Increased demand has accelerated Amazon’s distribution expansion. Further investment will be necessary to accelerate delivery times and reduce costs.
Over the last two years, Amazon expanded its real estate footprint across the U.S., building new fulfillment centers to handle surging demand. Now, that rapid expansion appears to be tapering off as the company focuses on other areas of its supply chain, such as increasing investment in transportation.
Amazon’s Strategy:
Having a large network of properties is a key part of Amazon’s plan. By running its own warehouses, sorting centers, and delivery hubs, the company has greater command over its supply chain, enabling them to fulfill the fast shipping speeds promised to Prime members.
“Fast shipping is the driving force in online retail,” said Jason Murray, CEO of Shipium and former supply chain VP at Amazon. “Prime made that clear. You can do all you want with marketing, checkout features, and one-click ordering, but in the end, speed is what drives everything.”
Amazon’s Expansion
Amazon’s focus on real estate demonstrates this. The company nearly doubled its capacity in the last two years to meet demand, CFO Brian Olsavsky explained during a February earnings call. Fulfillment center growth played a significant role: in 2021, Amazon grew its U.S. warehouse footprint by 30%, according to MWPVL International.
However, even with these investments, Amazon hasn’t yet achieved its desired delivery speeds. Prime’s one-day shipping has not returned to pre-pandemic levels. As a result, Amazon is now turning to other parts of its operations to improve its shipping speed.
Moderating Fulfillment Center Growth:
“We’re seeing a moderation in our fulfillment center spending,” Olsavsky said, adding that future expansion would likely match growth in other segments of the company.
Analysts point out that this deceleration was expected after the initial surge in e-commerce fueled by the COVID-19 pandemic subsided.
Fulfilling Customer Demand:
As online orders surged, retailers adjusted or accelerated their logistics strategies. Foot traffic in physical stores dropped as the pandemic hit, with many consumers shifting to online shopping. Olsavsky noted in June 2021 that Amazon had been playing catch-up to balance supply with demand—fulfillment expenses as a portion of net sales rose from 15.2% in 2020 to 16% in 2021, according to the company’s 10-K filing.
Growing Distribution Network:
Adding more facilities in different markets has allowed Amazon to increase its capacity while positioning inventory closer to customers, leading to quicker, more cost-effective deliveries. Other retailers in the e-commerce space are following suit.
“The demand for logistics space in e-commerce has leveled off compared to last year, but it’s still higher than pre-pandemic levels,” said Heather Belfor, director of U.S. research at Prologis, a major logistics real estate firm that lists Amazon as its top customer.
Walmart is also building out its network of warehouses and investing in automation to compete with Amazon’s Prime service through Walmart+. Similarly, Target has four new distribution centers underway, with more planned.
Investing in Transportation: Although Amazon is slowing down the expansion of its fulfillment centers, the company is still making significant investments in other areas of its operations. Olsavsky hinted at further investments in transportation in 2022.
With more personnel and vehicles in its fleet, Amazon aims to improve its ability to deliver to rural areas across the U.S. without relying as heavily on UPS and the Postal Service, said Marc Wulfraat, president of MWPVL International.
“They’re working toward full control over their delivery process,” Wulfraat explained. “Eventually, they want to phase out partnerships with UPS and USPS. The clues are there.”
The following chart highlights Amazon’s vast distribution footprint compared to other major retailers like Walmart and Target, showcasing its lead in both active and future warehouse space.
Increased Control Over Delivery:
Taking more control over its transportation network would help Amazon manage rising shipping costs. The company reported increased expenses related to third-party carriers in the fourth quarter, making an argument for ramping up its own delivery capabilities.
Looking Ahead:
Experts say Amazon is still eyeing other long-term opportunities. The company could expand its network of delivery stations, build up protections against global supply chain disruptions, or push further into the grocery business.
No one expects Amazon to stop expanding its fulfillment network altogether. “Slowing down” is a relative term for a company that has scaled its distribution network at a rate unmatched by any competitor. Olsavsky even mentioned during the Q4 earnings call that spending on warehouses could pick up again in the future.
“I think they’re easing up,” Wulfraat said. “But they’re certainly not stopping.”