Amazon Just Made a Big Move Nobody Is Talking About
The past year or so has been a tough time to be an Amazon (NASDAQ: AMZN) shareholder. After the stock peaked at the height of the pandemic, tough economic conditions have weighed on it, as consumer spending was hampered by high inflation and rising interest rates. This has resulted in tepid growth, as Amazon's first-quarter net sales of $127 billion grew 9% year over year, a far cry from the double-digit gains in 2021.
In the face of slowing growth and a bid to increase profitability, the e-commerce leader has quietly -- and without much fanfare -- made a change behind the scenes that could potentially speed up its deliveries, while also bolstering the bottom line.
Image source: Getty Images.
Tucked away in the shareholder letter
Under the purview of former Amazon CEO Jeff Bezos, the company's annual shareholder letter became something of a must read, as it gave investors important insight into the company's strategy and a peak behind the curtain at one of the world's most successful technology companies. Current CEO Andy Jassy has put his own unique spin on the document, which contained this gem about critical changes to the company's fulfillment network:
We made significant internal changes (e.g. placement and logistics software, processes, physical operations) to create eight interconnected regions in smaller geographic areas. Each of these regions has broad, relevant selection to operate in a largely self-sufficient way, while still being able to ship nationally when necessary.
Jassy went on to point out that the company continues to tweak its machine-learning algorithms, which will help it better predict inventory needs at Amazon's various geographic locations.
A little change that could lead to big savings
While these changes might not seem like a big deal, it's important to put the move in context. Delivery is among Amazon's biggest expenses, costing nearly $20 billion in the first quarter alone, or nearly 16% of the company's total revenue. According to Jassy, the early results are encouraging, noting that shorter travel distances "mean lower cost."
Another benefit of this change is that since items are closer to their ultimate destinations, they'll likely arrive more quickly, with "customers getting their orders faster." To that end, Amazon is increasing the number of products eligible for next-day and same-day deliveries. Jassy went on to note that Amazon is "on track to have our fastest Prime delivery speeds ever in 2023."
A true win-win?
Amazon began this ambitious undertaking last year in a bid to lower shipping costs while simultaneously speeding up delivery times.
For years, Amazon has operated its fulfillment network as a national distribution center, with fulfillment hubs spread across the U.S. As the company grew, the number of shipments skyrocketed, and getting the products to customers at times became a logistical nightmare. Rapid expansion of the fulfillment network during the pandemic only exacerbated the situation, as Amazon nearly doubled its fulfillment-center footprint in just two years. This, in turn, increased the complexity across the entire system.
If this initiative is successful, it will mark a rare win for both customers and investors. Lower shipping costs will increase profits, which will benefit the company and shareholders alike, while faster shipments will be a boon to customers.
It's too early to tell whether Amazon will ultimately achieve this two-pronged goal of speeding up delivery times while decreasing costs, but it certainly bears watching.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Danny Vena has positions in Amazon.com. The Motley Fool has positions in and recommends Amazon.com. The Motley Fool has a disclosure policy.
