Amazon Hoping Oct. Promotions Pull Demand Forward, Says CFO
Amazon is optimistic it can meet customer demand in Q4, said Chief Financial Officer Brian Olsavsky on a Q3 earnings call Thursday. He cited “a lot of promotional activity” in October to pull some demand forward from the typical November-December crunch around Black Friday and Cyber Monday. “Operationally, it's easier to perform when the volume is spread out," he said.
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The e-commerce leader “accessed new ports of entry” in the U.S. but “at a cost,” Olsavsky said. He described Amazon as “the shock absorber, absorbing a lot of the costs" for customers and sellers "not impacted” by rising supply chain costs. “Most companies would delay shipment or ... add fees or something," he said: "We don't think that is customer-centric, nor productive.”
Coming off a $1.3 billion Q3 drop in operating income vs. 2020, Amazon expects to incur about $4 billion of additional costs in Q4 as it navigates labor and supply shortages, increased wage costs, global supply chain issues, and increased freight and shipping costs, Olsavsky said. He also cited higher digital content costs.
Olsavsky referenced more original programming coming to Amazon's Prime Video, increasing the value of a Prime membership. On whether the company is planning a price increase to Prime membership, Olsavsky commented on the "real step-up in options and quality and volume for our customers globally," saying the video offerings "have a lot of value." Though he had "nothing to announce around Prime price increases," it's an area the company looks at on a country-by-country basis.
Labor remains Amazon’s biggest capacity constraint, said Olsavsky. The company has grown its global headcount by 628,000 in the past 18 months, 133,000 in Q3, and cost inflation added about $2 billion to operating costs, largely in August and September. Q3 had nearly $1 billion of inflationary pressures, primarily tied to wage increases and incentives, he said. Amazon’s average starting wage is now over $18 per hour with an additional $3 per hour, depending on shifts, in some locations; it gives sign-on bonuses of up to $3,000.
Labor shortages in Q3 caused inventory to be rerouted to fulfillment centers that had the labor to receive goods, said Olsavsky. The “less optimal placement” led to longer and more expensive transportation routes. Labor shortages and supply chain disruptions upset the balance of Amazon’s fulfillment model to deliver product to customers in one or two days, resulting in additional costs to maintain customer service levels, he said.
The company’s Q3 revenue was 0.7% below Wall Street consensus at $110.8 billion; operating income of $4.9 billion was 12% below consensus, said Cowen analyst John Blackledge in a Friday investor note. In addition to having higher labor, materials and supply chain costs, the September quarter also competed against tough comps of the prior year when Prime Day was held in October.
Amazon has “unfinished business” on its one-day delivery service for Prime customers, Olsavsky said, saying it was ramping “nicely” in 2019, pre-COVID-19 pandemic, and it’s not back to 2019 levels. “Labor constraints have not helped us close the gap there,” he said. Olsavsky expects the business to increase in 2022: “When something's available in one day or less, now you really don't have to go to a store even if you need it very quickly.” Blackledge believes Amazon's “massive” capital expenditures of $56.9 billion will help drive one-day and same-day delivery, “powering the flywheel longer-term.”