Amazon: Growing More Inefficient?

Since Q3 2010 Amazon has been consistently growing headcount at a faster rate than net sales: while TTM net sales went from $30.8B in Q3 2010 to $66.8B in Q2 2013 (2.2x), headcount grew from 28k to almost 100k (3.1x) over the same period. What’s interesting is that this is a clear inversion of trend compared to the quarters leading up to Q3 2010: from 2001 to 2010 net sales grew by a factor of 10x while headcount ‘only’ trebled.

amazon-growth

Amazon: net sales vs headcount growth

If one then looks at sales growth by segment (Amazon reports net sales by Media, Electronics & General Merchandise and Other), it all starts making sense: the bulk of the growth in absolute terms has come from the EGM segment, which grew from $15.6B TTM net sales in Q3 2010 to $43.1B TTM net sales in Q2 2013 and now accounts for close to two thirds of Amazon total net sales. EGM includes stuff like consumer electronics, DVDs, software, home & garden furniture, toys etc. which, unlike books, movies and video games (included in the Media segment) is heavy and bulky and requires both more warehouse employees AND more warehouse space. Also, as Amazon pushes aggressively towards same day delivery, more fulfillment centres are required to get closer and closer to the end customer, which is likely to further diminish Amazon efficiency at generating revenues.

Q3 2010 looks like an inflection point when the Media segment started being shadowed by the EGM segment in terms of net sales.

Amazon

Amazon: revenue per employee

Benedict Evans, in a brilliant post on Amazon’s (lack of) profits, has recently speculated that the company could well be a cleverly orchestrated ‘Ponzi’ scheme where top line growth can only be sustained by suppressing profitability and constantly re-investing every cent of free cashflow back into the business (and particularly, in fulfillment centre staff).

“The other view is that this isn’t actually possible – that Amazon is a sort of Ponzi scheme. It can only grow by running at zero profit – as soon as it puts up prices or cuts capex the business will collapse, and as soon as the share price stops going up all the staff will leave. “

While the market does not seem yet to buy into this thesis (Amazon stock price trebled since Q3 2010, despite razor thin profits), I think it is interesting to draw a comparison between Amazon and other brick and mortar retailers that have historically suffered from Amazon stellar growth.

While Amazon pulls in c. $700k in annual sales per employee, the bricks & mortar retailers average just over $200k per employee. Again, that all still makes sense: the volume of online customers that can be serviced for every warehouse employee exceeds that of a physical retail store; and while Amazon’s servers don’t need that many dev ops to keep them up at night, other retailers need cleaners to mop the floors at each store location every night. That’s why on paper ecommerce beats brick & mortar retail on a unit economics basis. What’s interesting though is the trend in Amazon revenue per employee: while Amazon is still significantly more efficient than its offline competitors at generating revenues, the trend is now clearly showing a steady decline.

The acquisition of Kiva Systems, a warehouse automation company, in March 2012 (Amazon’s second largest ever after Zappos) was timely, although it is yet to make an impact on revenue / employee efficiency.

I will be monitoring this metric over the next few quarters.

[UPDATE TO Q3 2013: numbers are out. As expected Amazon continues to grow more inefficient. With total employees now at 110k, it’s average LTM revenue per employee is at a 10 year low of $730k]

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