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The Seattle tech giant faces huge challenges ahead, including delivery and supply chain issues.

Photo: Angus Mordant/Bloomberg via Getty Images
Power

Can Amazon handle the coronavirus pressure?

If Amazon can meet surging global demand, it will emerge as one of the "biggest beneficiaries."

Amazon has become a crucial lifeline to the outside world during the global COVID-19 pandemic that's driven millions into their homes, but navigating the demands of this new reality will not be simple for the massive retailer.

The Seattle tech giant faces huge challenges ahead, including delivery and supply chain issues, as it walks a fine line between meeting a surge in online and in-store demand and keeping warehouse workers and store employees safe, all while making sure its Amazon Web Services keep so much of the internet running smoothly. But Amazon is also uniquely well-positioned to thrive because of its diverse businesses, which include cloud, e-commerce, online grocery delivery, and Whole Foods. The company's $13.7 billion acquisition of Whole Foods in 2017 is proving particularly prescient right now, as shoppers empty store shelves — or order delivery. As everyone is stuck at home, Amazon is, more than ever, the place that has what they need.

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"We're providing a vital service to people everywhere, especially to those, like the elderly, who are most vulnerable," wrote Amazon CEO Jeff Bezos in a memo sent to Amazon employees and posted on the company's website on Saturday. "People are depending on us."


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Amazon already owns 38.7% of all U.S. e-commerce sales according to the latest estimates from digital research firm eMarketer, and right now people are relying on it even more. Wedbush Securities analyst Michael Pachter conservatively estimates that Amazon orders are up between 10-12% in the U.S, driven by shoppers buying more items online, boosting the company's revenues an additional $800 million per month, at least.

"Amazon stands to be one of the biggest beneficiaries, and they're actually doing a pretty good job getting their ducks in line," said Oweise Khazi, a director and analyst at Gartner.

How is Amazon handling increased demand for goods?

It's tricky. Amazon's core e-commerce offerings have never been more in demand. "The good news [for Amazon] is that people who stay home can't shop elsewhere and that means a lot more business, particularly grocery," Pachter said. "The bad news is that some of us are using their services for the first time, and high demand has slowed delivery. The slower delivery may impair some people's perceptions about speed and reliability."

Increased online and in-store orders are taking a toll on Amazon's usually well-oiled logistics system. Amazon, which has long used fast delivery for online orders — including with Amazon Fresh — as a way to beat out competition, is currently having trouble meeting delivery promises. Orders once routinely delivered same-day or in two days now take several days and up to two weeks to get to customers. Meanwhile, in some cities like Los Angeles and Washington, available delivery windows for Amazon Fresh orders are virtually non-existent.

"Try ordering Amazon Prime Fresh right now — the wait is over a month," Pachter added. "It's supposed to be same-day. But nobody else is doing better. I just ordered at my local supermarket on Monday for Sunday delivery, and they canceled my order the next day without explanation. Nobody can keep up with this."

Amazon is clearly aware of the issue: atop the homepage of Amazon's grocery site, which includes its Amazon Fresh and Whole Foods Market units, the company warns that "inventory and delivery may be temporarily unavailable due to increased demand."

The brunt of this increased consumer demand is falling heavily on Amazon's 800,000-plus full-time and part-time workforce. While many Amazon office employees are able to work from home, warehouse workers, some of whom are being ordered to work "compulsory overtime," report being deeply concerned for their health as they continue to work in fulfillment centers. More than 1,500 U.S. workers have signed a petition calling for the company to take more safety and health precautions, as some workers in Spain and Italy have come down with the virus.

At some Whole Foods locations, all that panic buying translates to "record sales" — at one Texas location, sales have doubled — but it's also stressing out workers, some of whom have been sobbing at work and having panic attacks, according to a Vice report. One disgruntled Whole Foods worker tweeted earlier this week to Bezos: "Where is my overtime pay as a Whole Foods worker during a pandemic!!!"

If Whole Foods can effectively keep up with demand while keeping workers safe, it stands to generate Amazon huge revenues.

"How well stores keep products in stock will determine if they thrive or lose share in this crisis," said Sucharita Kodali, vice president and principal analyst at Forrester Research.

And while Whole Foods may be in higher demand, Amazon's other physical retail locations are likely hurting. The company currently operates more than 20 Amazon Books stores and a dozen or so Amazon 4-Star stores across the U.S. Many are in cities with social-distancing restrictions in place, including New York City, Seattle, Los Angeles and Washington.

Another Amazon product in high demand amid the coronavirus panic is streaming entertainment. And while customers are likely spending money to stream shows and movies, Amazon's original content development is taking a huge hit.

Amazon Studios, the company's TV and film production arm, paused production on all Amazon Original series, an Amazon Studios spokesperson confirmed to Protocol, in order to enable social distancing for the health and safety of its shows' casts and crews. The decision affects Amazon Originals including the upcoming "Lord of the Rings" series, which reportedly cost $1 billion to produce and employs roughly 800 people, as well as production of season 2 of "Carnival Row," which stars Orlando Bloom and films in Budapest. (In an Instagram post Bloom eventually took down, the actor confirmed he and many of crew members were being sent back to the U.S. in the interim.)

For viewers, those production delays may mean having to wait longer for shows to air, but for Amazon it means millions of dollars lost as production crews scatter back to their homes, and simply wait.

OK, but what is Amazon doing about it?

Amazon has made several big changes very quickly: It is beefing up headcount in key areas, temporarily increasing workers' wages and prioritizing the delivery of select, in-demand items.

Amazon has experience significantly ramping up its workforce, as it does every year in the months leading up to the holidays by hiring temporary seasonal workers. Now it's having to do something similar on a moment's notice. To keep up with the current surge in online orders, Amazon announced plans on Monday to hire an additional 100,000 employees in the U.S. That may be welcome news for people newly out of work in hard hit industries like events, hospitality and food service. Amazon said it will also raise pay for warehouse, delivery and Whole Foods employees by $2 an hour through April. After intense criticism for not providing enough sick time to its hourly Whole Foods employees, Amazon changed its policy and will give them unlimited sick days through the end of March, and workers who test positive for the coronavirus have two weeks of sick leave.

Amazon also told online sellers this week it had made an unprecedented decision in an effort to meet increased demand from shoppers for certain crucial items. Third-party items that don't fall into six categories — baby products, health and household, beauty and personal care, grocery, industrial and scientific, and pet supplies — won't be accepted at Amazon fulfillment centers until April 5. Prioritizing these products, according to an Amazon spokesperson, will let the company move more quickly to restock and ship customer orders.

That's obviously good for Amazon but bad in the short-term for third-party sellers who offer things like books, apparel, electronics other than PC monitors and webcams, and toys, which are not considered "high-demand products" right now.

"A high share of third-party sellers tends to be smaller establishments who might not be able to weather the reduced demand/cancellation of non-essentials products at this point as they depend almost exclusively on Amazon for their revenue," explained Khazi. "Many of them tend to have a single chain of product supply, which has a higher chance of being impacted, especially if they are dependent on Chinese manufacturers."

Translation: third-party vendors that sell products from China will likely run into supply chain issues since China temporarily shuttered factories to deal with the coronavirus. (Industrial output in China plunged 13.5% this January and February versus a year earlier, according to Bloomberg.) Those factory closures may also affect Amazon Basics, the 11-year-old private label behind Amazon-branded housewares, apparel and consumer electronics, which are largely manufactured in Chinese factories, as well. Amazon Basics generated $7.5 billion in sales in 2018 and could grow to $25 billion in annual sales by 2022, according to SunTrust Robinson Humphrey, an investment banking firm.

Related: A coronavirus 'perfect storm' hits Apple

What about Amazon Web Services?

As Amazon grapples with the logistics of increased demand across its retail offerings, it's easy to overlook the fact that the hugely profitable Amazon Web Services is likely to be affected by the broad economic fallout of COVID-19 as well.

AWS represents 11% of Amazon's overall revenues and captured $2.6 billion, or 67%, of the company's operating income during the company's fourth quarter. It remains the company's fastest-growing business segment. In the short-term, experts expect AWS to weather the coronavirus storm quite well, largely because so many businesses rely on the cloud computer giant, and it has locked in large companies —among them Fox Corporation, Pinterest, and the Swiss multinational pharmaceutical company Novartis — into lucrative multi-year contracts that guarantee regular spending by businesses in exchange for discounted services.

The longer coronavirus cripples the economy, though, the more it could be a problem for AWS, as its clients are affected. While big businesses aren't likely to decrease spending, small to medium-sized businesses could delay their transitions to the cloud as part of more frugal spending, or even shut down operations.

And the future of the business?

Though Amazon is primed to emerge from the pandemic intact, and likely having made money, the forecast may not be all positive for the company. Amazon's annual Prime Day is coming up in July, which marketing firm IgnitionOne estimates generated $6.1 billion in sales in 2019. Since its launch in 2015, those sales have been heavily dependent on apparel and consumer products shipped from China, which could still be delayed due to supply chain interruptions. And if the economy is still bad, consumers may be spending less anyway.

The key question for Amazon now is about optics. Will it be seen as having helped the world navigate this turmoil? Or as benefitting from the crisis? Much of that will come down to whether Amazon is able to take care of its workers, who now find themselves at the front lines of a global panic.


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"Enterprises like Amazon will be more essential than ever, but an added challenge at this time will of course be to keep their employees safe and socially distanced," said Khazi.

On Friday, AWS announced a $20 million initiative to fund research and development of diagnosting solutions, which includes working toward a swifter coronavirus test. On Saturday, Bezos stressed that he is trying as hard as he can to get millions of masks for warehouse workers. Yet even the richest man in the world can't get his order fulfilled right now. "I want you to know Amazon will continue to do its part, and we won't stop looking for new opportunities to help," he wrote. If Amazon can keep up with demand and deliver what consumers need, it may very well emerge as the company that kept households stocked — and mouths fed — during a global crisis of unimaginable proportions.

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