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COVID-19 Is Turning Amazon's Business Upside Down

By Jeremy Bowman - May 3, 2020 at 10:39AM

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But in a good way.

Amazon (AMZN -2.86%) shares have rocketed to all-time highs during the coronavirus pandemic.

The e-commerce giant, responsible for about half of online sales in the U.S., has been called upon by Americans and those around the world over the last several weeks to ramp up delivery of essential items like food, cleaning supplies, and medicine while stay-at-home orders are in effect to prevent the spread of coronavirus.

Amazon has seen unprecedented demand during the outbreak, and it has responded by hiring another 175,000 fulfillment and delivery workers. CEO Jeff Bezos spent much of his recent shareholder letter talking about the challenges and the changes to the company caused by the pandemic, and in the earnings release said it was "the hardest time we've ever faced."  

Though sales spiked in the quarter, rising 26% to $75.5 billion, operating income fell from $4.4 billion to $4 billion due to additional investments, including higher wages, to accommodate the surge in demand. The company also said it would spend $4 billion in incremental costs related to COVID-19 in the current quarter, essentially wiping out all of the $4 billion in operating profits it would have otherwise expected.  

An Amazon fulfillment center in a warehouse.

Image source: Amazon.

Among the initiatives and changes the company has made are:

  • Procuring 100 million masks, 1,000 thermal cameras, and 31,000 thermometers to prevent the spread of coronavirus in its warehouses and Whole Foods stores.
  • Creating a lab to build incremental testing capacity so the company can test its own frontline employees. The experiment will cost an estimated $300 million, but the company thinks it's worth trying even if it doesn't succeed in the relevant timeframe.
  • Hired 175,000 workers.
  • Raised wages by $2 an hour through May 16 and started paying double wages for overtime pay, up from time and a half, which will cost $700 million.
  • Made customer-facing changes, including prioritizing essential orders, fighting back against price gouging on its site, and expanding grocery delivery capacity.

A classic Amazon move

When he first started the company, Amazon CEO Jeff Bezos told investors that the company would invest for the long term, and with its decision to spend an incremental $4 billion in just three months, the company is applying this philosophy once again. Bezos has been willing to sacrifice short-term profit for long-term gain time and again, whether with lower prices for customers, faster delivery times, or the benefits in its Prime loyalty program, knowing that Amazon's reputation is its most valuable asset and also its biggest potential risk.

In the era of COVID-19, that risk could manifest itself as an outbreak in one of its warehouses, which could lead to employee protests, customer backlash, and negative press. The company is already a lightning rod in politics and its labor practices have come under scrutiny several times before. Taking extra steps to ensure the safety of its employees is a smart move, as it will only improve relationships with its key stakeholders and could even make the company an exemplar of corporate responsibility during the pandemic.

Unlike most of its brick-and-mortar competition, Amazon is fortunate in that it hasn't suffered significantly from store closings or other such challenges, and it's in a unique position in that it's able to spend $4 billion on coronavirus prevention, probably more than any other company will. Rather than pocket the windfall from its increased sales, Amazon is choosing to eliminate the tail risk involved in the pandemic, or the risk that an unlikely event will have huge consequences. That helps the company's already strong defensive positioning and increases its competitive advantages. Amazon, a company obsessed with efficiency, even said it was taking steps to be less efficient in certain areas in order to prioritize safety measures like social distancing. By doing so, it's absorbing short-term costs to protect against a potential catastrophe.

Amazon shares sold off after hours on Thursday as the company missed earnings expectations for the first quarter with earnings per share falling from $7.09 to $5.01, and its breakeven guidance for the second quarter was a surprise. However, the company's coronavirus-related moves will only strengthen its competitive advantages, eliminate risks, and boost its growth over the long term.

It's the right move.

 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jeremy Bowman owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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