Amazon Profits Fall – Is Delivery to Blame?

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By Published On: October 25, 20190 Comments

Amazon released its earnings for the last quarter - the profits have fallen for the first time in two years, with many putting the blame on its free one-day delivery options. 

Amazon’s profits have fallen in the last quarter and are expected to drop even further during the Christmas season. This news sent its shares down by seven per cent in trading.

Amazon has been on a series of profit rises until the last quarter. But in an effort to push the packages from the warehouse to a customer’s doorstep in one day, the increase in spending for its Amazon Prime shipping may have halted the growth in profits. In 2018, Amazon experienced a profit of $10 billion, which is more than triple of its previous records, but the aggressive introduction of delivery services may play a huge role in the slip in profits for the tech giant.

Amazon has arguably been one of the most influential retailers for the world when it comes to delivery. They have introduced various forms of free delivery services to its Amazon Prime members, as well as initiatives including Amazon Flex. Jeff Bezos, the Chief Executive of Amazon suggested that these same-day delivery services are better for the environment and will continue to execute them. “Although it’s counterintuitive, the fastest delivery speeds generate the least carbon emissions because these products ship from fulfilment centres very close to the customer – it simply becomes impractical to use air or long ground routes,” he explained.

Why the Price Hike?

The operations behind the same-day delivery service play a huge price, as the expenses rose 26 per cent to stay afloat of its promises. This means that the shipping costs rose 46 per cent to USD 9.6 billion.

Moreover, in an effort to get these products to the customer’s doorstep (or car boot) on the same day that they order the product, Amazon had to hire an influx of new employees. Amazon’s cost for the increased workforce, especially the AWS infrastructure, was a needed expense for the company. The AWS data centre cost rose 28 per cent to USD 9.2 billion, and the number of employees within Amazon increased by 22 per cent to 750,000 people.

What does this mean for investors? According to the projected revenue estimate, Amazon is falling short of USD 1 billion or so, as it’s expected to rise from USD 80 billion to USD 86.5 billion. The estimated analyst value was set at USD 87.1 billion, which suggests some trouble with growth as the last few years have shown.

Will Amazon Continue its Delivery Promises?

In short, yes. Amazon isn’t slowing down with its delivery promises, with Jeff Bezos explaining the reasoning behind the amping up of delivery times for its Prime members. “Customers love the transition of Prime from two days to one day – they have 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,” he explained.

“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.  “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.”

Despite the profits dropping, sales have risen by 24 per cent and hit a value of USD 70 billion. Amazon expects its sales to rise again from 11 per cent to 20 per cent in the next quarter, but the increase in Japan’s consumption tax may weaken the purchase rate during the Christmas season.

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About the Author: Power Retail

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