Amazon.com Creates 5,000 Jobs, Destroys 25,000 in the Process?

By Alex Daley, Chief Technology Investment Strategist / GoldSeek.com

The Technology Jobs Conundrum

The past few weeks have seen the tech and business media abuzz about a not-so-little warehouse in Tennessee. That’s because this distribution center, opening its doors with a burst of fanfare and even a few visits from nearby politicians, isn’t a jumping-off point for Macy’s or Target. Instead, the warehouse is the latest in a series of new locations being opened by retail technology giant Amazon.com.

The jobs this new mega-warehouse is purported to create: 5,000.

The politicians who made the quick trip to Tennessee to get in front of the cameras included one President Barack Obama, who gave a rousing speech not just about the importance of the 5,000 jobs promised at this one facility (and another 2,000 corollary positions at customer service centers elsewhere in the country), but also about the “need” to raise taxes on the businesses that are creating them and use those taxes to fund “infrastructure” jobs in green energy and natural gas, among other areas.

The politically charged speech and the press conference from Amazon.com touting its job-creation abilities have understandably drawn quite the skeptical reaction from some. But surprisingly, in all the talk I’ve heard in the media these past few days, most of the fury seems directed not at the proposed tax hikes, but at Amazon itself for creating what might be fewer jobs than it claims… and possibly for destroying more jobs than it creates.

Along with its jobs announcement, Amazon’s PR department was ready for the utterly predictable media criticism that the jobs are nothing more than menial, low-wage shop floor jobs. Its retort? These new jobs will pay on average 30% higher than typical retail jobs. That’s a good thing for the employed, no doubt, to be paid more for a similar skill-level job.

But with its emphasis on low prices, how can Amazon afford to boost those wages so much? It all boils down to efficiency. Think about Amazon versus another retailing giant without the same level of sales, but with a similar “low prices” kind of push: TJX companies (owners of TJ Maxx, Marshalls, and Home Goods). Last year, Amazon had retail sales of over $60 billion globally (up from $47 billion in 2011); TJX brought in about half that, at almost $26 billion globally (up from $23 billion in 2011).

Whatever the companies’ similarities, the differences between the two couldn’t be bigger; and those differences have profound impacts for investors, as well as for the future of our economy.

On one hand, you have companies like TJX—so-called “bricks and mortar” retailers—which in order to do business every day must staff a few thousand stores, and keep them open for 10, 12, or even 24 hours per day. That means greeters, checkers, security, customer service, and stockroom employees, plus bright lighting, catchy displays, and other ordinary features of a quality retail facility.

Companies like Amazon have bricks and mortar too, of course, as displayed on the recent junket in Tennessee. But that’s about all they have. Amazon can operate in facilities far off the beaten path, with nothing but wire shelves and cement floors, and they can serve just as many customers from only a fraction of the locations—and a fraction of the manpower—that their competitors require. On just about every front, the company is more efficient than its peers. But let’s look specifically at two of the top expenses for virtually any retail company: its plant and its people.

Facilities

Last year, TJX ended with 3,055 stores, making it one of the most prolific clothing and home goods retailers in the US. It pegs its sales at a respectable $8.5 million annually per store. That’s not a big-box retailer like Best Buy, which racked up $25 million per store in 2011, but it’s solid compared to many other clothing and home goods retailers (like Sears, with much larger stores and only $9.5 million in per location sales, or the Gap, with smaller, mall-style stores and only $5 million per outlet).

Amazon doesn’t have stores, of course. It has “fulfillment centers,” just like the new one in Tennessee that the POTUS visited. As of May 2013, a few dozen such centers are scattered across the world, including 37 in the US and 2 in Canada, and another dozen plus in Europe:

Of course, it’s unfair to count only fulfillment centers, as the company handles customer service at separate locations, something a retailer like TJX would normally handle mostly onsite in the stores (excepting the separate online sales division, but that constitutes only a small fraction of TJX’s business). Add in those locations, plus the newest centers Amazon plans to open, and you still have fewer than 100 retail operations centers globally.

If we round up just to be fair, that pegs Amazon’s sales per location for the past year at $660 million, or about 80 times the sales per location of a TJX.

In addition to the amount of dollars per square foot in revenue that Amazon can push out its doors, the company can strike deals to grab land in otherwise desolate areas for its facilities, so long as UPS and FedEx will service them—no need for high-rent districts with lots of shopper traffic. This means that not only does the company have to support fewer square feet of space and make each square foot less glamorous, it can also push into districts willing to offer it big tax savings, or where construction costs are highly depressed (often one and the same). Amazon’s negotiation power and economies of scale are both significantly higher than the average multi-thousand storefront retailer.

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