Amazon – delivery at a price

Another quarter of double-digit growth in net sales as Amazon continues to grow at full steam.

Milkman in honored to welcome Cathy Morrow Robertson, Founder and Head Analyst at Logistics Trends & Insights LLC and one of the brightest voices in our delivery sector. This is her first article for our Blog and from now on you can expect to read her contributions monthly. Personally we look forward to it.  

Another quarter of double-digit growth in net sales as Amazon continues to grow at full steam. In particular thanks to its AWS segment which noted the biggest gain in net sales growing at almost 50% to $6.1 billion. Indeed, as noted recently in a WSJ article, Shaleen Devgun, chief information officer Schneider National Inc. noted, “Transportation and logistics companies have to become technology companies.”

Flip Mr. Devgun’s quote around and you have Amazon, a technology company that has become a transportation and logistics company. From its fulfillment facilities, to tracking apps to managing transportation between facilities as well as consumers’ and business’ front doors, AWS is behind it all.

However, Amazon has discovered that transforming into a new and unique type of transportation and logistics company comes at a price particularly within final mile delivery. During the recent second quarter which ended June 30, shipping costs, which include sortation and delivery center and transportation costs, increased 30.4% to $6 billion. For the first half of 2018, shipping costs increased 34.4% to $12.1 billion. As noted in its SEC filing, “We seek to mitigate costs of shipping over time in part through achieving higher sales volumes, optimizing our fulfillment network, negotiating better terms with our suppliers and achieving better efficiencies. We believe that offering low prices to our customers is fundamental to our future success and one way we offer lower prices is through shipping offers.”

Among those shipping offers is Prime, Amazon’s subscription service which includes free 2-day shipping and in some cases, same day delivery. According to a survey by The Diffusion Group, 79% of Prime members said that the free two-day shipping perk is the “primary reason” why they pay for Prime. With about an estimated 95 million members in the U.S., Consumer Intelligence Research Partners, LLC estimates Prime is growing at about 12% a year, a slowdown compared to a 35% growth seen between 2016 and 2017. This could be the result of Amazon reaching a saturation point here in the U.S. and one reason why they are paying even more attention to overseas opportunities. During the recent quarter, Prime free same-day delivery was expanded to select cities in Italy and Spain and to Australia. In addition, Amazon Business expanded to Italy and Spain and now serves businesses in eight countries including the U.S., the U.K., Germany, Japan, India and France. According to its press release, Amazon Business ships to business customers in over 70 countries worldwide.

While Amazon dominates U.S. e-commerce, International is a bit more difficult. For the second quarter, net sales increased 27.2% to $14.6 billion but expenses increased 40.2% to $4.6 billion for a loss of $494 million, but down from $724 million loss for the same period 2017. Amazon is increasingly finding out that the rest of the world is not like the U.S. Challenges with infrastructure, unions and competition and more are resulting in Amazon retooling their logistics to meet challenges in countries it is in. Whether it is partnering with 3PLs for final mile delivery or fulfillment or doing it all themselves, each country is unique in how Amazon operates.

Delivery will continue to be a challenge for Amazon as it enters the second half of 2018. The third quarter began on a high note in terms of sales as Amazon hosted its 4th annual Prime Day on July 16. Deemed a ‘record breaking’ event, more than 100 million items were purchased while small and medium-sized businesses selling on Amazon exceeded $1.5 billion in sales during the Prime Day event.

To deliver all of those packages and more as we near the all-important peak season towards the end of 2018, Amazon will ramp up its Amazon Flex service, utilize its NVOCC licenses for cross-border deliveries, optimize its road and air services and roll out its latest service offering that helps entrepreneurs build their own companies by delivering Amazon packages. Business owners will be able to access Amazon’s delivery technology and package volume, as well as receive discounts on such assets and services as vehicle leases and comprehensive insurance. Additionally, Amazon committed $1 million to fund startup costs for eligible military veterans to start their own delivery businesses. A potential costly offering but one that could reap great benefits including a delivery network similar to that of FedEx’s and most important, data.

So, not surprising, Amazon’s outlook for third quarter is bullish with net sales expected to grow between 23% and 31% compared with third quarter 2017. Operating income is expected to be between $1.4 billion and $2.4 billion, compared with $347 million in third quarter 2017. And yes, the company will continue expanding services worldwide but at a price.

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