Amazon’s $800 million investment in one-day delivery has resulted in an earnings miss for the second straight quarter, but beyond Wall Street’s panicky reactions, the e-Commerce giant is proving its willingness to put its money where its mouth is, even at the risk of falling profits.
Q3 net income dropped 26% to $2.1 billion, marking Amazon’s first profit decline since 2017, which set off the alarms for investors. But while total operating income also dipped, from $3.7 billion in Q3 2018 to $3.2 billion in Q3 2019, this number remained above its guidance for the quarter. The decline is directly attributable to future-focused investments in its retail business, according to Jack O’Leary, Senior Analyst at Edge by Ascential.
“One-day delivery has resulted in fulfillment expenses ballooning, rising 23% year over year and weighing on these closely watched profit figures,” said O’Leary in commentary provided to Retail TouchPoints. “But this effort has also reignited the slowing online retail business to the tune of 20.6% growth this quarter compared to last year. Shoppers are loving accessing more items more rapidly, and we see this period as a return to growth orientation versus margin expansion for Amazon. To put these growth figures in context, Q4 2018 saw year-over-year growth of online sales of only 12.6%, and that figure has dipped as low as 9.5% growth for Q1 2019 (shortly before the one-day delivery expansion).”
Amazon’s one-day delivery investment is clearly influencing shipping costs, which surged 46% to $9.6 billion. As Walmart, Target and Best Buy all develop their own same-day or next-day shipping initiatives, it’s hard to imagine Amazon taking its foot off the pedal any time soon. In an earnings call, CFO Brian Olsavsky disclosed that Amazon plans to spend $1.5 billion in Q4 related to the one-day shipping initiative. Already, more than 10 million items now qualify for Amazon’s one-day free shipping.
“Amazon is thinking long-term for its Amazon Logistics (AMZL) division and its goal is to own end to end all of its shipping needs, from warehouse to last mile,” said Jon Reily, VP, Global Commerce Strategy Lead at Publicis Sapient in commentary provided to Retail TouchPoints. “The question is, will Amazon follow its previous pattern of creating a program or service to solve its own needs, and then once perfected offer that service to outside customers? This has been a pattern for Amazon in the past with AWS and Amazon Advertising. Is AMZL next? My bet is yes.”
Despite the income concerns, overall sales have not been an issue for the e-Commerce giant. Amazon reported total revenue of $70 billion in Q3, up 24% year-over-year and still more than $1 billion ahead of Wall Street analysts’ estimates.
Amazon Web Services (AWS) continues to be the chief profit driver for Amazon, with the cloud computing providerdelivering 71% of the company’s total operating income and 13% of its total revenue. AWS saw revenues increase 35% to $9 billion in the quarter, although growth has continued to stagnate — this is the fifth straight quarter AWS growth has slowed.
The Q3 news comes after Amazon revealed some new growth plans. Amazon is expanding Counter, a network of staffed pickup points at partner locations, to thousands of GNC, Health Mart and Stage Stores locations. Additionally, Amazon acquired a health care startup, Health Navigator, to provide symptom-checking tools that can help with remote diagnoses and with triage, helping patients figure out whether to stay at home, see a doctor or go straight to the emergency room.