'We've run out of space': Amazon braces for holiday shopping surge with relentless expansion

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Speaking to investors recently, having weathered the storm of the first wave of a global pandemic, Amazon.com Inc.’s chief financial officer Brian Olsavsky put the company’s next challenge in the simplest terms possible: “We’ve run out of space.”

The arrival of coronavirus spurred Amazon to accelerate what was already an aggressive expansion strategy. Between 2018 and 2019, it increased its global logistics footprint by 15 per cent, securing more warehouse space, sorting centres and delivery hubs in an effort to beat out rivals. This year, Olsavsky said Amazon was on track to add more than 50 per cent to its capacity.

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'We've run out of space': Amazon braces for holiday shopping surge with relentless expansion Back to video

The push comes as the company scrambles to hold on to its position as the essential western supplier of the pandemic, meeting the unprecedented demands of populations locked inside their homes while fulfilling one of its bedrock promises: guaranteed delivery in just one or two days.

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On the day of its annual selling spree Prime Day — delayed by three months until Tuesday and now heralding the start of Christmas season — and ahead of what are likely to be widespread second lockdowns, Amazon’s ever-growing shipping network faces two of its biggest challenges to date.

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The coming weeks will be what Moody’s has billed as a “litmus test” for the sustainability of Amazon’s blistering revenue growth, with sales in the second quarter up 40 per cent on last year.

With shipping costs doubling in the past year, the task of making sure people get their presents on time for Christmas during the pandemic will be a “high-stakes shipping gauntlet” that could cost Amazon upwards of US$20 billion, Moody’s estimates.

People power

Central to Amazon’s expansion drive are the people needed to staff its operations. In September, the company announced it was seeking to hire an additional 100,000 employees to help run its growing network, its fourth recruitment drive this year.

In 2020 alone, Amazon’s targets have it on course to grow its permanent workforce by more than a quarter, to almost 1 million. Within that, the company is in the process of recruiting about 30,000 corporate employees, on an average yearly salary of US$150,000.

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The hiring spree comes as Amazon faced criticism from some employees over its handling of operations during the pandemic. Earlier in October, the company announced that 19,816 frontline workers, from warehouse employees to Whole Foods staff, had contracted COVID-19 — though it declared the number a relative achievement given the company’s size, while arguing its competitors had shared less data.

The statement came after pressure from workers’ groups — who have staged a number of protests — and politicians, citing concerns over safety. A group of major investors called Amazon’s disclosure “incomplete.”

Nevertheless, changes in the labour market brought about by the pandemic have allowed Amazon to add to what had previously been a relatively limited pool of workers.

“The big bottleneck that we were seeing before this pandemic was the labour shortage,” said Juan Arias, a senior consultant with CoStar, adding that new employees had been particularly hard to recruit in rapidly growing cargo-handling regions, such as Savannah, Georgia.

“Now with a pandemic, with so many other companies laying off low-income workers, it’s a different show. Amazon gets to have the advantage again.”

Up in the air

In addition to coping with coronavirus-related demands, a key tenet of Amazon’s expansion plan has been to lessen its reliance on the third parties it uses to get its goods to customers.

Central to that effort has been the expansion of its own airline, Amazon Air.

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According to the Chaddick Institute for Metropolitan Development, there was a 30 per cent growth in the number of Amazon Air flights during the pandemic — 54 planes, soon to be 58, in regular use in the U.S., each flying, on average, almost three times a day.

Amazon itself has said its fleet now numbers more than 70 planes and would soon receive 11 more, though it’s unclear how many of them are in regular operation.

While dwarfed by the legacy cargo companies — United Parcel Service Inc. has more than 250 planes in regular use — the newcomer’s growth has been “nothing short of extraordinary,” said Joseph Schwieterman, the Chaddick Institute’s director.

He estimates Amazon will surpass 200 flights per day by the end of next year, bolstered by the opening of its new US$1.5-billion Cincinnati megahub, a private terminal that will streamline the movement of Amazon stock between its ground fulfilment centres.

However, Amazon Air uses the oldest planes of any of the major cargo lines, according to Planespotter.net, which produce more emissions than a modern fleet. To counteract this, Amazon has purchased 6 million gallons of biofuel from Shell Aviation. The substance, made up of waste fats and oils, would reduce emissions by 20 per cent, Amazon said.

On the ground, Amazon’s ever-present van fleet is made up of petrol-powered vehicles, mostly Mercedes Sprinter vans, 20,000 of which it bought in 2018. This year, with the pandemic in full swing, it ordered more than 2,000 Utilimaster walk-in vans that have traditionally been used by the likes of UPS and FedEx.

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It’s the wrong direction for a company that has pledged to achieve carbon neutrality, without offsetting, by 2040. To achieve that, Amazon has ordered 100,000 custom-built electric delivery fans from Rivian, a start-up in which Amazon has an undisclosed stake, to be rolled out by 2030. The first will be incorporated into Amazon’s network in 2022.

Moving closer, getting smaller

Amazon is also said to be making inroads on the next stage of its strategy: bringing its facilities closer to the communities it serves, particularly in places where Prime members are densely populated.

A Bloomberg report last month suggested Amazon had plans to launch 1,000 micro-fulfilment centres in the U.S. — a strategy that is likely to face some resistance, with concerns of increased traffic and industrial rezoning near affluent communities. Amazon would not comment on its plans.

In its effort to compete against retailers such as Walmart Inc. — which has gained ground on Amazon by offering fast delivery and kerbside pick-up of groceries — Amazon recently opened its first-ever permanently “online-only” branch of Whole Foods in Brooklyn, New York. Closed to foot traffic, the store is configured to streamline online pickers.

There is speculation that Amazon will aggressively move to take over spaces left vacant by retailers unable to survive the pandemic — on top of years of declining sales — turning stores formerly in use as Sears and JCPenney into Amazon delivery hubs instead.

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Meanwhile, in Los Angeles, the company has taken yet another approach: the company’s new Amazon Fresh store is part brick-and-mortar grocer, part micro-fulfilment centre for customers in the immediate vicinity.

Prime targets

Maintaining its edge on free and fast shipping, by whatever means necessary, is crucial if Amazon is to retain its Prime members, a subscription base expected to exceed more than 142 million in the U.S. alone — more than half of the country’s adult population. eMarketer says free and fast shipping is the primary driver of its popularity.

To that aim, the Prime Day event is as much a membership drive as it is a sales push: the company’s most high-profile opportunity all year to lock in loyalty. On average, an Amazon Prime member in the U.S. will spend US$1,400 on products each year — versus US$600 from non-members who use the site.

To keep Prime growing, Amazon needs to now attract more lower-income shoppers, or those who previously might have just been averse to buying online. Lockdown, and talk of new normals, has brought these people into play, said Lipsman.

“All of a sudden, the need becomes very urgent…so they become Prime members for the first time.”

? 2020 The Financial Times Ltd