In the first quarter since Amazon.com Inc. announced plans to transform its Prime loyalty program into a one-day free shipping offer, the retail giant’s sales jumped nearly 20%.
The change drove consumers to buy more on Amazon. But it was also a “shock to the system” as Amazon, No. 1 in the Internet Retailer 2019 Top 1000, exceeded the $800 million it planned to spend on the change, said Brian Olsavsky, the retailer’s chief financial officer, during a conference call with analysts.
“We saw some lower productivity as we were expanding rather quickly,” he said. “We also saw some costs from [our need to] buy more inventory and move inventory around in our network to have it be closer to customers.”
Amazon’s one-day shipping push did put a damper on the company’s bottom line. After the retailer’s profit more than doubled in the first quarter, its net income growth rose just 3.6% in the second quarter compared with the year ago period. Amazon’s investments are a “short-term pain for long-term gain” that is necessary for the retailer to compete with physical retailers, says Charlie O’Shea, a Moody’s analyst who covers Amazon.
The retailer is in the “middle of the journey here,” Olsavsky said, noting that Amazon’s one-day shipping volume accelerated throughout the quarter. And it expects that volume to continue to grow over the next few quarters in North America and around the world.
Amazon’s growth was bolstered by its ever-growing marketing spending. Amazon’s marketing costs rose nearly 48% year over year to $4.291 billion in the second quarter ended June 30. For the sake of comparison, that’s more than luxury giant LVMH, No. 20, generated in online revenue in all of last year.
At the same time that Amazon is boosting its marketing spending, it is also rapidly growing its own advertising business. The retailer reported $3.002 billion in revenue in its “other” revenue category, which is largely made up of Amazon Advertising. That’s nearly a 37% increase from the same period a year earlier.