- Amazon Logistics increased its square footage an estimated three times more in 2020 than in 2019.
- The e-tailer is working to recover its delivery speed after COVID-19 hindered one-day shipping.
- The former head of Amazon Air said only external forces could halt the expansion in the long run.
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Amazon raced to meet skyrocketing demand with new logistics facilities in 2020, building late into Q4, a time when construction usually slows before the holiday shopping season. It maxed out intentionally underused capacity meant for the holidays early in the year, and so upped its logistics square footage by roughly 50%, adding an estimated 130 million square feet.
It was a good thing it did, CFO Brian Olsavsky said on Amazon’s Q4 earnings call last week, since the company beat expectations with a 44% year over year uptick in sales in the fourth quarter.
An RBC Capital Markets assessment released last year put the 2020 square footage increase at three times that of 2019 — totaling more than the last three years combined. Amazon Logistics’ square footage growth from 2017 to 2020 was equal to Walmart’s in the last 50 years, according to RBC.
Olsavsky said last week the company hadn’t figured out how much more square footage of fulfillment, sortation, or delivery station space it would pile on this year. But it will add more. It has to, if it’s going to get back to its pre-pandemic shipping speed — let alone continue to spread the one-day standard to more items within Amazon Prime.
“In the [fulfillment center] world, it’s hard to turn that capacity on quickly, so it generally means you may have to overbuild to protect the customer experience,” Olsavsky said on the call.
The space added mirrors staff hired. Amazon brought on more than 170,000 new workers in 2020 — more than three times the 50,000 it hired in 2019.
With $44 billion spent on the logistics build-out in 2020 alone, what is Amazon’s definition of enough? Will the e-commerce giant ever exit the logistics growth phase?
One-day delivery requires close-by inventory
When Amazon announced Prime delivery would shorten from two days to one for millions of items in 2019, it underplayed the logistics lift needed to achieve it. Initially pegged at $800 million, the cost quickly rose to multiple billions.
Amazon Logistics facilities consist largely of fulfillment centers, where orders are packed; sortation centers, where they’re batched and transferred closer to their destination; and delivery stations, where they are transferred to vehicles for last-mile delivery. Most one-day Prime packages go through all three stages, often spending just minutes or hours in the latter two types of facilities.
To achieve fast delivery, especially in one day, Amazon needs inventory close enough to the consumer to be packed and dispatched quickly. One day isn’t enough time to put most packages on a plane. So the company keeps building.
“Failure to optimize inventory in our fulfillment network increases our net shipping cost by requiring long-zone or partial shipments,” reads the company’s 10-K filing with SEC for 2020.
Olsavsky said that going into 2021, planning ahead is difficult given uncertainty around what items will be hot, and how many Prime customers will continue habits picked up in the first year of the pandemic. But, since delivering in one day requires inventory to be close to consumers in the first place, Amazon has to prepare for the best-case sales scenario — what he called “overbuilding.”
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