In case you haven't been paying attention to Amazon (AMZN 2.04%) for the last half-decade, it's been building a massive logistics network across the United States. And even while sales slowed for its online store over the last couple quarters, the growth in capital expenditures remains robust.
The bulk of its spending goes toward "additional capacity to support our fulfillment operations," according to the company's quarterly filing with the SEC. Which means, Amazon expects plenty more growth ahead for its online retail business.
Image source: Amazon.
A massive investment
Amazon's capital expenditures increased 51% in the third quarter and spending is up nearly 78% through the first three quarters of 2021 versus 2020.
To get a real understanding of just how much Amazon is investing in building out its logistics network, though, consider this fun little fact: Amazon's capital expenditures since the start of 2020 are greater than the company's total capital expenditures throughout the rest of its history. And it's not even close.
Image source: Author. Data source: Amazon.
Amazon is investing in every aspect of the logistics network. It now operates an air hub out of Cincinnati. The company will have 85 planes in operation by the end of the year, shuttling inventory across the country every day. The ports of entry in its network increased by 50% this year, while the shipping container processing capacity doubled.
The e-tailer now counts more than 800 delivery stations across the U.S., which are responsible for readying packages for last-mile delivery. It had just 337 at the end of 2020, according to logistics consultant MWPVL. Not to mention the ever-expanding footprint of its warehouses and sortation centers. CFO Brian Olsavsky said the company's on track to increase its total fulfillment network footprint more than it did in 2020 when it increased by 50%. In other words, Amazon will more than double its footprint from 2019.
It may be a while before the results show up
Despite Amazon's massive increase in its investment in its logistics network, investors will be disappointed if they think this investment will translate into an immediate increase in sales for the internet retailer.
In the immediate future, Amazon faces a labor shortage. It's hiring 150,000 seasonal workers this year, and it recently instituted a wage hike for both new and existing workers. The labor shortage is Amazon's biggest capacity constraint right now, Olsavsky told analysts during the company's third-quarter earnings call.
Second, Amazon's infrastructure improvements will probably not show up as lower shipping expenses, which have climbed faster than unit sales in each of the last six quarters. Instead, the company is taking greater control over the shipments, handling more than half of all deliveries within its own network instead of relying on third parties.
Ultimately, taking more direct ownership of delivery will allow Amazon to fulfill more orders more quickly without substantially increasing the cost per delivery. And when Amazon can offer next-day delivery, it's noticed an uptick in purchases, according to Olsavsky. As such, the investments should translate into more sales over time, as Amazon can offer one-day delivery on more items. And as sales grow and Amazon can increase its route density, shipping costs per unit should decline in the long run.
That's not going to happen this quarter, though. Amazon's fourth-quarter guidance called for revenue growth between 4% and 12% year over year. That suggests strong potential for a further slowdown in online store sales from the 3% it posted in the third quarter. Despite Amazon's massive expansion of its own logistics network, there's only so much it can do to overcome global supply shortages.
As Amazon works through the labor and supply shortages and laps the massive growth it saw in 2020 and early 2021, growth should return, and it's ready to deliver more packages than ever next year.
