Amazon (AMZN 0.28%) stirs up a lot of excitement when it talks about artificial intelligence, investment in its cloud computing business, or the results of its Prime Day sales events. These are elements known to boost growth at the trillion-dollar company -- and eventually share performance too.
But one much-less-exciting element is on track to become another top growth driver for Amazon. And that's a change to the nuts and bolts of Amazon's e-commerce business, the manner of shepherding items from warehouses to your doorstep. The e-commerce giant has switched its fulfillment model to a regional one from a national one, and results so far have surpassed Amazon's expectations. In fact, the move could be revolutionary for the company over time. Let's find out more.
Amazon's fulfillment network growth
First a bit of background. Amazon's earnings soared during the early days of the pandemic as shoppers favored buying online, and to keep up with this demand, the company expanded its fulfillment network. In fact, it doubled the network in just two years.
The problem, though, was that a weakening economy then began to weigh consumers' wallets, and that and other challenges left Amazon with excess capacity. The company took action, cutting jobs and making moves to increase efficiency across its system of stocking and delivering items.
But the most significant move was Amazon's shift in the U.S. to the new regional model, launched earlier this year. This involved splitting the country into eight separate regions, with each of these centers maintaining high stock levels of certain popular items. Amazon uses its algorithms to select products to stock and to manage the inventory levels.
The e-commerce powerhouse has generally sent items on the path of fulfillment center to sortation center to delivery station, but thanks to the new system, Amazon has been able to more directly connect fulfillment centers to delivery stations.
Though the company has made significant progress, chief executive officer Andy Jassy says the job is far from done. Amazon continues to work on its algorithms to ensure regions have high in-stock levels of the right products. And Amazon has zeroed in on changes to its processes that could "have a significant impact on our cost to serve and speed of delivery," Jassy said during the recent earnings call.
Operating income recovery
Amazon already is seeing benefits of this change to its fulfillment network. It contributed to Amazon's North America operating income recovery in the quarter -- income of $4.3 billion compared to a year-earlier loss of $400 million -- and is a reason behind the strength Amazon saw in sales of consumables and essentials. When customers see they can receive daily necessities quickly, they're more likely to turn to Amazon for these sorts of items. And that's the trend Amazon noticed in the quarter.
Importantly, Amazon said its regionalized network has set it on track to deliver packages this year at its fastest pace ever.
Of course, it will take a while to see the full benefits of this change, as it represents investment today, and as mentioned above, there still are many improvements to be made. In the quarter, fulfillment expenses rose about 8% to $22 billion year over year. But these costs represented a smaller percentage of overall sales in the quarter -- 15% versus 16% a year ago.
Amazon made many moves to improve its cost structure over the past year, but this one could be one of the most beneficial since it involves continually making delivery cheaper for Amazon and faster for the customer. That's a win-win situation, improving Amazon's financial picture and increasing the chances shoppers will order more and more items they use regularly on the e-commerce site.
This revolution may not happen overnight. But over time, Amazon's moves in this ho-hum area of fulfillment could result in major cost savings and earnings growth -- and that's great news for long-term investors in this top e-commerce player.
