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AWS still growing like a weed but Amazon's retail empire hit by soaring labour, supply chain costs

CFO warns of $4bn in extra costs in the Christmas quarter

Amazon says inflationary pressures caused by labour shortages and the pandemic-struck supply chain will add $4bn in overheads to its business in the Christmas quarter.

In the last 18 months, headcount has grown by over 628,000 employees and another 150,000 in the US alone are being recruited to "support" the "seasonal demand", said CFO Brian Olsavsky on a conference call last night.

"This demand for labor has recently coincided with the shortage of available workers particularly in the US that began in Q2, but it really started to impact our operations and cost structure in Q3.

"It has led to wage increases and sign-on incentives, as companies compete for workers, as well as inconsistent staffing levels in our operations," added Olsavsky. "In addition, disruption to the global supply chains and inflation in the cost of materials such as steel and services such as trucking have also raised our cost of operations.

Amazon estimates the price of labour, labour-related productivity costs and cost inflation was $2bn in Q3. "Labor became our primary capacity constraint, not storage space or fulfillment capacity.

"Our Q4 guidance range anticipates that these costs will approach $4bn in Q4 as we see a full quarter's impact of these effects, and a higher seasonal unit volume."

Around $1bn is "tied to wage increase and incentives" said the CFO. "Our average starting wage is now over $18 per hour with an additional $3 per hour depending on shifts in many locations and sign-on bonuses that can be up to $3,000."

Fulfilment capacity is also on track to double in Q4 compared to pre-pandemic levels.

For the quarter ended 30 September, Amazon reported group revenue of $110.8bn, up 15 per cent year-on-year. Online retail North America booked $65.55bn in sales, up from $59.37bn and recorded an operating profit of $800m versus $2.52bn in the same period last year. The international retail segment jumped 15.8 per cent to $29.14bn and made an operating loss of $911m.

In less dramatic news, Amazon Web Services reported another quarter of double digit gains in revenue, up 39 per cent to $16.11bn. Operating profit came in at $4.883bn, up 38 per cent.

Olsavsky said AWS saw a "re-acceleration" in the top line as customers "expanded their commitment to the cloud." He said spending from some customers in certain sectors hit hard by the pandemic was "suppressed."

"Then I think there's a general level of recovery across a lot of our customer base," he said.

Highlights in the quarter for AWS include announcing a new region in New Zealand; GA of Amazon Memory DB for Redis; GA for Managed Grafana; GA of a managed service for Prometheus; and EC2 DL1 instances for "cost efficient" training of deep learning models.

Investors hate surprises but there was no derailing the megacorp and maybe AWS was the soothing balm that healed sores emerging on the retail side. ®

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