Here’s how Amazon plans to rein in costs in quest to restore its consumer business to profitability

Amazon CEO Andy Jassy at the 2021 GeekWire Summit. (GeekWire File Photo / Dan DeLong)

After doubling its fulfillment capacity and hiring hundreds of thousands of workers to meet demand during the pandemic, Amazon is determined to get costs under control and return its consumer business to profitability, CEO Andy Jassy assured shareholders Wednesday.

Speaking during Amazon’s annual shareholder meeting, Jassy called cost management a top priority for Amazon’s retail team, and something he’s personally spending a lot of time on these days.

Without providing a specific timeframe, Jassy said he’s “confident we’ll get back to a healthy level of profitability in our consumer business.”

“Today we are focused on reducing our cost structure by improving our productivity, growing into our capacity and identifying opportunities to mitigate ongoing costs,” Jassy said. “We have effectively lowered our cost structure before, and I have high confidence that we’ll get back on track as we work through these incredibly unusual past two years.”

Illustrating the scale of the challenge, Amazon would have posted an operating loss of more than $2.8 billion in the first quarter if not for its profitable Amazon Web Services cloud unit. With the benefit of AWS, the company posted operating profit of $3.7 billion for the quarter.

So how will the company get a handle on costs?

Responding to our inquiry after the meeting, Amazon said it’s not planning any layoffs at this time. However, the company is also not backfilling some roles at some operations sites.

In addition, Jassy told shareholders that Amazon will defer construction on properties where it doesn’t yet need the additional capacity, and let some leases expire. Bloomberg News reported May 21 that the company will try to sublet at least 10 million square feet of warehouse capacity.

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The Amazon CEO said he’s still “quite confident that we will grow into this footprint” over the long run.

Jassy also cited changes that Amazon can make in its fulfillment operations, including adjusting hours and procedures for processing packages, to improve its overall productivity.

Amazon’s free cash flow, which is what’s left over from cash flow after capital expenditures, was negative $14 billion in 2021, as capital expenses rose to more than $72 billion for the year. These were three of the slides shown by Amazon CFO Brian Olsavsky in his presentation to shareholders.

Amazon acknowledged in its first-quarter earnings report that it added more warehouse space than it needed during the pandemic, resulting in an extra $2 billion in costs for the quarter.

During the meeting, Jassy pointed out that Amazon doubled its fulfillment infrastructure during the pandemic, and nearly doubled the size of its workforce. Overall, the company employed more than 1.6 million people as of the end of the first quarter, up from 840,000 two years earlier.

Jassy also referenced a decision to boost fulfillment fees 5% for third party-sellers, saying that Amazon tried to avoid the move, but its hand was forced by rising costs, largely due to inflation.

“We absorbed a lot of these costs for sellers for much of the pandemic for really the first two years, hoping costs would attenuate at the beginning of 2022,” he said. “But when the war in Ukraine hit, and the inflationary costs continued to go up, we just couldn’t keep absorbing all those costs, and run a business that’s profitable and sustainable.”

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He added, “We didn’t take this decision lightly. We hate raising costs for our sellers.”

Amazon shares rose 2.5% to close Wednesday at 2,135.50. Its shares are down 39% over the past six months, outpacing the decline of 26% in the Nasdaq Composite Index over the same period. As part of the meeting, shareholders approved a 20-for-1 stock split that will take effect in early June.

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