Insights

Amazon Q2 Recap: The Capacity Conundrum

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In Amazon’s Q2 earnings report to investors, Amazon CFO Brian Olsavsky characterized the last few months as “highly unusual.” What is usually the company’s lightest retail quarter has turned out to be its biggest ever in terms of online sales, and it’s all due to the pandemic.

“Amazon’s second quarter was another highly unusual quarter,” said Olsavsky. “As we mentioned on our last earnings call, we began to see a significant increase in customer demand in early March, and demand remained elevated throughout Q2. Strong early demand for groceries and consumable products continued into Q2, while demand increased during the quarter in our other major product categories.”

That “strong early demand” Olsavsky referred to describes the period when Amazon prioritized essential items in early March. Many of those products were low-cost, low-profit household goods. Now that the company’s supply chain is beginning to slowly normalize, demand for other product categories — including those that carry a higher profit — is beginning to rise.

Throughout the call, Olsavsky placed emphasis on the company’s first two priorities moving forward: the safety of their workforce and expanding capacity.

 

Capacity is the biggest issue heading into Q3 and Q4

Amazon’s supply chain came under overwhelming pressure in Q1. Demand continued to be high in Q2, but the company was able to meet that demand by flexing into areas reserved for Q3 and Q4, which are typically the company’s busiest quarters. Q3 is now here, Q4 is right around the corner, and increasing capacity is a top priority.

“As we move towards peak in the second half the year,” said Olsavsky. “We will ramp up our space needs even further and will be adding significant fulfillment center and transportation capacity in the second half of the year.”

Amazon is expected to increase its capacity by 50% by the end of 2020, a majority of which will come online in late Q3 and Q4. In the meantime, the company has placed new limitations on FBA in the form of quantity limits and an increased Inventory Performance Index requirement.

Limitations on FBA make it essential for brands to have a flexible supply chain that can quickly shift to meet demand. Flexibility will become even more important during the holiday season, which is expected to be busier than ever due to Amazon Prime Day being rescheduled for Q4.

 

The road ahead

When addressing a question about when Amazon’s operations will get back to normal, Olsavsky said this:

“When will we get back to par? We don’t know yet. We’re getting progressively better, but we’re also balancing what is going to be a very stepped-up demand and capacity in Q3 and Q4. If you look at our historic run rates and see how big Q2 was, Q2 was actually higher revenue than Q4 of last year, which is unheard of, and Q3 is now forecasted to also be higher than Q4 of last year.”

Amazon is doing great with revenue, but its capacity is still quite a ways from normal. Demand is only expected to get higher from here, and for brands, meeting that demand is going to be a moving target. Being successful will require brands to be flexible and quick-to-adapt, especially when it comes to fulfillment methods.