Is Amazon’s Labor Intensity A Ticking Time Bomb in an Inflationary World?

During their latest episode of the VALUE: After Hours Podcast, Taylor, Carlisle, and Clapham discussed Is Amazon’s Labor Intensity A Ticking Time Bomb in an Inflationary World?. Here’s an excerpt from the episode:

Steve: The other one that slightly puzzles me is Amazon. I was looking at Amazon sales per employee the other day, and its sales per employee has fallen by 60% in the last 10 or so years. The reason being it’s gone into logistics. When I started on South Side, I was a transport analyst. I can tell you one thing that transport companies do not make good investments unless they have local monopolies. So ports and airports are good companies. Shipping companies, trucking companies tend not to be good investments.

Tobias: Doesn’t go to their moat though? Doesn’t that go to their competitive advantage? It just once they don’t need to hand off any of the– Once they’re vertically integrated all the way to the consumer, then it’s going to be hard to unseat them, isn’t it?

Steve: Well, I talked to Benedict Evans, the guy that used to be the Strategy Director, Andreessen Horowitz about this, because he’s always very thoughtful, always very smart and that’s exactly what he said. He said, “They’re reinforcing their competitive position.” But bringing all this stuff in house, it means you end up– To be fair, they’ve done a very good job of it and they’re very efficient, very reliable. But what it does mean is that they have a lot more in the way of physical assets behind each dollar of revenue, and they’ve got a lot more people behind each dollar of revenue. And that makes the business inherently more volatile.

I would argue riskier, because I’m not saying that anybody’s going to steal Amazon’s market share tomorrow, but you could see regulatory action in certain countries for example. And the fact is that, if their revenues don’t carry on growing, God forbid that revenues should start to fall. Well, that capital intensity will really bite them. The labor intensity, it seems highly likely to me that inflation is here to stay. I know that we’re all getting excited and inflation is going to disappear and we’re going to be– [crosstalk]

Jake: [chuckles] We’ve already moved on from all that. We’re on the AI now. Don’t worry about it.

Steve: It seems to me inflation is a bit endemic. I was having conversation today– My office is in– It’s not a WeWork, but it’s like a WeWork. I was having conversation today with other business owners, “How much are you putting your prices up next year?” Not one of them said, “Oh, economy is a bit weak. We’re not putting our prices up.” [chuckles] I was doing quotes for next year. So I was just wondering, the trouble is, asset managers are not experiencing the same tolerance for inflation as some other industries. I unfortunately sell into an industry which is a bit more price sensitive.

But inflation, I think, will be here for some time. If we are shifting from capital to labor, which seems highly likely, then Amazon’s business isn’t quite what it was when it didn’t have all these people on the payroll.

Jake: Price increases being baked into future contracts, which starts to make this structural and not just as temporary as perhaps we thought. I don’t know.

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