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The Amazon Effect

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The Amazon Effect

The Internet giant has been a key driver of job growth and productivity during the pandemic, but unionization efforts could undermine its e-commerce model. February 15, 2021
Economy, finance, and budgets

For decades, unions tried unsuccessfully to organize Walmart as it expanded from a regional chain to America’s biggest store. Founder Sam Walton fiercely resisted labor’s efforts because in a successful company, he said, workers and management must pull together to serve customers; in a unionized business, though, employees and management were too often at odds. Walton offered generous stock options, profit sharing, and a path to management for long-time employees as part of his arsenal to fend off what was for years the most intense ongoing union-organizing effort in America.

Now Amazon is inheriting Walmart’s mantle as the retailing company most fiercely pursued by organized labor, even as the online store experiences explosive growth. To keep unions at bay, Amazon offers starting pay that’s often well above what workers can get at many other retailers, as well as health benefits and a 401(k) plan. Moreover, Amazon has been willing, even eager, to place the distribution centers so crucial to its business strategy in declining regions that desperately need jobs—like Bessemer, Alabama. It’s no small irony, then, that the workers at that Bessemer facility are in the middle of an election on whether to authorize a union. If the vote succeeds, it will almost certainly prompt other unionization efforts at many of the company’s more than 100 U.S. fulfillment centers.

Much is at stake. Though Amazon is popularly viewed as a giant tech company that dominates its marketplace, the company’s e-commerce business has low profit margins and only an erratic history of making money. A successful wave of unionization drives could fundamentally alter Amazon as we know it, threatening its e-commerce model.

Nearly 6,000 people now work at the Bessemer facility, up from the 1,500 that the company originally said it would employ when it announced the project in June 2018. The Greater Birmingham area had originally pitched itself somewhat optimistically as a site for Amazon’s so-called HQ2. While it didn’t win that battle, nearby Bessemer won a commitment for a $325 million investment in a fulfillment center. Until then, greater Birmingham was the largest metro area in the nation without such a facility. A former mining and steel-making region whose fortunes faded with the decline of mining, Bessemer needed those jobs and the income they would bring. Even today, median household income in the area is just $32,301, less than half the national median. The median hourly wage for a retailing job is about $11, while packers and stockers, who do the kinds of jobs needed in the company’s fulfillment warehouses, earn from $11.50 to $12.50 on average. Amazon, by contrast, starts workers at $15.30 an hour.

The Amazon facility is supercharging growth. The fulfillment center stands on a site once owned by U.S. Steel. Studies initially estimated that the area would gain some $200 million in new economic activity based on the original 1,500 jobs. Amazon added jobs so quickly there, however, that those original estimates became quickly outdated. Other big firms have noticed Amazon’s move. FedEx, Lowe’s, and online used-car retailer Carvana are now building similar distribution centers nearby.

The pandemic that has boosted Amazon’s growth—as millions of Americans traded in-store shopping for online—also underlies the unrest at Bessemer. The facility officially opened last April, just as Covid-19 was spreading rapidly throughout the country. Workers have complained of long shifts, inadequate breaks, and lack of attention to Covid protocols. They’re looking for higher wages, news reports say. Amazon says that it offers compensation packages well beyond those of similar jobs, including vision and dental care and a 50 percent match on employee contributions to their defined-contribution retirement plans. The company also says that it has made extensive modifications to provide worker protection from the coronavirus and is offering two weeks off with pay for workers who contract it. Nonetheless, workers have opted for a vote on whether to join the Retail Wholesale and Department Store Union. That would be a big win for labor in an industry where union membership has declined by 400,000, or 40 percent, over the last 20 years.

As one of America’s largest employers and a giant technology company, Amazon has more than its share of critics across the ideological spectrum. Some 50 congressional representatives wrote the company a letter recently urging it to use the Bessemer organizing campaign as an opportunity “to chart a new course and break with your history of disempowering workers.” The letter accused the company of “a clear pattern of denying workers dignity on the job” and “strong-arm tactics.” It made no mention of the wages and benefits that Amazon pays workers compared with other, similar companies, but did note that the company’s profits have recently risen robustly—as media stories have also noted.

Yet, the profit story at Amazon is far more nuanced. Amazon has attracted a lot of attention since its early days in the 1990s as a tech innovator with a hot stock price that eventually helped make Chairman Jeff Bezos the world’s richest person. But it took the firm nearly a decade to earn a profit, and for years, the income it could squeeze out of its growing sales was modest. By 2006, the company’s sales had soared to $10 billion, but it made just $190 million in profits on that enormous volume—a net profit margin of just 1.9 percent of sales. Things have improved substantially since then, but much of Amazon’s current earnings power has not come from those distribution centers and its consumer website.

The real profit success of Amazon today is its web services—cloud computing, network services, and data analytics, offered largely to businesses and government. Though perhaps the least visible of all Amazon’s enterprises, these provided nearly two-third of the company’s operating profits last year: $13.5 billion on revenues of $45.5 billion. By contrast, the North America retail business that the Bessemer facility is part of recorded profits from operations of $8.6 billion, but that from an enormous $236 billion in revenue—a margin of only 3.6 percent. The pandemic has helped fuel growth of the retail division, but because it’s so labor intensive, the company has had to hire tens of thousands of new workers and now employs an estimated 800,000 people in the U.S., mostly in the retail division. Adding compensation of just a few dollars an hour through some combination of higher wages and greater benefits to that workforce would add billions of dollars annually to Amazon’s costs, eroding its already-slim margins.

In the world inhabited by many of its critics, Amazon should be sharing most of its profits with its workers, regardless of how much it pays them now and what it offers them in terms of security and opportunity in an otherwise struggling retail landscape. Among the many factors that these critics ignore—probably because they can’t understand them—is that innovative, efficient businesses like Amazon not only produce unprecedented job opportunities but also drive productivity, and hence standards of living, across the economy. One way they do this is by offering an intensely competitive selling landscape, where average Americans can benefit from quality products delivered at low prices. If a retailer becomes big enough, those gains can be enormous. In the 1990s, as Walmart expanded across America, McKinsey estimated in a famous study titled “The Wal-Mart Effect” that the giant retailer’s gains had been responsible for one-sixth of the U.S. economy’s productivity improvements in the decade. Warren Buffett declared that it wasn’t Microsoft or any other tech giant but Walmart that had done the most to spur the country’s economic growth in that era. Nonetheless, many of labor’s political allies worked hard to restrain Walmart’s growth, including in low-income areas in places like New York City and Chicago that desperately needed its jobs and low prices.

Amazon may be a virtual retailer, but it relies on those brick-and-mortar fulfillment centers to make its model work. A string of successful organizing campaigns might force it to accept even smaller profit margins that bring it closer to being in the red again after the pandemic ends, which might simply prompt layoffs. Or the company could try raising prices, which would almost certainly be an invitation for competitors to chip away at its fragile profitability. Given that only 4 percent of retail jobs in America are unionized, many of those competitors would gain a distinct advantage over Amazon. So the company has bluntly resisted unionization, which, to many of its critics, is nothing short of immoral.

Amazon hasn’t helped its case among free-market types and cultural conservatives. Apparently wanting to placate the Left, Amazon has endorsed a $15 national minimum wage—a move that, not coincidentally, would also force competitors to raise their salaries closer to Amazon’s. And it was Amazon’s Web Services that de-platformed Parler, the free-speech alternative to Twitter, in the wake of the January U.S. Capitol protests that turned violent.

The one constituency that matters the most—American consumers—doesn’t pay much attention to these kinds of internal corporate disputes. Consumers just go on expecting quality products at good prices and reasonable service. If Amazon stops delivering in any of those areas, consumers will move on to the next big next thing. Amazon understands that, and that’s why it’s fighting this battle.

Photo by Rick T. Wilking/Getty Images

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