Amazon (AMZN +0.30%) is known for rapid delivery of just about everything all over the globe. But the vast network behind all of those packages is costly -- and last year, rising inflation wreaked havoc. It increased Amazon's expenses and hurt its customers' buying power. As a result, Amazon reported its first annual loss since 2014.
But things are looking up at the e-commerce giant. Amazon beat analyst forecasts for net sales, earnings per share, and operating margin in the first quarter. Even better, Amazon has made a move that should cut costs and boost efficiency now and over the long run.
Could this be a game changer for the company? Let's find out.
A strength and a weakness
Before we check out this potential game changer, let's talk about one particular element that's a strength and a weakness at Amazon. That's the company's fulfillment network.
It's a strength because it allows the company to rapidly deliver groceries and general merchandise to customers anywhere, any time. But over the past year or so, it's become a weakness because it's resulted in higher costs -- and a rapid expansion of this network left the company with too much capacity.
How did all this happen? Amazon saw a surge in demand during the earlier stages of the pandemic. So to meet this and potential future demand, it expanded fulfillment. In fact, it doubled the network in just two years. By comparison, Amazon took 25 years to build up its fulfillment network to that point.
The problem was that, following Amazon's fulfillment network ramp up, the economic situation started to deteriorate. And as mentioned above, rising inflation weighed on customers' wallets and made it more expensive for Amazon to maintain this network.
Now let's get to Amazon's potentially game-changing move. In the U.S., the company is shifting its model from a national fulfillment network to a regional one. The company has developed eight regions within geographic areas offering access to a broad selection of items. These interconnected locations work together, shipping merchandise to customers within this specific territory.
They still have the ability to ship nationally, if needed. But generally, these centers cater to their regions, and this reduces travel distance for packages. And the great news here is this also reduces shipping costs. Shorter distances also mean quicker travel times -- and that's something shoppers will appreciate.
So Amazon's transition to a regional-fulfillment model in the U.S. could be a game changer in those two ways. This will be a positive for earnings and customer retention.
NASDAQ: AMZN
Key Data Points
"Bullish" on early results
Amazon Chief Executive Officer Andy Jassy said the company recently launched this new system and is "quite bullish on the early results." Through this and other efforts, Amazon aims to record its fastest Prime delivery times ever this year.
Amazon also has made other adjustments, such as improvements in productivity. The efforts are working. Amazon's growth in stores revenue and unit sales surpassed fulfillment and outbound shipping expenses in the first quarter.
Does Amazon's game-changing move make it a buy? I wouldn't recommend buying a stock for one particular reason alone. But Amazon's switch to regional fulfillment is definitely a reason to be optimistic about the stock. To better manage rising inflation -- today or at any point in the future -- it's important for Amazon to streamline its fulfillment processes as much as possible and keep shipping costs down. The regional model is set to do just that.
At the same time, there are other reasons to like Amazon. The company is an e-commerce leader and should benefit from this high-growth market as the economy improves. Amazon also is the global leader in cloud computing services -- another high-growth area that should boost revenue over time.
Meanwhile, Amazon's latest earnings figures show us it's making progress along the path to recovery. The share price is following -- up 23% so far this year.
It's not too late to buy this top e-commerce and technology company. Investors who invest now are likely to benefit from today's game-changing moves and much more over the long term.
