How much will Amazon’s wage hike cost investors?

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Amazon (NASDAQ: AMZN) Really capitalizes on incentives for new hires as it battles other entry-level employers for employees amid the ongoing US job shortage

All new hires and pay increases add up. Labor costs will increase by about $ 4 billion year-over-year in the fourth quarter, according to Morgan Stanley analyst Brian Nowak. The increase in spending led Nowak to lower its price target for FAANG stock, but long-term investors should also recognize the benefits of Amazon’s increased spending.

Image source: Amazon.

Amazon’s hiring wave

Amazon has hired about 450,000 new workers since the start of the pandemic, and it is set to hire 125,000 more as the holiday shopping season approaches.

These new hires, mostly frontline warehouse and logistics workers, will start with an average salary of over $ 18 an hour. This is a big step up from the minimum wage of $ 15 an hour introduced by Amazon in 2018.

Earlier this year, Amazon increased the salaries of 500,000 employees. He also announced his intention to cover the tuition fees of 750,000 employees.

Nowak expects the average salary for logistics workers to drop from $ 18.82 in the previous nine months to $ 21.82 in the fourth quarter. He expects this to translate into a 50% increase in labor cost per unit compared to the fourth quarter of last year.

Fuel growth

Rising wages among the workforce ensures that Amazon will be well staffed in time for the holidays. With the current labor shortage, it’s critical that Amazon offers better wages and benefits than competing retailers in order to maintain a competitive advantage during the greatest buying time of the year.

Amazon expanded its distribution network footprint by 50% in 2020. It continued to invest in 2021 to connect all of its new warehouses, including items such as sorting centers, Amazon Air and transport trailers. line. And it still hires through its delivery service partners who get packages from delivery stations to customer doors. Not to mention that it has officially opened its air hub in Cincinnati.

If Amazon didn’t invest in more workers, there would be a lot of wasted assets running at sub-maximum capacity. Amazon has spent billions of dollars in capital expenditures to build this network, and just because the cost of labor rises doesn’t mean it’s more efficient to hire fewer workers.

More importantly, Amazon should be able to provide better service to customers than competing retailers. As a result, Amazon will be able to deliver better inventory levels and keep delivery times short, which will allow it to regain market share this holiday season.

He can fuel Prime signups with his one-day and two-day shipping promises, and if he fulfills those orders as planned, he could turn more trial members into paid subscribers.

There are also long term benefits to paying workers more. Amazon should see better employee retention rates with higher pay. The offer to pay for college is a particularly strong incentive for employees to stay on, as it takes several years to graduate. This can be extremely valuable in a high turnover industry.

As labor costs rise for Amazon this year, investors can expect it to pay off with strong fourth quarter sales results, and with longer-term benefits of a increased efficiency and customer loyalty in 2022 and beyond.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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