Amazon's (AMZN -1.64%) Prime Day was actually a two-day shopping event on July 12 and 13. The company said in a statement on Thursday morning following the event that it was its best Prime Day ever. Members purchased more than 300 million items worldwide. Not to be undone, Prime members in the U.S. were buying more than 60,000 items per minute.
The record-setting shopping comes as Amazon's online sales face headwinds from the economic reopening that's gaining momentum worldwide. Some shareholders are hopeful that the event's popularity could turn around the troubled segment.
Amazon's fulfillment expenses are rising
In its most recent quarter, which ended on March 31, Amazon reported that online sales fell by 3% compared to the same quarter in the prior year. This is for a segment that increased sales by 43% and 41% in Q4 2020 and Q1 2021. The quick reversal caught management off guard as the company invested in growing capacity to meet the surging sales.
From Q4 2020 to Q1 2022, Amazon has added 324,000 employees to its roster. Amazon's 1.6 million staff members are weighing on its profits as the company paid bonuses and higher wages to attract people during a challenging hiring environment. Meanwhile, Amazon's fulfillment expenses rose 14% in the quarter ended in March, even though the number of units shipped remained flat.
That can partly explain why in its quarter that ended in March, operating income decreased to $3.7 billion from $8.9 billion in the same quarter in the prior year. In its Q1 earnings release, management did not think these headwinds would abate anytime soon, forecasting operating income would fall to $1 billion at the midpoint in Q2 from $7.7 billion in Q2 of last year. Looking at those operating income figures, you can understand why shareholders are hopeful that Amazon's Prime Day results are a harbinger of success for online sales.
Unsurprisingly, reports are coming out that Amazon is decreasing the number of private-label items it will sell on its website. With the price of materials, fuel, and labor rising, these already low-margin products have become an even worse proposition for the e-commerce giant. Its presence in this category has also drawn regulatory pressure. Therefore, the move away from the category could provide a double benefit.
The rebound in online sales will take more time
It will take time, but eventually, Amazon will rightsize its fulfillment operations in line with consumer demand. The company underwent unprecedented changes, with the pandemic first causing an explosion in customer shopping, then abruptly slowing when economic reopening gained momentum. Amazon's customer-first philosophy had it choosing to overinvest rather than scrimp on customer service. It remains to be seen if customers will reward it with their loyalty over the next several years to make those billions of investments worthwhile.
Nevertheless, while the results from Prime Day are great news for Amazon, it's unlikely to have been the catalyst for turning the segment around. That will likely come from a thorough adjustment through employee attrition, an end to the pent-up demand for shopping in person, and raising prices on third parties for using Amazon's fulfillment services.
