In this crazy new world we live in where everybody stays at home, one company which has benefitted hugely and seen soaring sales is the online e-commerce giant Amazon.
As Covid-19 has continued to cause social and economic destruction around the world, people’s buying habits have changed dramatically. Not only are people now buying more online, they are also buying things in larger quantities.
According to a report from analysts on Wall Street, Amazon’s revenue for the first quarter of 2020 is expected to be up by over 25%. The majority of these sales however have been due to increasing demand for household essentials. So whilst the sales figures look great, profit margin on these low-priced goods tends to be relatively low.
When judging the success of a business, revenue from sales is only half of the story. What we also need to talk about is costs. And making things costs money, especially when there is a deadly virus spreading around the world!
In order to satisfy the huge demand for all sorts of products, Amazon has had to increase their workforce dramatically in the last few months. This is a move they have been largely praised for as they have created over one hundred thousand jobs at a time when most other businesses are collapsing around them, with workers being laid off in their millions.
This has come at a high cost though. In order to attract the tens of thousands of workers required, Amazon has been offering high wages amounting in total to an additional $700 million spent on labour. On top of this, the company has also needed to install special equipment in their offices and warehouses to monitor worker’s temperatures and ensure the safe movement of people during these extraordinary times.
Different shift patterns to avoid close contact has also led to reductions in productivity, likely to have a further impact on Amazon’s profit margins in the last few months.
Whilst the cost of Amazon’s increased sales is likely to be high, profits will still be strong and the company is also likely to benefit in the long-run from the change in consumers behaviour. Many who are new to online shopping are likely to stick with it, paving the way for further market domination, and unfortunately putting more pressure on the survival of the high-street shop.
THINK LIKE AN ECONOMIST!
Q1. How is profit calculated for a firm?
Q2. What is the difference between a fixed cost and a variable cost? Which is increasing for Amazon and why?
Q3. Assess the impact that Covid-19 has had on the number of workers employed by Amazon.
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