Amazon's push for one-day delivery dents profit as costs soar
By Akanksha Rana and Jeffrey Dastin - Jul 26th, 10:16
Amazon.com reported its first profit miss in two years and said income would slump in the current quarter, as the online retailer ramps up spending to deliver goods faster and spark sales growth.
Shares fell more than 2% in after-hours trade.
Seattle-based Amazon has drawn more than 100-million paid subscribers to its loyalty club Prime by releasing original TV shows, equipping more gadgets with its voice assistant Alexa and offering quick shipping for countless goods, including groceries from its subsidiary Whole Foods Market.
Now, it is investing heavily to halve delivery times to one day for Prime members, in an effort to stay ahead of rivals such as Walmart that have marketed two-day shipping with no subscription fees.
CEO Jeff Bezos said in a news release that the company’s sales growth was accelerating, citing one-day delivery. The cost of that programme slightly exceeded the $800m Amazon had forecast it would spend in the second quarter, CFO Brian Olsavsky said on a call with reporters.
“Right now we are seeing an increasing and ramping cost penalty, and that’s what’s built into the Q3 guidance,” Olsavsky said, adding that the company would continue to roll out one-day delivery in North America and Europe in the coming quarters.
Revenue for the world’s largest online retailer jumped 20% to $63.4bn in the just-ended second quarter, Amazon said.
Analysts were expecting $62.5 billion, according to IBES data from Refinitiv.
The growth, still smaller than a year prior, partly reflects the changing nature of Amazon’s business. The company is gradually moving away from low-margin retail toward a marketplace model where it collects lucrative fees for helping other merchants on its site ship and advertise their products.
Revenue from seller services grew 23% to $12bn in the second quarter, while ad and other sales increased 37% to $3bn.
Though profitable — Amazon earned $2.6bn in the quarter versus expectations of $2.8bn — its dual retail and marketplace business model has drawn scrutiny.
Earlier in July, the European Commission launched an antitrust probe into whether Amazon’s use of other merchants’ data offered an unfair advantage to its retail unit, which has made private-label versions of popular products.
The US justice department also said on Tuesday it would look into whether Big Tech engaged in any anti-competitive practices, including in online retail.
Meanwhile, Amazon’s cloud unit slightly slowed its breakneck pace of growth from enterprises paying the company to store their data and handle their computing operations. Sales for Amazon Web Services rose 37% to $8.4bn in the second quarter. AWS growth rate has been consistently above 40% since 2015.
AWS is now at a $33bn revenue run rate, up from $24bn this time in 2018, Olsavsky said.
“We’re growing faster than anyone” on a dollar basis, he said.
This was no help to Amazon in offsetting an uptick in investments that it planned for this year. On top of its bet on faster shipping, the company, as usual, is expected to spend more in the current quarter to prepare for the winter holiday shopping season. It has hoped more marketing would drive sales, too, most recently putting on a concert with pop star Taylor Swift to promote Prime Day, its summer sales event.
These bets and others further afield, like its investments in electric and self-driving car companies earlier this year, show how Amazon has been happy to forgo short-term profit for a chance at future market dominance.
The company for years was known for having roller-coaster results. While the rise of its profitable cloud and advertising businesses allayed most investor concern and its 2017 investments paid off through 2018, Amazon has said it would step up spending again in 2019.
Overall for the third quarter, Amazon said it expects operating profit will be between $2.1bn and $3.1bn versus $3.7bn the year prior. Analysts were expecting $4.4bn, according to analytics firm FactSet.Business Live
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