Amazon.com Inc. isn’t content to rest on its laurels; the retail giant routinely flexes its muscles in ways that force the rest of the retail industry to adjust.
Few moves exemplify that power more than the retailer’s April announcement that it planned to spend $800 million to offer members of its Prime loyalty program free one-day shipping.
The change drove consumers to buy more on Amazon, as its second-quarter sales jumped nearly 20%. But the rapid shift was a “shock to the system,” said Brian Olsavsky, the retailer’s chief financial officer, during a conference call with analysts. For example, Amazon’s shipping costs rose roughly 46% during the third quarter, which contributed to the retailer’s first quarterly profit decline in more than two years.
However, those investments were a “short-term pain for long-term gain” and were necessary to help the retailer better compete with retailers that operate physical stores, says Charlie O’Shea, a Moody’s analyst who covers Amazon.
Amazon’s investments to speed up fulfillment are in line with its long-term approach. The retailer has long spent heavily on shipping and fulfillment; it spent $27.70 billion on the direct cost of shipping items to consumers last year, up 27.6% from 2017. That total doesn’t include the expenses Amazon incurs from its extensive fulfillment network or staffing those facilities; those expenses totaled $34.03 billion last year, up 34.8% compared to the previous year. Combined, Amazon spent $61.73 billion on shipping and fulfillment expenses last year, which was 28% of its total operating expenses. And that heavy spending is helping Amazon send shockwaves across the industry.
Amazon’s fulfillment-related expenses are growing as the retailer builds out its distribution network…
To get immediate access to the rest of this article, sign up for a free Strategy Membership using the Join for Free button below. If you’re already a member, please sign in.
Want to read more? Unlock Free Strategy Membership