Published in

Amazon robotic arm hard at work

Amazon Automation 2021 and Beyond

Strangely, over the last 5 years, Amazon’s headcount (HC) growth rate has been about 20% higher than their sales growth rate. It’s is odd because we think of them as an automation, innovation, and machine learning company who heavily use robotics and benefiting from one of the highest revenue per employee ratios in retail. While these features are all true, there has been a consistent trend which is counterintuitive and offsets the improvements of innovation and robotics: as Amazon has tripled revenue from $100B to $300B, their shipping and fulfillment costs as a % of revenue have meaningfully increased from 23% to 28%. This is substantial, and represents +$50B more cost of shipping and fulfillment. What’s in this number?

  1. Increased amount of third party (fulfilled by amazon) sales — Following the Alibaba model, Amazon has increased the number of third party “fulfilled by Amazon” products (3P), which are now greater than 50% of total warehouse volume. Interestingly, Amazon does not report the revenue from sales 3P items (AMZN is only the platform), but they do recognize proceeds from the ~15% of revenue charge to 3P sellers to play on Because of this, Increasing 3P volume always increase the fulfillment cost as a percent of total reported (first party) revenue. However, I have calculated that shipping and fulfillment is STILL increasing over this time period vs. the total “gross volume” including first part (1P) and third party (3P).
  2. Scale up of DC capacity to meet demand — holiday surges (normally a 5%-10% bump), COVID (30% volume increase), additional safety investment (amazon announced $4–6B), and new DCs to meet new customers globally.
  3. Meet customer needs and build a competitive moat — Amazon invested a huge amount in delivering 2-day and later 1-day shipment. These are now customer expectations, which makes a large competitive moat.

The last capacity cycle

In 2015 and 2016, Amazon investment in HC significantly outpaced revenue (by 30%) as warehouse workers doubled from 130K to 260K. At the time, Amazon had been a relatively unprofitable retailer, never posting more than $500M profit per quarter (for reference, Walmart typically posts about $3B net income per quarter). However, this cycle of investment ended with 2 breakout years of profitability, posting $3B and $10B annual net income sequentially.

The next cycle

In 2018 and 2019, Amazon began increasing investment in HC and capacity (again ahead of revenue) as further international expansion and 1-day shipping were introduced. At the time, international sales were pretty unprofitable and other large retailers were beginning to grow in the US ecommerce space. These investments were significant, but enabled the long term strategy. With hindsight being 20/20, these already look like great investments as volume in India has increased, international business is now profitable, and market share has increased from 35% to 50% in US (only accelerated by 1-day shipping). Amazon’s moat was already significant before these investments further increased Prime users and site traffic which also benefits other parts of the business (ads, AWS).

Automation for profit

Warehouse costs represent nearly $90B per year at Amazon today. Of this, I estimate about $20B is cost of warehouse employees (based on some fuzzy wage and employee estimates). With this increasing cost, one of Amazon’s largest profitability upsides is through increased warehouse efficiency. Today, there is a huge potential automation upside for Amazon given recent progress in AI and automation.

  1. Robotic arms stacking higher racks — most warehouse efficiency is looked at per square foot, but should probably be looked at per cubic foot. There is lots of wasted space above the height that humans can reach. Amazon’s most automated warehouses are beginning to take advantage of this.
  2. Automated item picking — some companies are getting closer to finding this holy grail of warehouse automation. Robotic arm + camera item recognition could improve warehouse efficiency and reduce worker injury.
  3. Machine loaded trucks — inbound/outbound loading is a large part of the work in warehouses and relies on our human ability to play Tetris well. Longer term, this could be done mechanically, but here are some interesting concepts existing today.
  4. Autonomous workflows — longer term lights out warehouse concept where products are brought in in autonomous trucks (Amazon bought and autonomous car company called Zoox) and shipped out in drones (Amazon’s funny beehive shipping center patent).

Impact and Risk

If further automations are able to drive additional 20% efficiency, Amazon is set up for $18B savings as they will be able to hold additional inventory or absorb a few quarters of volume increase with the same number of warehouses/staff. If these efficiencies are delivered, shipping as a % of revenue would decrease to 25% and 12.5% as a % of total gross sales (include 3P).




Data Scientists must think like an artist when finding a solution when creating a piece of code. ⚪️ Artists enjoy working on interesting problems, even if there is no obvious answer ⚪️ 🔵 Follow to join our 18K+ Unique DAILY Readers 🟠

Recommended from Medium

“We are not a technology company.”

Your Favorite Restaurant is Still a Mess. There’s a Reason.

Cooks in the kitchen at Tacolicious

Is Innovation in Pharma Broken?

Is Apple a Good Investment?

We Work is No Longer Working

Out-Reaching for Consequence — Why Outreach and Sapphire Ventures Are Excited to Partner

Look Listen’s Innovative Approach to Kool Smiles’ Paid Search Strategy

Watch Manufacturer List: A Guide to Watch Brand Owners And Wholesalers

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
David Hall

David Hall

Miami University Alum. Microsoft - Finance & Accounting.

More from Medium


How blockchain technology might impact politics

Triall Product Spotlight: Reporting & Analytics

Octet raises funding from investors to become the ‘Amazon of Residential Construction’