August 22, 2013

Amazon spends billions on fulfillment

The online retailer races to build warehouses to compete in speed of delivery to shoppers.

Bloomberg News

SAN FRANCISCO - Amazon.com is stepping up a warehouse building spree, signaling the urgency of getting products to customers more quickly amid rising competition from eBay and Walmart.

AMAZON
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The Amazon.com warehouse in Goodyear, Ariz., is one of the retailer’s older facilities. It has built at least 50 since 2010.

Bloomberg News photo by Joshua Lott

Consider Amazon's center in Chattanooga, Tenn., which opened in 2011 after about 10 months, compared with as much as two years for older warehouses. Boasting more space and technology that makes it easier to find items, the building is part of Amazon's almost $13.9 billion spending binge on fulfillment expenses -- including 50 new facilities -- since 2010.

That brought the total to 89 at the end of 2012. Amazon has announced five more in the United States this year.

"We've standardized them in such a way that opening them and replicating them happens very fast," Dave Clark, vice president of worldwide operations and customer service, said in an interview at the Chattanooga building.

The warehouse strategy carries risk. Fulfillment has become Amazon's top operating expense, squeezing profit margins and contributing to a $39 million loss at the Seattle-based company last year. Yet CEO Jeff Bezos is under pressure to move more quickly as rivals including eBay and Walmart devise their own faster ways to deliver products.

"What Walmart and eBay are working on is can they be faster than Amazon," said Matt Nemer, a San Francisco-based analyst at Wells Fargo & Co. "It might not be the highest margin sale in the world, but they can potentially get something to you in an hour."

At stake is leadership in the growing market for products that can be ordered online and then delivered to a customer's door or a nearby store within hours. EBay has rolled out same-day delivery in some cities. And Walmart is increasingly moving its $482 billion in estimated fiscal 2014 sales online. The retailer has more than 4,700 stores across the United States, most just a few miles from consumers' homes.

Some competitors are either building their own delivery networks or relying on third parties, such as United Parcel Service. Amazon charges $3.99 and up for same-day and one-day delivery for users of its of Prime program, which includes unlimited two-day delivery for $79 a year. Non-Prime customers pay $8.99 and up.

So far, investors are giving Bezos the benefit of the doubt on the spending rampage. Amazon's stock, which rose less than 1 percent yesterday to close at $285.57, has more than doubled since the start of 2010.

Amazon's spending on fulfillment jumped more than 40 percent annually from 2010 to 2012, compared with 24 percent in 2009, according to data compiled by Bloomberg.

The spending is crimping Amazon's margins. The company's trailing 12-month operating margin of 0.95 percent lumps it in the bottom 3 percent of peers in the Standard & Poor's 500 Index -- even though it ranks among the top 10 percent of that group by sales, according to data compiled by Bloomberg.

And the margin pressure is rising as the price tag associated with warehouses is set to increase. The company said last month that it's adding more than 5,000 full-time jobs in 17 U.S. warehouses. Those new hires will join more than 20,000 employees. Amazon said it's also bringing on 2,000 staff for customer service, including part-time and seasonal workers.

 

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