Amazon (AMZN 1.16%) doubled its fulfillment network footprint from 2019 through 2021, but now it's focused on precision and speed.

While Amazon has gotten a lot of flack about potentially overbuilding its fulfillment network, it's not going to stop building. It's merely shifted the focus of its buildout to smaller warehouses closer to dense populations that can send items directly to customers' doorsteps in a matter of hours.

The investment is supporting a growing number of same-day shipments for its Prime members, and it could be the key to winning back retail sales from Walmart, Target, and other physical retailers.

The big buildout

Amazon saw its capital expenditures balloon from before the COVID-19 pandemic through 2021, and they still grew higher in 2022.

Amazon had cash capital expenditures totaling $12.7 billion in 2019. By 2021, that number was $55.4 billion. And its spending climbed to $58.3 billion last year.

Granted, not all of that spending goes toward building out its fulfillment network. A lot goes toward its cloud computing business, which requires data centers and equipment. Still, the climb in spending is correlated with the buildout of Amazon's network of fulfillment centers and delivery stations.

Going forward, Amazon may be more exacting with its buildout. It did note it intends to spend more of its capital expenditures on technology infrastructure to support Amazon Web Services, a notable change from previous annual reports. But the company is still planning to spend big on building out its fulfillment network.

With many facilities sitting well below capacity and Amazon closing, canceling, or delaying warehouses, many are wondering if the spending is worth it. Especially considering Amazon's e-commerce sales are slowing considerably.

But Amazon's plan to deploy its capital over the next few years is an essential part of its strategy to grow its Prime membership.

Competing for same-day delivery

Amazon's main focus for its network buildout is supporting its same-day delivery efforts.

The company already has 45 same-day fulfillment centers, according to research group MWPVL. That number could quickly expand to 150 over the next few years. Eight new fulfillment centers are already under development.

To put that level of growth into perspective, consider Target's plan to invest $100 million to build new sortation centers. Those efforts will have it open six new sortation centers over the next three years. Sortation centers allow Target to move inventory out of the back of its stores more efficiently and then sort them for delivery the next day through its network of logistics partners and its own in-house delivery network, Shipt.

Target is spending $100 million to expand its next-day delivery (i.e. 24 to 48 hours) capacity. Walmart, likewise, has been using its stores and a delivery network of independent contractors to fulfill orders the same day for shoppers

Without a network of pre-existing stores within a few miles of most of its customers, Amazon must build warehouses near its shoppers to compete. The good news is Amazon can make its same-day fulfillment centers far more efficient than a Walmart or Target location because all it does is send items to deliver to customers. In fact, Amazon intends to stock these warehouses with the top 100,000 items purchased on its marketplace, similar to how physical retailers stock their merchandise.

Expanding same-day shipping will give more people a reason to subscribe to Prime. When shoppers subscribe to Prime, they end up using Amazon for their orders more often. And that should lead to reaccelerating sales combined with growing subscription revenue. While Walmart and Target fight to chip away at Amazon's online sales, Amazon may be about to steal physical retail sales right out from under them.

Despite worries about overspending, Amazon has a proven track record of producing strong return on invested capital relative to its cost of capital over time. A shifting focus of its logistics network buildout should make that return even stronger as it's able to win more sales from brick-and-mortar rivals. And with its share price still sitting very low, now's a great time to add shares before the impact of wider same-day shipping shows up in Amazon's earnings results.