With the unexpected turn of events of the COVID-19 pandemic, many individuals and families were forced to adapt to the new normal, which included working from home and utilising online platforms to get their day-to-day requirements. While the pandemic has seen the closures of numerous companies in various sectors across the globe, Amazon, among other major players in online trading, has seen its sales dramatically increase because the consumers relied on online shopping and avoidance of in-store shopping. However, there is some controversy as to how the group will fare over the coming years. These concerns are due to rising labour costs and some development plans which one could perhaps consider ambitious.
Well, known for its low-cost model dealing with prices that are deemed as affordable while not compromising on the quality of the products provided, Amazon has a huge labour force due to its sheer size. Throughout the pandemic, online purchases consistently increased; its revenue for Q4 of 2020 was 125.6 billion USD, a 44% year-over-year increase. Amazon’s response to the rising demand has been to set up new warehouses and increase the delivery capacity. A statement in the Financial Times by Morgan Stanley predicted that Amazon US will see its logistics workforce increase from 500,000 to 700,000 and warehouse operatives to have an increase of 125,000 employees by the end of 2021.
While these figures may look lucrative at first sight, the online giant might be shooting themselves in the foot. There have been criticisms from competitor firms against Amazon calling that their employees are underpaid for the intensity of the work they deliver daily. However, as a response in 2018, the company decided to standardise their employees starting wage in the United States to 15 USD per hour, which is considerably higher than the national minimum wage of 7.25 USD per hour. Additionally, in a press release on the 14th of September 2021, Amazon announced its plans to increase its starting pay to 18 USD per hour in the United States to attract more much-needed employees and to meet their consumers’ demand.
With the anticipated labour cost increases at Amazon, a statement released by Morgan Stanley suggests that when the Q4 of 2020 and that of 2021 are compared, Amazon’s labour costs will see a 4 billion USD increase which equates to a 60% rise. Moreover, according to an article published by the Financial Times, Q3 in 2021 saw nearly a 50% decrease in profits and it is directly attributed to the labour increases. The labour costs may not be a major cause for concern because sooner than later Jeffrey Dastin, a columnist for Reuters, suggests that the new warehouses will begin to generate incomes that will cushion the amount of money spent on labour. Despite all the labour costs and the effects, they have had on various quarters, Q2 of 2021 recorded a 24% increase in sales when compared to the same period in 2020. Hence, the online giant is still operating in what is known as a safe zone as its decisions have not majorly threatened its assets.
While all these changes are happening, Amazon still delivers quality products and maintains customer satisfaction. An article by James Anthony on Finances Online predicts that the number of customers subscribing to Amazon prime will increase from 142.5 million users to 148.6 million in the next three years and that there will be a 93% rate of subscription renewal. More broadly, Amazon’s expansion of its operations means the company has increased its market share from 47% in the US in 2020 to an estimated 50% in 2021 according to data released by Statista. Therefore, there is reason to argue that Amazon’s development plans are not overly-optimistic.
Investors may have a more optimistic view of the expansion of operations for Amazon. This is because Amazon already has a very wide and diverse business portfolio which includes web services, cloud computing logistics, e-commerce etc, all contributing to the staggering 110.8 billion USD revenue in Q3 of 2021, up 15% compared to the previous year’s period. The move to increase wages could be seen as a technique to attract talent into the company to increase efficiency in the long run.
Overall, Amazon’s low-cost business model continues to thrive. Due to increasing investment in different sectors and different market economies, the company seems to be flourishing under global market changes. However, these increases in wages by the company and major countries like the US and the UK could see Amazon having lower profits as time progresses which could, in turn, affect its position as a market leader.
By Jenny Enow-Akpa
Sector Head: Robert Armstrong-Jones