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Amazon's Fulfillment Center in NJ

AMZN

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Amazon.com Inc. (AMZN - Analyst Report), the world's largest online retailer has announced that it will build a fulfillment center in Robbinsville, New Jersey. The online giant will invest more than $200 million for the construction.

Amazon said that the 1 million-square-foot center will create hundreds of full-time jobs and more than $22 million in tax revenue for the township. The center is expected to open in early 2014. The company plans to accelerate its investments and build one more project in NJ, for which the time has not yet been decided.

At the facility, Amazon employees will pick, pack and ship smaller items, such as books and DVDs to customers. Amazon said that on an average, the company pays 30% more than traditional retail jobs, including health care and other full-time benefits.

Fulfillment centers are giant warehouses that help Amazon and other online retailers to store products, ship them and handle returns quickly. These are important for providing the level of customer service that Amazon customers have come to expect of the company.

Over the past few years, Amazon has been spending heavily to set up new fulfillment centers all around the country. A Bloomberg report states that Amazon spent $5.3 billion in capital expenditure in the past five years, of which $2.3 billion or 43% was spent in the last 12 months.

To further automate its order-fulfillment process, Amazon agreed to buy warehouse-robot maker Kiva Systems Inc. last year for $775 million, the company’s biggest acquisition since its purchase of shoe retailer Zappos.com in 2009.

The need for fulfillment center expansion is rising due to the growing demand for online shopping and the ever-increasing needs of Internet users. Prompt and accurate delivery of products is very important for the success of an online retail company.

Also, small retailers find it difficult to provide their customers with relatively cost-efficient same day/next day shipping like Amazon. Hence, they have also been signing up for fulfillment by Amazon, where the company stores their products in its warehouses, ships them and makes those items eligible for Amazon Prime free two-day shipping.

Third parties also use Amazon’s warehouses and shipping services. All these are helping Amazon to increase its revenue base and drive expansion.

We believe that for Amazon to remain at the top, it is important to maintain its U.S. market share and expand globally. For this Amazon needs to invest more in both fulfillment and technology and content, especially in international markets, where growth rates are likely to be higher and its own facilities fewer.

Though the increased expenses could hurt the company’s bottom line in the near term, we believe these investments are necessary to maintain its dominance in this highly competitive market.

Amazon is one of the leading players in the extremely fast-growing retail ecommerce market and its strength lies in its huge scale of offerings, its broad reach and platform approach. In the third quarter, Amazon’s revenue of $13.81 billion and fulfillment expenses were up, both on a sequential as well as year-over-year basis.

At the moment, however, most of Amazon’s competition (whether direct or indirect) continues to come from Google .

Currently Amazon retains a Zacks Rank #3  (Hold).

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