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Amazon Is a Customer-Friendly "Shock Absorber" of Costs

By Anders Bylund – Nov 2, 2021 at 9:07AM

Key Points

  • Amazon’s profits are suffering amid rising labor costs.
  • CFO Brian Olsavsky just explained why some short-term pain to the bottom line is no big deal.
  • The online retail giant’s long-term vision matches Costco’s recipe for success.

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The e-tailer will gladly accept higher costs of doing business as long as it can continue to deliver a fantastic customer experience.

It's no secret that Amazon.com (AMZN -4.31%) is facing higher labor costs than ever. The e-commerce and cloud computing giant boosted its minimum wages to $15 per hour in 2018, then kicked it up to $18 per hour in September 2021. In last week's third-quarter earnings call, management made it clear that labor costs are surging and will limit the company's bottom-line profits for the foreseeable future.

Some investors saw the projection of lower profits and ran for the exits. Amazon's stock plunged as much as 4.2% lower the next morning and still trades in that diminished price range.

That opens a decent buying window for long-term investors. Amazon is fully prepared to take this labor-cost challenge in stride. In fact, management appears to take pride in their company's ability to roll with the punches.

A smiling person with a credit card in one hand and a smartphone in the other.

Amazon is all about happy customers. Image source: Getty Images.

Meet Amazon, the "shock absorber" of unexpected costs

Amazon CFO Brian Olsavsky took some time in the earnings call to explain how management views the rising labor costs. Long story short, the higher expenses will be tough in the short term but they are no big deal in the long run.

"Certainly, the cost of fulfillment in the last few months and what we forecast into the next quarter are not what we're happy about," Olsavsky said. "But we see ourselves as the shock absorber, absorbing a lot of the costs so that the customer is not impacted and sellers are not impacted."

The CFO went on to explain that many rivals would add extra fees or delay shipments in this situation, but that's not how Amazon works. The customer comes first, and that concept includes both buyers and sellers in Amazon's global network of e-commerce operations.

"We will get through this period and then we are committed to getting our cost structure down," Olsavsky finished up.

You should expect this extreme customer focus from Amazon

All of this fits neatly into Amazon's stated operating principles. Here's how the company describes itself in every press release and regulatory filing lately:

"Amazon is guided by four principles: customer obsession rather than competitor focus, passion for invention, commitment to operational excellence, and long-term thinking. Amazon strives to be Earth's Most Customer-Centric Company, Earth's Best Employer, and Earth's Safest Place to Work."

Let's break this mission statement down in the light of Olsavsky's statement.

  • As a "shock absorber" of unexpected costs, Amazon is obsessing over the customer experience even if it hurts the bottom line.
  • If it costs a bit more to do the right thing and keep the e-commerce engines running, Amazon will do it.
  • Maintaining a great user experience even during hard times builds the company's reputation as a reliable vendor, which should pay dividends in the long run.
  • Rising labor costs can't be a problem for a company that wants to be the best employer in the world.

Amazon doesn't always succeed in this ambitious mission, as demonstrated by the company's contentious worker relations. The current trend of rising wages may actually help the company overcome that challenge, though. Happy workers tend to be more effective, which adds value for the employer as well.

A similarly extreme focus on customer satisfaction is working wonders for warehouse retailer Costco (COST -0.86%) as well. Amazon would be wise to copy Costco's proven blueprint. One market-crushing retail giant is snagging operating ideas from another sector-leading winner here:

COST Chart

COST data by YCharts

And that is why I remain a happy Amazon shareholder today, with an eye toward perhaps adding a few more shares in the near future. The company's laser-like focus on what's best in the long run greatly outweighs the temporary pain that may come from costly labor relations over the next few quarters. I'm in it for the long haul.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Anders Bylund owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and Costco Wholesale. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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