Amazon (AMZN 1.29%) announced plans to move its Prime shipping benefit from standard two-day shipping to one-day shipping about six months ago, and it started rolling out the expedited service at the start of June. The company now has two earnings reports detailing the impact of the faster shipping speeds on the business, and it's quite noticeable. Amazon's third-quarter results disappointed investors as earnings fell below expectations. But the online retailer saw excellent top-line growth that should excite long-term investors.
Diving into the company's earnings report and management's commentary can give investors a better idea of the impact of one-day shipping on Amazon's financial results so far and what to expect in the future.
Image source: Amazon.
Accelerating retail sales
Amazon has seen its retail sales accelerate across every reporting segment in each of the last two quarters.
|
Segment |
Q1 2019 Growth |
Q2 2019 Growth |
Q3 2019 Growth |
|---|---|---|---|
|
North America |
17% |
20% |
24% |
|
International |
16% |
17% |
21% |
|
Online stores |
12% |
16% |
22% |
|
Third-party seller services |
23% |
25% |
28% |
|
Paid units |
10% |
18% |
22% |
Data source: Amazon Q3 2019 earnings release.
CFO Brian Olsavsky says the introduction of one-day shipping has been a key part of the accelerating growth. "We're very pleased with the customer response to One Day. You can see it in our revenue acceleration and also in our unit growth acceleration," he said during the company's earnings call. He later noted that the reduced threshold for Prime shipping benefits on some lower-priced items also led to an acceleration in paid units.
The latter is key in Amazon's attempt to take market share from physical retailers for more consumer staples and convenience items. If you run out of dishwasher detergent, for example, you might make a run to the store so you can run the dishwasher tomorrow. But with one-day shipping, Amazon can win that sale. The paid unit growth results indicate the strategy is working.
Olsavsky's fourth-quarter outlook indicates the acceleration might not continue through the holiday season. Amazon has historically seen revenue growth decline from the third quarter to the fourth quarter, as shoppers have regularly chosen Amazon for typical holiday shopping. Olsavsky also notes a few headwinds, particularly internationally, from the timing of the Indian holiday Diwali and an increase in consumption tax in Japan that pulled sales forward into the third quarter.
Big spending
Olsavsky originally said Amazon would spend an additional $800 million on speeding up delivery for its customers in the second quarter. In his update three months ago, he said spending exceeded his expectations, and that number would grow in the third quarter. He says the fourth quarter will see a "penalty" of $1.5 billion for the increased cost of one-day shipping.
Indeed, the increased shipping spend was the biggest drag on Amazon's profit for the last two quarters, leading the company to miss analysts' expectations for net income.
Here's how fulfillment and shipping expenses have accelerated over the last two quarters.
|
Line Item |
Q1 2019 Growth |
Q2 2019 Growth |
Q3 2019 Growth |
|---|---|---|---|
|
Fulfillment expense |
10% |
17% |
23% |
|
Shipping costs |
21% |
36% |
46% |
Data source: Amazon quarterly reports.
A lot of those expenses are transitory. Olsavsky said:
We have temporary costs in the short run as we do things like forward deployed inventory, get greater inbound into those warehouses, set up new Amazon Logistics (AMZL) capacity, staff multiple shifts, so that we can have later pull times to hit One Day cut-offs, things like that, adding sort centers. So it's a drastic change to the whole network topology.
Long term, Amazon should grow into the higher shipping costs and ultimately show greater efficiency from greater forward-deployed inventory (i.e., more inventory closer to customers homes) and greater Amazon Logistics capacity. Olsavsky declined to comment on the path of the expense growth but did note, "We've been down this road before." Sure enough, Amazon's major investments in shipping and fulfillment capacity about five years ago have led to strong results since.
The early results should provide encouragement to long-term investors that the strategy for one-day shipping is paying off. While the company's bottom line is suffering, and Olsavsky's fourth-quarter outlook seemed a bit disappointing at first blush, the impact of one-day shipping should be a net positive for the company over time.
