Back in April, Amazon (NASDAQ:AMZN) CFO Brian Olsavsky announced the company's plans to shift its Prime shipping program from two-day shipping to one-day shipping. By the start of June, Amazon could ensure one-day delivery on 10 million items nationwide. At the time, Olsavsky warned the company was investing an additional $800 million in its logistics operations to keep inventory stocked closer to shopper's homes.
Late last week, Amazon's efforts showed up in a big way on the company's second-quarter earnings release. The costs added up and resulted in lower-than-expected profits. And those costs will keep climbing next quarter, negatively affecting Olsavsky's outlook for third-quarter operating income. On the bright side, North America retail revenue growth accelerated, something Olsavsky attributed in large part to the transition to one-day shipping.
The impact on Amazon's business is just starting to be seen, but it's going to remain noticeable in Amazon's results over the next year. Long term, the move should produce a positive impact if Amazon's early results are anything to go by.
Just getting started
During Amazon's second-quarter earnings call, Olsavsky made it clear that its efforts to increase shipping speeds are just getting started. "We expect to see a continued ramp [up] of the one-day selection and availability for the next few quarters, both in North America and international," he told analysts. "International was up slightly in Q2, but for the most part, the improvement in delivery speeds will be, in future quarters, there."
Olsavsky also noted he expects the costs of increasing shipping speeds to increase this quarter compared to the second quarter. He added that the "cost penalty" -- the decreased efficiency of its warehouses as it ramps up one-day shipping -- will accelerate. That weighed heavily on his outlook for this quarter, where he expects Amazon to earn $2.1 billion to $3.1 billion in operating income compared to $3.7 billion last year.
Unfortunately, Olsavsky won't break out how much of the expense growth this quarter can be attributed to the shift to one-day shipping. "It's very hard to pinpoint exactly the lines between one-day and other cost issues," he said. And considering Amazon is continually investing to improve its first-party logistics capabilities, that could blur the lines even further.
Investors should expect the costs of growing the Prime one-day shipping product selection to affect Amazon's bottom line for a long time. "When the dust settles," Olsavsky assured investors, "we will regain our cost efficiency over time."
Investors can already see the positives
While the costs are rising, so are sales for Amazon's retail business. North American sales increased 20% year over year, up from 17% in the first quarter. Some investors have expressed fear regarding Amazon's slowing retail sales, but one-day shipping appears to have helped it win more sales that may have gone to more convenient competitors.
Olsavsky noted that the average selling price of goods sold during the quarter declined. That suggests shoppers are buying more convenience items. "I think what you're seeing is just a lot more products enter the consideration set for our customers," Olsavsky told analysts. "So things that maybe they can't wait 2 days on, they can wait 1 day, and it lights up a whole separate usefulness for the Amazon site."
That was one of the major points Olsavsky brought up during the prior earnings call, after announcing Amazon's plans to shift to one-day shipping. If consumers can get more use out of their Prime membership by having the ability to receive convenience items the next day, suddenly, Amazon becomes a lot more valuable. While they're buying convenience items, they might buy some other things as well, and those sales could've gone to Amazon's competitors in the past.
Lower average sales prices will have a negative impact on Amazon's margins in the near term, as Amazon ships out more packages with items that cost just a few dollars. Long term, though, the increased engagement from both buyers and merchants/vendors as well as Amazon's improved logistics capabilities should help boost the average value of items in each shipment, so the costs don't cut into margins as much.
Investors may have been scared by the earnings miss and disappointing outlook, but one-day shipping is a major evolution for the company. The negative impact of the increased costs involved has overshadowed the significant impact one-day shipping has already had on Amazon's sales growth in just a month or so of its nationwide rollout.