehouse space and hiring tens of thousands of employees to meet a surge in online spending and home deliveries in the pandemic, executives at the e-commerce giant said the company has started scaling back the expansion of its vast warehouse and fulfillment network as labor and energy costs rise and revenue declines as consumers dial down online spending.
“We have some excess capacity in the network that we need to grow into, so we’ve brought down our build expectations,” Chief Financial Officer Brian Olsavsky said on a call to discuss the company's first-quarter results on Thursday. “Labor and physical space are no longer the bottlenecks they were throughout much of 2020 and 2021."
Executives said higher costs and declining e-commerce revenue contributed to a $3.8 billion loss for Amazon in the quarter ended March 31, its first quarterly loss since 2015, compared with an $8.1 billion profit in the same time last year. A significant driver of the loss was a $7.6 billion decline in the valuation of Amazon’s stake in electric car maker Rivian Automotive, Olsavsky said.
The company is making good on projections from executives in February that it might start tapering its warehouse leasing, buying and development this year. Amazon trimmed spending on leasing and build-to-suit development to roughly $3.6 billion in the first quarter from about $6.4 billion in the year-earlier period, according to its earnings statement.
Olsavsky said Amazon’s rapid expansion since the onset of the pandemic left the company with too much warehouse space as it doubled the size of its operations and nearly doubled its workforce to 1.6 million employees across the globe. The company expects to spend less on expansion of its logistics network this year than it did in 2021, he added.
Amazon executives did not estimate how much they would reduce spending on real estate for the balance of 2022. The company projects sales of between $116 billion and $121 billion in the current quarter, an increase of between 3% and 7% compared with the year-earlier period.
More Demand Expected
Olsavsky expects the excess warehouse capacity to be temporary, with shopping demand ramping up to match logistics capacity again this year during Amazon's annual Prime Day promotion in July, followed by the holiday shopping season in November and December.
Amazon’s efforts to expand its logistics and fulfillment network have helped drive unprecedented expansion in the global industrial real estate industry.
The company’s logistics network totals 376 million square feet in the United States alone, with just under 110 million square feet under construction or planned as of March 31, according to MWPVL International, a Montreal-based supply chain and logistics consulting firm.
Walmart, Amazon’s nearest retail rival, had less than 150 million square feet of active space in the United States and another 14 million square feet of logistics space in development as of the end of 2021, according to MWPVL.
Amazon CEO Andy Jassy said in a statement that the growth of home delivery during the pandemic, combined with the economic disruption to global financial markets caused by the war in Ukraine, have brought “unusual growth and challenges” for the Seattle-based company.
“Today, as we’re no longer chasing physical or staffing capacity, our teams are squarely focused on improving productivity and cost efficiencies throughout our fulfillment network,” Jassy said. “This may take some time, particularly as we work through ongoing inflationary and supply chain pressures."