Amazon's faster shipping dents profits, more pain to come

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© Reuters. FILE PHOTO: A delivery person pushes a cart full of Amazon boxes in New York© Reuters. FILE PHOTO: A delivery person pushes a cart full of Amazon boxes in New York

By Lisa Baertlein

(Reuters) – (NASDAQ:) Inc’s chief financial officer on Thursday said costs for its one-day shipping program will spike to around $1.5 billion during the holiday season as the online retailer speeds up free delivery to woo shoppers and fend off rivals like Walmart (NYSE:) Inc and Target Corp. (NYSE:)

Amazon’s fourth-quarter cost for one-day shipping will be nearly double the $800 million the company spent during the second quarter, Chief Financial Officer Brian Olsavsky said on a call with reporters. The company began rolling out free one-day delivery with no minimum purchase early in the second quarter.

Carriers like United Parcel Service Inc (NYSE:) charge more for faster delivery, but that is only one component of the cost increase at Amazon, which ships around 10 billion packages per year.

Another is “foregone shipping revenue,” Olsavsky said.

“Now that it is free, people don’t pay to get product in one day,” he said. Before, “you had to pay an additional fee to get one day or faster” shipping.

Logistics experts, who noted that volumes surge during the holiday season, took Amazon’s shipping cost forecast in stride.

“That is to be expected,” said ShipMatrix founder Satish Jindel, who added that Amazon saw a similar spike in costs when it rolled out free two-day shipping for Prime members in 2005.

Amazon’s volume increases 50-60% in the fourth quarter versus the second quarter, and more packages mean higher costs, Jindel said.

Based on the guidance and historical trends, Amazon’s fourth-quarter shipping costs “will easily surpass $10 billion, perhaps coming close to $11 billion,” said Cathy Morrow Roberson, founder of Logistics Trends & Insights.

That will be felt on Amazon’s bottom line, Baird analyst Colin Sebastian said in a note.

“Significant investments tied to the rollout of one-day shipping will depress Q4 profits,” Sebastian wrote.

Olsavsky’s comments came on the heels of Amazon’s third-quarter earnings report, where the company said overall shipping costs surged 46% in the third quarter.

Amazon spent $9.61 billion on shipping in the third quarter, up from $6.57 billion the year earlier.

“Customers love the transition of Prime from two days to one day — they’ve already ordered billions of items with free one-day delivery this year. It’s a big investment, and it’s the right long-term decision for customers,” Amazon CEO Jeff Bezos said in a statement.

Amazon recently made low-cost items like deodorant, bars of soap and dental floss eligible for free shipping – contributing to its costs.

“Whether all the extra investment will be worth it in the end is perhaps open to question, especially given the lacklustre sales guidance for next quarter,” said Hargreaves Lansdown (LON:) analyst Nicholas Hyett.

Meanwhile, Amazon’s faster shipping push is boosting the Next Day delivery business at UPS.

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