Amazon faces more than slowing sales growth: it needs more warehouses

Amazon.com Inc needs to spend billions of dollars to expand its warehouse and delivery system, adding pressure to its shares which dropped 7% on Friday after it forecast lower sales growth.

The company is racing to meet demand even though shoppers are venturing more outside the home and it is returning to a pre-lockdown sales trajectory.

Last year, Amazon turned goods away from warehouses for weeks because it lacked the people and space to fulfil them safely. It still is playing catch-up, said Andrea Leigh, vice president at e-commerce optimization firm Ideoclick, who formerly worked at Amazon.

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"Amazon is running out of available space," she said. "They're also running out of labour."

Even after the company almost doubled its warehouse and transportation network in the prior 18 months, it sees significant investment ahead, not to mention costs from hiring and training staff. A tight labour market forced Amazon to raise wages early and add signing bonuses to attract full and part-time employees, who now number 1,335,000.

It also has to get back on track to its goal of one-day Prime deliveries in the United States. "This is all part of a multi-year investment cycle for us," Chief Financial Officer Brian Olsavsky told analysts Thursday.

For shareholders, Amazon's spending to capture long-term gains at the risk of near-term profit is in a playbook it has deployed over 27 years, sometimes testing the patience of Wall Street.

"Slower growth & increased investments make the shares more challenging," JPMorgan analysts said in a note.

Amazon plans to add 517 facilities to its global distribution infrastructure in the coming years, according to logistics consultancy MWPVL International. That is 176 million square feet on top of the 402 million it already has.

Amazon did not comment on the accuracy of those estimates, but said its infrastructure rollout already is ramping up. Over the past 12 months, capital expenditures and equipment leases jumped 74% to $54.5 billion, almost double the growth rate a year ago.

That may be par for the course for a $1.7 trillion retailer that wants to get bigger. Credit Suisse analysts said Amazon's ramp-up in capital expenditures is more important than its revenue guidance.

"The consumer responds positively to higher/faster service levels," they said in a note. "Unit volume accelerated following one day Prime delivery launch in 2Q19 – we believe it is only a matter of time before we see a similar impact as Amazon deploys fulfilment assets into the Holidays."