Right now, many enterprises are struggling to find enough employees, especially in lower-level roles. But Amazon (AMZN 1.43%) has hired more employees than it needs -- and it did so deliberately. Here's how the company's massive scale and ambition could help it turn a potential weakness into yet another strength.
Why Amazon kept jobs that other companies would have cut
As much of the sector struggles to find enough employees to hire while losing people extensively, Amazon CFO Brian Olsavsky said that Amazon is now enjoying an employee surplus.
Pay close attention to his exact words from the company's most recent investor call:
"As a reminder, in the second half of 2021, we were operating in a labor-constrained environment. With the emergence of the Omicron variant in late 2021, we saw a substantial increase in fulfillment network employees [going] on leave, and we [continued] to hire new employees to cover these absences.
As the variant subsided in the second half of the quarter and employees returned from leave, we quickly transitioned from being understaffed to being overstaffed, resulting in lower productivity. This lower productivity added approximately $2 billion in costs compared to last year.
In the last few weeks of the quarter and into April, we've seen productivity improvements across the network, and we expect to reduce these cost headwinds in Q2."
Let that sink in a moment. During the difficult economy and business environment last year, when employees left, Amazon didn't opt to tighten its belt and make do. It replaced them all knowing that many, if not all, would soon return.
This is in keeping with Amazon's generous investments in IT, in Amazon Web Services, and in a wide range of other business priorities. Amazon is hardly seen as a contrarian investment, but it has a strong tendency to go in the opposite direction from the rest of the industry. Years ago, it poured massive amounts into IT investments -- and got beaten up by Wall Street for doing so. Yet those bets paid off. Amazon's current hiring surplus seems like yet another such bold move.
NASDAQ: AMZN
Key Data Points
Why overstaffing isn't as risky as it seems
But isn't there a downside to having too many employees? In general, yes, but not when it's a strategic investment in the future -- especially the near future.
This is an unstable environment, where Amazon might be days away from a major COVID spike. Quarantines could hit the company with no notice. Plenty of disgruntled employees in Amazon's workforce -- you may have heard about workers forced to urinate into bottles to avoid taking breaks -- are still aggressively trying to unionize. During all of this, competitors are upping their recruitment enticements for all levels.
With that context, a slightly larger-than-needed workforce might help Amazon hedge against all of the above. Excess workers make it far easier for Amazon to deliver -- and potentially overdeliver -- during peak demand, such as July's Prime Day sales event.
And CFO Olsavsky explained during the call that Amazon mostly isn't squeezing those "productivity gains" out of its workforce by simply laying them off. "During the quarter, we had a peak of 1.7 million, and we were able to work that down [to 1.6 million] by the end of the quarter. We have a certain ability with contractors and all to adjust headcount," Olsavsky said. "But for the most part, our employees are what we call blue badges or permanent Amazon employees. And now, we work on getting productivity up."
Avoiding Wall Street's wrath
Amazon can probably get away with having too many employees as long as that headcount doesn't undercut long-term profits -- and anger the stock market. Wall Street lives and dies by the quarter. Amazon, fortunately, is into long-term strategic investments. Its customers don't care if the stock takes a small dive, and as long as the company's efforts keep customers buying, Wall Street can't stay angry for very long.
The fact that Wall Street frowns on excessive employees is precisely why Amazon's move is both gutsy and impressive. E-commerce investors should keep an eye on the company's operating income and free cash flow in the months ahead. Both have taken a hit in the past few quarters, but increases there might signal that Amazon's bet on a bigger workforce is paying off.
