When Jeff Bezos named his startup after the world's largest river, he could not possibly have known it would eventually become one of the planet's biggest companies, employing more than 1.5 million people. But Amazon's waters will run a little thinner in 2023. Joining other tech firms that have already announced layoffs, it plans to cut 18,000 jobs from its payroll in the coming weeks, including roles it has been scrapping since November.

It is a recognition of the tough economic environment that confronts Amazon at the start of this year. The signs were there in Amazon's last set of quarterly results, when it recorded a net loss of $3 billion for the first nine months of its current fiscal year, compared with a profit of $19 billion 12 months before. Subtract AWS, its seemingly unstoppable cloud business, and Amazon would have been staring at an operating loss of about $8.1 billion, rather than the $9.5 billion profit it reported.

Like other tech stocks, Amazon's share price has also taken a battering in the last year. Trading at a near high of about $184 in late 2021, it has slumped to about $85 today. Investors worry about the cost-of-living crisis that affects everyday consumers, and what impact it could have on their spending with Amazon. The company's expenses have also risen sharply, hurting margins. At more than $355 billion, operating costs for the first nine months were up 14% year-on-year.

Figure 1: The e-commerce giant aims to cut 18,000 jobs in total.
(Source: Amazon)

The cuts yet to be happen will mainly affect staff in Amazon Stores, the mainstream retail outfit, and PXT, Amazon's "People Experience and Technology Solutions" team. Those it has already made chopped into the devices and books divisions. Writing to staff in a memo posted online, CEO Andy Jassy was forced to explain why staff had not been notified directly before the news went mainstream.

"We typically wait to communicate about these outcomes until we can speak with the people who are directly impacted," he wrote. "However, because one of our teammates leaked this information externally, we decided it was better to share this news earlier so you can hear the details directly from me."

The limits of automation

But as big as the figure of 18,000 layoffs might sound, it represents a tiny fraction of Amazon's global workforce – just 1.2%, in fact, based on the current estimate that Amazon employs about 1.5 million people. If that widely reported number is accurate, Amazon's workforce has already shrunk dramatically since the end of 2021, when it had 1,608,000 employees, according to its annual filing with the US Securities and Exchange Commission. The filing scheduled for next month should reveal all.

From a profitability perspective, Amazon's big problem has long been headcount. As far back as 2015, it had a workforce of nearly 231,000 employees, roughly 67,000 more than Apple employs today. For all the talk of drone-delivered parcels and robot factories, Amazon still needs an army of human beings to lug boxes around warehouses and do various other menial jobs. Automation currently seems likelier to put a journalist out of work (ChatGPT, anyone?) than badly affect many of Amazon's employees.

That's a positive for them but a negative for Amazon – because if it cannot reduce headcount by more than 18,000 roles, its profitability is not going to markedly improve. Amazon's operating margin has been dwindling rapidly. For the first nine months of 2021, it stood at 6.4%. The most recent set of accounts points to a margin of just 2.6%. Unless sales crash, Amazon would have to slash other types of expense to boost the figure. That said, a hiring freeze after its growth spurt of recent years could make the difference, assuming revenues continue to rise.

On the downside (for Amazon), many of the 18,000 employees losing their jobs are likely to be on lowish wages, especially those working for Amazon Stores. The highest-paid employees, as at other technology companies, will be the software gurus nearly every big organization is seemingly desperate to acquire. Cutbacks here would have a bigger impact on short-term profitability, but they would potentially hinder long-term growth.

Until 2022, the tech sector had been a net creator of jobs for many years, with Amazon the biggest creator of all. But all that looks set to change in 2023. Last year, Facebook owner Meta announced it would cut 11,000 jobs across the 87,000-strong organization, and other firms are either downsizing or halting recruitment. It is not the start to the year that anyone would have wanted.

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— Iain Morris, International Editor, Light Reading