Amazon’s push for faster delivery is hurting its profits.
The online retailer said third-quarter profit fell 26 per cent from a year ago, missing Wall Street expectations. Its stock sunk 6.5 per cent in after-hours trading.
Amazon is moving to cut its delivery time in half, to one day instead of two, for Prime members who pay $119 a year (all figures US). The company said that it’s costing the company about $1.5 billion to make the switch, nearly double what it expected.
“It’s a big investment, and it’s the right long-term decision for customers,” Amazon CEO Jeff Bezos said in a statement.
The Seattle-based company reported net income of $2.1 billion, or $4.23 per share, in the quarter ending Sept. 30. That’s 36 cents below what analysts expected, according to FactSet.
Shipping costs are rising faster than before, up 46 per cent to $9.6 billion in the third quarter, Amazon reported, but its revenue beat expectations by rising 24 per cent to $70 billion.
Next-day shipping ‘paying fast dividends on the top line’
The news underscores the costly investment Amazon is making in order to outmanoeuvre rivals such as Walmart that have marketed two-day shipping without subscription fees.
It also reinforces worries that the ongoing U.S.-China trade spat is hurting the U.S. retail industry. Holiday sales typically generate a majority of retailers’ revenue and profit.
Fast delivery on countless goods has helped the world’s largest online retailer attract more than 100 million paid subscribers to Prime, who keep returning to take advantage of their membership and other perks like music and television streaming. Amazon acquired the U.S. grocer Whole Foods, and has rolled out a popular lineup of voice-controlled Echo speakers to lure still more customers to transact with the Seattle-based company. It also offers cloud computing services.
“AWS [Amazon Web Services] has fuelled Amazon’s margin expansion of late, but the continued softening in growth rates will weigh on the company’s profits if they can’t reverse the trend,” said eMarketer analyst Andrew Lipsman. “At the same time, the advertising and commerce sides of the business look very strong as investments in next-day shipping, though eating into the bottom line in the near term, are paying fast dividends on the top line,” he said.
Amazon forecast fourth-quarter net sales in the range of $80-86.5 billion for the crucial holiday quarter. Analysts were expecting revenue of $87.37 billion, according to IBES data from Refinitiv.
Amazon also said it expects holiday-quarter operating income to be between $1.2 and $2.9 billion, while analysts were expecting $4.19 billion, according to research firm FactSet.
Amazon’s business model has drawn some scrutiny. Earlier this year, the European Commission launched an antitrust probe into whether Amazon’s use of other merchants’ data gave it an unfair advantage in retail. Some sellers have complained about Amazon’s ability to create private-label versions of their products, a criticism that U.S. presidential hopeful Senator Elizabeth Warren has echoed.