Amazon Boosts Capacity as It Runs Out of Space

Capacity, capacity, capacity. Amazon said it was running out of space for inventory due to higher pandemic-related demand from customers - especially from Prime users who shopped more often and had bigger shopping baskets.

Amazon grew net sales 43% in the US in Q2 year-over-year, and 38% internationally. As a result of high demand, it is ramping up capacity earlier than it had intended, Amazon's Chief Financial Officer Brian Olsavsky told Wall Street analysts on Thursday. ("We pulled in capacity that we probably didn't think would be needed until 2021, maybe later.")

In 2019, Amazon increased network square footage by approximately 15%, and it expects to grow it by 50% in 2020. That includes new fulfillment center space as well as sort centers and delivery stations - "We expect the majority of this capacity to come online in late Q3 and into Q4," Olsavsky said.

Because the second quarter is typically Amazon's lightest volume quarter, it was better able to handle the high demand (it flexed into space normally used for third- and fourth-quarter peak demand). "We'll be adding significant fulfillment center and transportation capacity in the second half of the year," Olsavsky said.

It also grew headcount by 34% year-over-year as of the end of the second quarter - and that number continues to grow. Amazon hired over 175,000 new employees in March and April. 

In March, Amazon instituted the stop-gap measure of limiting sellers who use its FBA service from shipping product to its fulfillment centers. Amazon's CFO addressed this, saying it had lifted the policy in mid-April. 

"As we moved into late April and early May, we expected that because a lot of the sellers can toggle between MFN or FBA sales that we would see MFN drop as FBA picked up. But to a large extent, MFN remained strong even as FBA picked up." 

MFN is a reference to Merchant Fulfilled. It's a little harder for sellers to toggle between FBA and MFN than Olsavsky's statement implies, since sellers are constrained by where their inventory is located. 

Sellers also said during the early outbreak of COVID-19, Amazon prioritized the fulfillment of essential goods to the detriment of non-essential items. For merchants who were burned, and with so much uncertainty about the coronavirus, some may be hedging their bets when it comes to FBA.

Olsavsky addressed the issue of slowed deliveries. "We're working very hard to get faster shipments." Amazon saw 1-day and 2-day shipping recover during the quarter. The CFO said Amazon is prioritizing employee safety, then capacity expansion.

"We are improving the percentage of 1-day (shipping). We're not back to where we were pre-COVID." He said he doesn't think it will return in the short run but will continue to improve it.

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