On April 28 Amazon opened its First Quarter 2022 report (through March 31) with these three outcomes:
- Operating cash flow decreased 41% to $39.3 billion for the trailing twelve months, compared with $67.2 billion for the trailing twelve months ended March 31, 2021.
- Free cash flow decreased to an outflow of $18.6 billion for the trailing twelve months, compared with an inflow of $26.4 billion for the trailing twelve months ended March 31, 2021.
- Free cash flow less principal repayments of finance leases and financing obligations decreased to an outflow of $29.3 billion for the trailing twelve months, compared with an inflow of $14.9 billion for the trailing twelve months ended March 31, 2021.
This is not the direction you want these flows to go.
Amazon’s CEO, Andy Jassy, is quoted to provide context:
Our Consumer business has grown 23% annually over the past two years, with extraordinary growth in 2020 of 39% year-over-year that necessitated doubling the size of our fulfillment network that we’d built over Amazon’s first 25 years—and doing so in just 24 months. Today, as we’re no longer chasing physical or staffing capacity, our teams are squarely focused on improving productivity and cost efficiencies throughout our fulfillment network. We know how to do this and have done it before. This may take some time, particularly as we work through ongoing inflationary and supply chain pressures, but we see encouraging progress on a number of customer experience dimensions, including delivery speed performance as we’re now approaching levels not seen since the months immediately preceding the pandemic in early 2020.
During the third week in April I visited several warehouses, distribution hubs, and fulfillment centers — including Amazon facilities — in one US West Coast metro area This was my first time back since late-2019. It is an amazing build-out. I had, of course, read about the tight market for logistics space (here and here and here). But walking pre-pandemic empty lots and derelict buildings, now featuring dozens of dock doors, fresh tarmac, and ambitious landscaping was eye-popping and mind-expanding. This urban area’s collection of Amazon facilities is a fascinating example of the transition from hub-and-spoke networks toward rhizomes. Million square foot hubs can still be important for procuring price-advantaged volume, but velocity is better advanced by much smaller nodes more intimate with demand.
Nonetheless even a “modest” quarter-million square foot structure is a challenge to insert into an already dense urban web and especially residential neighborhoods — no matter how nice the landscaping. Siting is an intricate dance of snuggling as close as possible to high velocity demand (population multiplied by wealth), divided by real-estate costs (often weighted by transportation, topographical, and zoning constraints). Simple availability is not a given. Given limitations of time and space, I am impressed by what Amazon so quickly accomplished.
We currently have excess capacity in our fulfillment and transportation network. Capacity decisions are made years in advance, and we made conscious decisions in 2020 and early 2021 to not let space be a constraint on our business. During the pandemic, we were facing not only unprecedented demand but also extended lead times on new capacity. And we built toward the high end of a very volatile demand outlook. Now that demand patterns have stabilized, we see an opportunity to better match our capacity to demand. We have lowered our operation’s capital expenditures for 2022 and are evaluating other ways to increase our fixed cost leverage. We estimate that this overcapacity, coupled with the extraordinary leverage we saw in Q1 of last year, resulted in $2 billion of additional costs year over year in Q1.
But then — crucially — Mr. Olsavsky added, “We do expect the effects of the fixed cost leverage to persist for the next several quarters as we grow into this capacity.” During 2020 and 2021 Amazon did what it could to fulfill an extraordinary surge in demand. There were understandably rough relations between supply and demand for an extended period, but in most places, most of the time, Amazon mostly succeeded in delivering what was expected. Amazon led the way in demonstrating that consumers could have confidence in ecommerce… even in times of considerable duress.
In many urban areas Amazon has now claimed the forward operating facilities needed to fulfill future growth with increasing velocity and profitability. The value of this investment — especially operationally, especially in terms of flow velocity — will more often grow than slow. As every supply chain nerd will assert, these are not warehouses. These are crucial intersections and accelerators of flow.
The Amazon Chief Financial Officer is apparently a supply chain nerd too (as investors would hope). Deep inside last week’s analyst call Mr. Olsavsky said that Amazon’s productivity depends mostly on, “the right capacity and the right demand matched at the warehouse level and the transportation node level.” Bingo. Bingo. Bingo.
During my late April tour of one metro area, I visited several distribution/fulfillment centers that were disconcertingly ghostly. Most of these had been leased for the first time in the last 18 months. Interior racks were not overflowing. Outbound stock was not being hurriedly lined up. Selectors seemed remarkably relaxed. These were mostly traditional large retailers (with ecommerce operations). Amazon is not the only enterprise experiencing over-capacity. For what it’s worth, at each of the handful of Amazon facilities personally observed there was, in contrast, sustained inbound and outbound flows, busy selectors, and an impressive line of Prime delivery vans heading into surrounding neighborhoods (especially for a Sunday morning).
Deploying the right capacity within the right configuration of nodes and channels to fulfill the right demand is how the most sustainble flows and profits are achieved. Agile, adaptable networks organized (and disciplined) around effectual demand can, like Goldilocks, find flows that are “neither too hot nor too cold, but just right.” These just-right equilibria are typically ephemeral (even fragile), but possible. The possibility, better yet probability, of just-right flows is improved when we don’t (like Goldilocks) just stumble across these possibilities, but (like the three bears) do the cooking ourselves. Amazon is a smart and adventuresome cook.