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What a September Prime Day Means for Amazon Investors

By Adam Levy - May 23, 2020 at 12:30PM

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Delaying Prime Day will have a significant impact on earnings and the competition.

Amazon (AMZN -1.85%) has been forced to delay its Prime Day shopping holiday, typically held in mid-July, as it faces an unexpected surge in demand. With the coronavirus pandemic leading to more online shopping, Amazon has had to make several moves to limit the sale of items it doesn't deem essential. One move was a pullback on marketing spend and changes to its website to stop promoting related items to those already in a shopper's cart.

The ultimate marketing event for Amazon is Prime Day. The company promotes thousands of deals to draw in customers and convince them to sign up for its unlimited shipping service. But due to the surge in demand, Amazon is delaying the event until September, according to a report from The Wall Street Journal.

September is about as late as Amazon could delay Prime Day without cancelling it altogether. But the delay will come with considerable costs. Not only will it require Amazon to either hold or sell inventory at a loss, it will delay Prime signups and offer competitors like Walmart (WMT 0.11%) and Target (TGT -2.69%) an opportunity to win over customers in the summer months.

An open Amazon box on a table

Image source: Amazon.

September or bust

Prime Day is designed to bolster sales at Amazon during a seasonally weak shopping quarter. The last time I checked, September was the last month in the third quarter. So, if Amazon wants to produce sales at all comparable to previous years, September is the latest it can push Prime Day. (Although a lack of third-quarter Prime Day would show investors exactly how big of an impact the event has had previously.)

Amazon also has to consider that if it reschedules the promotional day for any later than September, it'll start overlapping the holiday shopping season that starts in November. It'll run the risk of seeing shopper fatigue for Black Friday sales or customers delaying purchases during Prime Day with the hope of even steeper discounts in November. Either way, it could be setting up investors for disappointment.

Another factor to consider is the competition. Walmart and Target have historically run sales coinciding with Prime Day in order to woo customers who are already planning to do some online shopping. They let Amazon do the heavy lifting of getting them into the shopping spirit.

The two big-box retailers may decide to make a July sales push this summer anyway, which could pull spending away from Prime Day. Walmart and Target aren't nearly as capacity constrained as Amazon given that they can rely on their physical stores. Target fulfilled 80% of its digital orders from its stores in the first quarter, when online sales spiked 141%.

The cost of delaying Prime Day

There are several costs to Amazon for delaying Prime Day.

First, it's storing excess inventory of its devices, which it typically sells as a loss leader on Prime Day. Offloading those at a discount to clear out space in its warehouses will cost it an estimated $100 million, according to a report from Reuters last month. The other option is to hold onto the inventory until Prime Day, but there's opportunity cost involved with that.

Second, Amazon typically signs up millions of new Prime members on Prime Day. With a two-month delay, it'll see a drop in subscription revenue growth. That said, the actual impact of Prime Day is increasingly small as its subscriber base has surpassed 150 million. And it may have pulled forward a lot of subscribers last quarter as more shopping moved online and Prime members started seeing more value in their subscriptions.

Finally, there's the unknown cost of some competitors taking advantage of Amazon's delay to win over customers. Walmart is working on an expansion of its Delivery Unlimited program, that it could promote with a shopping holiday. Target is aggressively growing its online sales. Meanwhile, it's unclear if in-store retail will return to how it was pre-COVID-19. The big-box retailers may be more motivated to grow online sales if in-store sales don't bounce back as expected.

While the delay is necessary for Amazon to have a successful shopping promotion, it comes with significant costs. Still, a September Prime Day is still better than no Prime Day at all.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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