Free next-day shipping hits Amazon in its bottom line

Discussion
Photo: Amazon.com
Oct 25, 2019
George Anderson

Amazon.com doesn’t frequently report quarterly earnings that disappoint Wall Street, so yesterday’s announcement that the e-tail giant posted earnings of $4.23 a share in the third quarter, down from $5.75 last year, has investors taking notice. Amazon’s earnings miss is being tied to the company’s switch from free two-day shipping for Prime members to next-day delivery.

While some investors may be concerned — Amazon’s share price fell after the announcement — the company has often put market share gains ahead of short-term profitability in the past. Is Amazon looking to do the same with free next-day shipping? Will the amount of added business from existing Prime members plus the addition of new ones take sales away from rivals and put Amazon in an even stronger competitive position a year from now?

Amazon founder and CEO Jeff Bezos appears confident that free next-day delivery is the very edge his company needs to succeed heading into the Christmas selling season and beyond.

“We are ramping up to make our 25th holiday season the best ever for Prime customers — with millions of products available for free one-day delivery,” said Mr. Bezos in a statement. “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.” 

On the company’s earnings call yesterday with analysts, CFO Brian Olsavsky said the expense of moving to next-day delivery has been in line with Amazon’s expectations to date. He also expressed confidence that Amazon would perform well during the holiday season even though the company’s forecast for the fourth quarter was below analysts’ expectations.

“The ops team has really done yeoman’s work here to create this capacity for us and they continue to unlock additional capacity daily,” said Mr. Olsavsky (via Seeking Alpha). “We’re expecting that it will be a great help to customers in Q4. We have seen Prime members increase their orders, spend more, so they must also see it as a real help to them in their daily lives.

Amazon rivals Best Buy and Walmart have countered with next-day delivery programs of their own.

DISCUSSION QUESTIONS: Do you think the math for free next-day delivery adds up to a win for Amazon in the short- or long-term? How do you expect free next-day delivery from Amazon, Best Buy and Walmart to affect their competitors large and small?

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"The math absolutely works for Amazon in the long-term by continuing to build deep loyalty with their core customers."
"Amazon is attempting to lead its competitors over a cliff and only Amazon has the financial wherewithal to sustain the landing."
"Urban streets are blocked, cars and trucks sit idling, the carbon footprint of same day/next day/two day delivery are environmentally unsustainable."

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23 Comments on "Free next-day shipping hits Amazon in its bottom line"


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Paula Rosenblum
BrainTrust

Amazon has bought a LOT of vans down here in Miami. Yes the stuff comes more quickly but, more importantly, the company is using less packaging. That will pay them dividends.

Honestly, I don’t much care about one-day shipping except on very rare occasions. I don’t see it as a differentiator. But if Amazon can cut back on its packaging, that will be a huge boon to profits.

P.S. You can’t tell me Prime Day didn’t have an impact on profits. That’s just silly.

Neil Saunders
BrainTrust

The same in Scottsdale/Phoenix, Paula: Amazon has loads of vans tootling around the roads delivering stuff. Last year I saw none.

Lee Kent
BrainTrust

I’m totally with you Paula! Next day delivery is great to offer, but I’ll bet many customers don’t care so I would suggest that Amazon ask before they ship. That little bit of difference/savings could really add up. And looking for other places for savings, like packaging, is where I would put my 2 cents.

Mark Ryski
BrainTrust

The cost of next-day delivery is painful and even the mighty Amazon is feeling the pinch. But let’s keep this in perspective – Wall street expected $2.9 billion in quarterly net profit, and Amazon only did $2.1 billion. Amazon is winning the battle for next-day delivery and it has a war chest of AWS profits to help it fight. And while the other major players like Walmart and Target will certainly look for a way to neutralize this next-day advantage, the number and size of players who can compete with next-day is limited, as the costs for providing this level of service will take its toll on the P&Ls of the retailers who try to compete with Amazon on next-day delivery.

Doug Garnett
BrainTrust

I agree about the amounts – they’re not inconsequential. But 3 percent profit? This despite a 24 percent increase in revenue?

Amazon seems to have us trained to believe any profit is magical for them. Yet Microsoft returned a 30 percent profit this quarter. Apple delivers similar. Amazon’s percentage of profits is on par with a housewares manufacturer like Hamilton Beach — a known very tough business.

Oliver Guy
BrainTrust

The one-day shipping from Amazon is almost too easy. It creates a huge expectation in the eyes of the consumer and others have to follow suit. In the long term I question how sustainable it is – both financially and environmentally – mumblings are starting already about the environmental impact of these deliveries. At some stage consumers are going to start thinking about it. Many might argue that Amazon and others have a duty of care to highlight the overall impact of one-day delivery versus alternatives.

Perhaps retailers need to start offering discounts to customers who choose not to have it delivered inside a day. I have had these discussions with customers who have actually said they would like to do this but there have been “system constraints” stopping them.

Neil Saunders
BrainTrust

Free one-day delivery helped Amazon win on the top line. Orders and revenues of product sales rose at a faster clip than in the past year. Our data also shows existing customers are ordering more frequently, especially on urgent purchases. However, there has been a cost on the bottom line because shipping expenses were up by $3 billion over last year.

The danger here is that this is all a race to the bottom as other retailers join the free next day bandwagon. This will undercut some of Amazon’s differentiation and will also affect those retailers’ profit margins. In this war of attrition the question is who can absorb this best and hold out the longest. The answer is probably Amazon and potentially Walmart.

Shep Hyken
BrainTrust

Moving to next-day costs in the short term and will pay off in the long term. Jeff Bezos has always been willing to trim margins to create a better experience for the customer. This is classic Bezos – focusing on the customer at the expense of a little profit. Obviously, not all the profit!

Mohamed Amer
BrainTrust

Amazon’s top line numbers did not disappoint, but it’s the softer Q4 guidance that triggered concerns. One-day delivery efficiencies will continue to improve as more orders flow through their shorter distribution network in Q4. Amazon is purposely pushing the operational envelope in order to establish higher consumer expectations while increasing the cost and complexity for the competition.

Jeff Sward
BrainTrust

“Free” is such a wonderful word. It seems to eliminate so many barriers. Except in this case it’s not really “free.” It’s subsidized. Amazon absorbs the cost and “invests” in market share growth. One can only hope that their execution can keep pace with the demand they are creating. So far so good. And now the coming holiday season will provide the next critical pass/fail test.

Shelley E. Kohan
BrainTrust

The math absolutely works for Amazon in the long-term by continuing to build deep loyalty with their core customers. While the expenses may be more by offering next-day shipping, Amazon is working hard behind the scenes to reduce other costs to mitigate the increase on the front side. For example, their recent move to combine return shipments at UPS stores making the returns less costly for Amazon than individual returns. Free next-day delivery will impact the retail landscape and raise consumer expectations. For smaller niche brands the way to combat next-day delivery without losing money is offering differentiated products that the consumer values and will not mind waiting a day or two for the package. On the consumables side, offering subscription delivery can also help to relieve retailers of sending expedited shipments.

Anne Howe
BrainTrust

One-day delivery is not the differentiator for me. I can wait an extra day. The power of the brand and the statements Amazon can make by changing their massive ops structure to make it real is darn impressive. I’ll still keep paying for Prime, and reap the other benefits.

Steve Montgomery
BrainTrust

There is little doubt that Amazon’s next-day delivery had two impacts. The first was on Amazon’s profits. What the article didn’t mention was the impact on Amazon’s Prime membership. Did it go up, stay the same, etc.? The second is it will force other retailers to match this service, find an alternative such as Oliver mentioned or run the risk of losing those customers who feel the need for next-day delivery.

Ken Cassar
BrainTrust

Amazon is attempting to lead its competitors over a cliff and only Amazon has the financial wherewithal to sustain the landing. It is far from clear that one day makes an appreciable difference to consumers. Competitors should be careful before following Amazon’s lead here.

Ralph Jacobson
BrainTrust

Nothing is ever free in retailing. At least one supply chain participant needs to cover costs, and that often includes the end consumer. In this case, these costs might be laid to blame for the earnings miss, however it definitely got the shoppers’ positive attention. Perhaps a cost of doing business these days?

Doug Garnett
BrainTrust

There is no math that adds up to a win with free next-day delivery. It continues to boggle my mind that anyone thinks premium services should be offered for free as a long term approach to success. Short term? Maybe as a gimmick to grab new customers or new headlines.

Bezos has often been wrong about consumers. We so quickly forget that his opportunity was NOT in our margin – it was in AWS, content, and Amazon branded devices. So we shouldn’t be surprised when eventually it turns out Amazon moves away from free next-day shipping.

Who knows what the future holds for Amazon. They’re just fortunate to have found an extraordinarily high margin business like AWS to continue to fund their loss-leading attempts to be in retail.

Ryan Mathews
BrainTrust

Back in simpler times, there used to be an old industry joke about the grocer who advertised T-bone steaks for 15 cents a pound. A neighboring businessman stopped by to see him, confused about what his friend, the grocer, was doing. “Aren’t you losing a lot of money at 15 cents a pound?” the business man asked his friend. “Of course,” the grocer confidently replied, “but you should see the increases in volume.” This week we spoke about Best Buy and Walmart moving up delivery windows and accelerating deal periods. I wrote then that the problem was that next-day delivery isn’t seen as a benefit by consumers, just table stakes to win their business. The more convenient Amazon makes it to buy, the more they sell. And the more they sell with next-day delivery, the more money they will lose. At best, this is a war of attrition only those with deep, deep corporate pockets can fight and win — at a huge cost to themselves.

Rich Kizer
BrainTrust

My thought: they had $2.1 billion in profits. Not too shabby. Seems to me that Jeff Bezos has always followed the path of focusing on growing Amazon long term over quick profits. That obviously doesn’t sit well with short term investors. I know that Amazon keeps a tight eye on competitors, and that viewpoint most certainly moves Amazon in looking for ways to create its advantages. Amazon won’t sit back in this environment. And shouldn’t!

Ed Rosenbaum
BrainTrust

I see many Amazon vans on the road today. That can’t be inexpensive, especially when they are Mercedes vans. The main point is Amazon is building huge customer loyalty with next-day delivery. Because of their deep pockets, it will make it difficult for others to follow without a larger profit loss.

Lisa Goller
BrainTrust

Amazon keeps raising the bar, conditioning consumers to expect speed. Last-minute holiday shoppers will particularly love free, next-day delivery. With AWS as its cash cow, Amazon can afford to fund fast delivery over the short term to stay competitive with retail’s biggest giants over the long term.

Paco Underhill
BrainTrust

I am deeply troubled by delivery issues. Outside my NYC office window, I see the sidewalk where someone is sorting Amazon packages. Urban streets are blocked, cars and trucks sit idling, the carbon footprint of same day/next day/two day delivery are environmentally unsustainable. However digital they may be at the front end, the view from the street is still 20th/19th Century analog. When and how are we going to get to a better solution/system? My 2 cents.

Liz Adamson
BrainTrust

Jeff Bezos has always prioritized market growth and being first to market over profits and will continue to do so. By being first to market for free next day shipping (with a membership) they have raised the bar that other retailers like Target and Walmart will at some point need to catch up with as customers begin seeing next day shipping as the norm. Whether it’s delighting customers or simply staying one step ahead of its competition, Amazon will continue to invest their profits into testing new and different initiatives.

Craig Sundstrom
Guest

I suspect this is where we reach “irreconcilable differences” between the numbers people and the marketing people. The former say that in the long run, you can’t make money by giving away even more of it, while the latter insist you can … or that’s this numbers guy take on it, anyway.

I think the answer, ultimately, is whether or not Amazon can achieve a “last man standing” status where it has virtually a monopoly on online sales, and thus an ability to cover shipping and handling thru higher prices (even if the former is still technically “free”).

It’s not something I’m sure can happen, and no one except Amazon shareholders should want to happen.

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Braintrust
"The math absolutely works for Amazon in the long-term by continuing to build deep loyalty with their core customers."
"Amazon is attempting to lead its competitors over a cliff and only Amazon has the financial wherewithal to sustain the landing."
"Urban streets are blocked, cars and trucks sit idling, the carbon footprint of same day/next day/two day delivery are environmentally unsustainable."

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