Amazon plans more facilities

Online retailer tries to fend off eBay, Wal-Mart

Bloomberg NewsAugust 20, 2013 

Online Sales Tax

FILE - In this Nov. 11, 2010 file photo, Ricardo Sandoval places packages in the right shipping boxes at an Amazon.com fulfillment center, in Phoenix, AZ.

2010 AP FILE PHOTO

— Amazon.com is stepping up a warehouse-building spree, signaling the urgency of getting products to customers more quickly amid rising competition from eBay and Wal-Mart Stores.

Consider Amazon’s center in Chattanooga, Tenn., which opened in 2011 after about 10 months, compared with as much as two years for older warehouses. Boasting more space and technology that makes it easier to find items, the building is part of Amazon’s almost $13.9 billion spending binge on 50 new facilities since 2010. That’s more than the company spent on warehouses in its lifetime and brought the total to 89 at the end of 2012.

Amazon has announced five more in the United States this year.

“We’ve standardized them in such a way that opening them and replicating them happens very fast,” Dave Clark, vice president of worldwide operations and customer service, said in an interview at the Chattanooga building.

The warehouse strategy carries risk. Fulfillment has become Amazon’s top operating expense, squeezing profit margins and contributing to a $39 million loss at the Seattle-based company last year. Yet Chief Executive Officer Jeff Bezos is under pressure to move more quickly as rivals, including eBay and Wal-Mart, devise their own faster ways to deliver products.

“What Wal-Mart and eBay are working on is, can they be faster than Amazon?” said Matt Nemer, a San Francisco-based analyst at Wells Fargo & Co. “It might not be the highest margin sale in the world, but they can potentially get something to you in an hour.”

At stake is leadership in the growing market for products that can be ordered online and then delivered to a customer’s door or a nearby store within hours. EBay has rolled out same-day delivery in some cities. Wal-Mart is increasingly moving its $482 billion in estimated fiscal 2014 sales online. The retailer has more than 4,700 stores across the United States.

Some competitors are either building their own delivery networks or relying on third parties, such as United Parcel Service Inc. Amazon charges $3.99 and up for same-day and one-day delivery for users of its of Prime program, which includes unlimited two-day delivery for $79 a year. Non-Prime customers pay $8.99 and up.

So far, investors are giving Bezos the benefit of the doubt on the spending rampage. Amazon’s stock has more than doubled since the start of 2010.

Amazon’s spending on fulfillment jumped more than 40 percent annually from 2010 to 2012, compared with 24 percent in 2009, according to data compiled by Bloomberg.

The spending is crimping Amazon’s margins. The company’s trailing 12-month operating margin of 0.95 percent lumps it in the bottom 3 percent of peers in the Standard & Poor’s 500 Index, even though it ranks among the top 10 percent of that group by sales, according to data compiled by Bloomberg.

And the margin pressure is rising as the price tag associated with warehouses is set to increase. The company said last month that it’s adding more than 5,000 full-time jobs in 17 U.S. warehouses. Those new hires will join more than 20,000 employees. Amazon said it’s also bringing on 2,000 staff for customer service, including part-time and seasonal workers.

Amazon executives said the costs are necessary amid a crowded e-commerce landscape.

“As we get closer and closer to customers with fulfillment, we have seen growth,” Chief Financial Officer Tom Szkutak said July 25 in a conference call.

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