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This Amazon Segment Is Poised to Reaccelerate in 2022

By Adam Levy – Dec 23, 2021 at 10:30AM

Key Points

  • Amazon's third-party fulfillment service has been constrained since the start of the pandemic.
  • Labor shortages have kept it from operating at full capacity in the second half of the year.
  • As the company works through these challenges and raises fees, revenue should reaccelerate.

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The company is still working through some big bottlenecks, but 2022 is looking strong.

Amazon (AMZN -0.59%) saw a significant slowdown in revenue growth in the third quarter. The decline was most significant in its main online retail business. Total online store sales grew just 3% over the year-ago period. Meanwhile, growth in third-party seller services -- that is, for other businesses which sell on the Amazon platform vs. Amazon's own goods -- slowed to 18% from 53% a year ago.

But as Amazon moves through the busy fourth quarter and gears up for 2022, there's reason to believe its third-party seller services will see a reacceleration from the second half of 2021. Here's why investors should expect good things from this valuable business segment.

Amazon warehouse worker adjusting a robot under a shelving unit.

Adjusting a robot in an Amazon warehouse. Image source: Amazon.

Working through the bottlenecks

Since the start of the pandemic in the spring of 2020, Amazon has faced severe capacity constraints in moving items from its warehouse to customers' doorsteps. So it's been working hard to increase the size and capabilities of its warehouse and fulfillment network as well as hire new workers. 

Amazon has more than doubled its fulfillment network footprint. It has also added over 628,000 permanent jobs since the start of the pandemic and an additional 150,000 seasonal workers for this quarter. Still, Amazon remained capacity-constrained through the first half of the year -- unable to do as much business as it might if it had even more workers and warehouse space.

There's good news for investors, though. For the first time since the start of the pandemic, "labor became our primary capacity constraint, not storage space or fulfillment capacity," Chief Financial Officer Brian Olsavsky told analysts on Amazon's third-quarter earnings call.

If Amazon can keep some of its seasonal workers on permanently, it should be able to work through the labor shortage as well. That means more capacity for third-party sellers in its warehouses, which should fuel greater adoption of its fulfillment services.

A price hike

Amazon will also institute a price increase for its fulfillment services in early 2022. Merchants will pay up to 12% more in fees on some of the inventory that Amazon holds and ships for them from its warehouses. In addition, merchants will have to pay higher storage fees if inventory sits on Amazon's warehouse shelves during non-peak months. There are several other fee increases going into effect throughout 2022 as well.

Amazon says it postponed many fee hikes since the start of the pandemic -- and those it did institute were kept to a minimum. Now that Amazon is better able to offer faster and more convenient service again, it feels it can justify a price hike.

The fee increases will help cover Amazon's wage increase, which included hundreds of thousands of workers and could result in a 50% jump in the labor cost per unit, according to Morgan Stanley analyst Brian Nowak. So a single-digit percentage increase in fulfillment service fees won't completely offset those costs, but it will certainly help.

What it means for investors

Third-party seller services are Amazon's second-largest revenue source after online sales of Amazon's own goods. But the operating margin on third-party services is likely much higher. That's because Amazon doesn't pay for the inventory and merely takes a commission off the top of each sale.

As revenue growth from third-party seller services accelerates in 2022, operating profit should begin to grow once again. After watching several quarters of increased investments in fulfillment capacity and labor, shareholders of the FAANG stock should start to see their investments pay off.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Levy owns Amazon. The Motley Fool owns and recommends Amazon. 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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