While Amazon.com Inc.’s sales rose 24% in the third quarter, the retail giant’s transformation of its Prime loyalty program into a one-day free shipping offer put a dent in its bottom line as its net income fell 26%.
The push to speed up its delivery not only led Amazon to miss analysts’ estimates, it also caused Amazon’s first quarterly profit decline in more than two years. Amazon’s shipping costs rose roughly 46% during the quarter to $9.608 billion. Brian Olsavsky, the retailer’s chief financial officer, acknowledged that the costs associated with the shift to one-day delivery have been higher than anticipated. He noted that Amazon expects the effort to cost roughly $1.5 billion during the fourth quarter.
“Back in Q2, I said that we were estimating an $800 million expense tied to one-day [shipping] in Q2, and we actually were just above that in Q2,” he said. “In Q3, we expected that to grow, we factored that into our guidance and we hit essentially where we expected on the guidance. So as we head into Q4, we’ve added what’s just nearly a $1.5 billion penalty in Q4 year-over-year [expenses] for the cost of shipping, which is essentially transportation costs, the cost of expanding our transportation capacity, things like adding additional poles and shifts in our warehouses, the cost for deploying inventory closer to customers. There are a lot of tangential costs but the biggest expense is the actual transportation cost.”
Jeff Bezos, Amazon founder and CEO, acknowledged the expense in a statement that accompanied the retailer’s earnings release, noting that “it’s a big investment, and it’s the right long-term decision for customers.” He added that “customers love the transition of Prime from two days to one day.”
In addition to faster deliveries, Amazon’s sales growth was bolstered by its ever-growing marketing spending. Amazon’s marketing costs rose nearly 44% year over year to $4.752 billion in the third quarter ended Sept. 30. For the sake of comparison, that’s more than Nordstrom, No. 18 in Internet Retailer 2019 Top 1000, generated in online revenue in all of last year. Amazon is No. 1 in the Top 1000.
At the same time that Amazon is boosting its marketing spending, it is also rapidly growing its own advertising business. The retailer reported $3.586 billion in revenue in its “other” revenue category, which is largely made up of Amazon Advertising. That’s nearly a 44% increase from the same period a year earlier.
“We are very happy with the progress in the advertising business and continue to focus on advancing advertising experiences there to provide advertising options that are helpful for customers, that help them to see new products,” Olsavsky said.
However, he noted that Amazon’s advertising business is still in its early days. “What we’re focused on really at this point is relevancy, making sure that the ads are relevant to our customers, helpful to our customers, and to do that, we use machine learning and that’s helping us to drive better, better and better relevancy,” he said.