Amazon Warehouse Growth Rate to Slow

Amazon warehouse under construction in Buffalo. Photo courtesy of Buffalo News

For the past few years, one of the biggest contributors to the commercial construction sectors growth has been the warehouse space segment. And the company predominately responsible for this has been Amazon. In fact, when Dodge Analytics did its 2022 Outlook last November, Amazon was projected as being the largest and 3^rd largest developer of warehouse space for 2022 (they were #1 directly and #3 is Prologis where Amazon is their #1 customer.)

Dodge’s 2022 Outlook projected an overall 6% growth, however, when the “Amazon effect” is removed, the market was projected to be flat … an indicator of its significance on the market. While they have put up many warehouses as their growth, and eCommerce in general, has expanded, the key is the size of these warehouses (and don’t forget the local labor impact of these warehouses … more warehouse jobs at $18-20 / hour!)

While Amazon sought efficiencies, the purpose of the development was also strategic as they sought to position more goods “locally” to improve their deliveries. But it appears that Amazon is now getting ready to transition its investments to another stage of its delivery network.

This article in Construction Dive shares that Amazon will be reducing its rate of development of new warehouses and reallocating those funds to enhancing elements of its transportation network.

In fact, Amazon’s CFO recently said “We see [fulfillment center spend] moderating,” Olsavsky said, adding future growth will probably match other sides of the business.”

Amazon Slows

Here’s the article:

Amazon spent the past two years absorbing real estate space across the United States. It built new fulfillment centers to meet ballooning demand. Now, its breakneck pace may soon be slowing as it turns its attention to other nodes of its supply chain — including heavier investments in transportation.

A massive real estate footprint is a critical aspect of Amazon’s strategy. Operating its own fulfillment centers, sortation centers and delivery stations provides greater control over the supply chain, allowing the company to deliver on the shipping speeds it promises Prime members.

“Shipping speed is the growth driver in e-commerce,” said Shipium co-founder and CEO Jason Murray, former vice president of supply chain and retail services at Amazon. “Prime submitted that as the number one fact. You can do whatever you want with marketing, checkout, one-click (ordering), whatever it is — speed is what drives everything.”

Amazon’s real estate footprint is a case in point. The e-commerce giant nearly doubled its operations capacity in the past two years to keep up with demand, CFO Brian Olsavsky said on an earnings call in February. Fulfillment center growth has been a large part of this equation — Amazon grew its number of U.S. fulfillment centers by 30% in 2021, according to data from supply chain consulting firm MWPVL International as of Feb. 16.

But investments alone have not been enough for Amazon to reach its desired shipping speeds. One-day delivery levels for Prime services are not yet back to where they were pre-pandemic. So now, Amazon is looking closer at other operational investments to boost its shipping capabilities.

“We see [fulfillment center spend] moderating,” Olsavsky said, adding future growth will probably match other sides of the business.

Experts say the development was likely after the initial e-commerce boom fueled by the COVID-19 pandemic cooled off.

How Amazon’s strong fulfillment footprint meets demand

A flood of online orders caused retailers to adjust – or accelerate – their logistics plans. Foot traffic at brick and mortar stores declined as the pandemic took hold and many consumers opted to shop more often online. In June, Olsavsky said Amazon had been playing catchup to match supply with demand – fulfillment costs as a percentage of net sales climbed from 15.2% in 2020 to 16% in 2021, according to Amazon’s 10-K.

Adding more facilities in more markets allows Amazon to grow its capacity while positioning inventory closer to customers for faster and less-expensive delivery. Other companies in the e-commerce space are doing the same.

“The e-commerce share of leasing has really steadied since last year, but it’s still higher than pre-pandemic levels,” said Heather Belfor, director and head of U.S. research at Prologis, which has Amazon as its top customer. “Amazon is still obviously a major player within the e-commerce space, but it’s very diverse because users need more logistics space across the supply chain.”

Walmart, for example, is opening its own fulfillment centers and investing in an automated supply chain as it pursues more subscriptions for Prime competitor Walmart+. And Target has four more distribution facilities in development “with plans for several more to follow,” Executive Vice President and COO John Mulligan said on the company’s Q4 earnings call. The retail titans also have the ability to use their brick and mortar locations scattered throughout the U.S. for omnichannel fulfillment, a critical development as companies try to limit their delivery costs for online orders.

Amazon’s distribution footprint far ahead of retail giants

Meanwhile, Amazon’s slowdown in its fulfillment center buildout appears to already be occurring. Per MWPVL data, the fulfillment center growth rate is currently set to be 22% in 2022. Marc Wulfraat, president and founder of the firm, noted that figure is affected by many existing projects being pushed into this year due to lengthy supply lead times.

Still, among e-commerce platforms, Amazon is unmatched, said Jean-Paul Rodrigue, a professor of Global Studies and Geography at Hofstra University who researches freight distribution. Its domestic distribution infrastructure also towered over Walmart and Target’s combined footprint by roughly 173 million square feet, per MWPVL.

“You have that (omnichannel) competition, but it’s essentially Walmart offering simply an expansion of its services — that’s not the same thing,” Rodrigue said.

Amazon gears up to invest in transport

Although Amazon is easing its fulfillment center growth as competitors try to bolster their own distribution capabilities, other areas of its operations are still receiving plenty of attention. Olsavsky hinted at “additional levels of investment” in transportation capacity coming in 2022.

With more people and vehicles moving goods, Amazon can deliver to rural areas of the U.S. without calling on the services of UPS and the Postal Service, Wulfraat said.

“We think that’s what their goal is, that they want total control over their destiny when it comes to delivery,” Wulfraat said. “We think that ultimately they do want to eliminate UPS and USPS as partners. There’s certainly a lot of clues that lead us to believe that.”

Greater transportation control would help shield Amazon against rising costs. Amazon reported higher third-party carrier costs in Q4 — an incentive to invest in owned capacity.

Observers say Amazon could have additional long-term pursuits. The company could build more delivery stations, in which customer orders are prepared for last-mile services. It could explore investments to insulate itself further from global supply chain disruptions. Or, it could find ways to penetrate further into a difficult grocery market.

“Everyone buys food, everyone buys a lot of it,” Murray said. “They’re going to have to find a way to continue to be relevant in that space. I think Whole Foods has been okay, but it hasn’t moved the needle.”

One thing company observers agreed on is that Amazon isn’t satiated with its current fulfillment network, and “moderating” is a relative term for a company that has invested in and grown its fulfillment network at an unmatched rate to set itself apart from competitors. Olsavsky even noted on the Q4 earnings call that fulfillment center spending could tick up once again in the future.

“I think they’re slowing down or decelerating,” Wulfraat said. But they haven’t stopped. “That’s certainly not the case.”

Takeaways

So, what does this mean for the electrical industry?

• For most electrical distributors, not much. While many have benefited from an Amazon warehouse during the construction phase, it is a “one-time” construction project. There are some regional distributors who have benefited multiple times and a few national chains who work with national contractors who have benefited significantly.
• Perhaps this will help some areas on their labor costs because an Amazon warehouse will not show up on their doorstep (but no way to determine what areas will benefit from this except, if you are not competing against an Amazon warehouse today for labor, you may be someone that is spared … but that doesn’t mean Walmart, Target or someone else won’t develop in your area.)
• Manufacturers, on the other hand, have earned repeat business. The Amazon warehouse model essentially is a “cookie cutter” and manufacturers know what to expect. While Amazon does spread the business around somewhat through a competitive process, there are a limited number of suppliers in each category.
• There will still be warehouse growth. The business will just be more diversified as the warehouses will be owned by others; hence design specs (and contractors) may change. But the national pace will be different.
• Watch for Amazon transportation investments. They are an investor in Rivian and are expecting 100,000 Rivian vehicles. This will mean the need for more EV charging capabilities and the resulting increased local power needs. Where? How?
• What other types of vehicles will they need to acquire? How will this impact those suppliers?
• Larger trucks to move materials from warehouses to smaller depots? These will be more fuel efficient, and electric, and eventually autonomous for the long-haul segment.
• Perhaps instead of building large warehouses they will be going to more “hub and spoke” through the renovation of smaller, unused facilities (malls? Others’ megastores?)
• Perhaps more planes which will require more facilities at airports?

All of these could represent other segments that will benefit … and opportunities for electrical distributors and electrical manufacturers to benefit. While the same distributors may benefit, albeit selling different products, it could be other electrical manufacturers that benefit as the material needs change.

There will still be Amazon warehouse investments, just not at the same pace. What Amazon giveth Amazon can taketh.

And, as Amazon has been a model for supply chain efficiency through its expansion, focusing more on the transportation side may also reveal ideas for others to emulate.