When Amazon announced its quarterly earnings last week, the results were, well, not good. For the first time in seven years, Amazon lost money. Sure, part of that was due to an adjustment related to the company's stake in electric vehicle (EV) maker Rivian, whose stock price has tumbled since its IPO last fall. But Amazon's real trouble is of its own making.
Here's how Brian Olsavsky explained it on the company's earnings call:
We have worked to protect and enhance the customer experience despite a sharp increase in costs, particularly over the past three quarters. We've seen a large cost to keep up with demand these past two years. During this period, we doubled the size of our operations and nearly doubled our workforce to 1.6 million employees. Labor and physical space are no longer the bottlenecks they were throughout much of 2020 and 2021. However, we continue to face a variety of cost pressures in our consumer business.
That's a staggering amount of growth. Amazon doubled the size of its operations, adding more than 200 million square feet of facilities, and nearly doubled its head count. It now employees more than 1.6 million people.
At the time, when people were buying everything online, that expansion made sense. Now, however, the company is paying the price for all that growth.
With the emergence of the Omicron variant in late 2021, we saw a substantial increase in fulfillment network employees on leave, and we continued to hire new employees to cover these absences. As the variant subsided in the second half of the quarter and employees returned from leave, we quickly transitioned from being understaffed to being overstaffed, resulting in lower productivity. This lower productivity added approximately $2 billion in costs compared to last year.
What Olsavsky is really saying is that Amazon is too big. It has too much capacity and too many employees for its current level of demand.
That's not particularly surprising. Amazon's business got really good not because it was necessarily the best shopping experience, but because it was one of the only places people could buy toilet paper and dog food without exposing themselves to a global pandemic. At the time, that put a huge strain on the company's ability to fulfill orders so it added both staff and warehouse space.
Now that things seem to be returning to some version of normal, people are buying less online. It only makes sense that as circumstances change, so will the effect they have on your business. As convenient as it is to order stuff online and have it delivered to your door in a day or two, it turns out people still actually enjoy having reasons to leave their homes.
Amazon isn't the only company to experience unforeseeable growth over the past two years, only to come crashing back to earth as the pandemic subsided and people largely returned to their pre-pandemic habits. Netflix, for example, reported a loss in subscribers for the first time in a decade after it had seen record growth as people stayed at home.
Look, I have no question that Amazon will be able to figure things out. There are plenty of very smart people working there, and I don't imagine it will take long for them to bring things back in balance. Amazon is in a much different situation than, say, Peloton, which ended up with a warehouse full of bikes it couldn't sell and brought in a new CEO to try to turn things around.
Still, the most logical solution for Amazon means laying off employees it hired to help it meet extraordinary demand. That's a painful way to fix a very expensive mistake.
It's also a valuable lesson for every business. If your growth is based on external circumstances beyond your control, you're at the mercy of those circumstances. It's your job to have a plan for what happens when those circumstances change. If you assume that those external conditions will continue to trend in the same direction, you're betting against reality. Growth is great, but the last thing any business wants is to get too big. That, as Amazon demonstrates, is an expensive problem.