Amazon’s One-Day Prime Shipping Was a Drag on Earnings — Here’s Why the E-Giant Is Still Betting On It

Amazon.com Inc.’s streak of record-high earnings has hit a snag: The e-giant posted Q2 profits of $2.6 billion, or $5.22 per share — significantly missing consensus bets of $5.56.

When it released its results yesterday, the Seattle-based retailer noted that its profitability was hit by higher shipping costs, particularly its newly rolled out one-day Prime shipping service. (Amazon announced in April the switch from two-day delivery to one day for Prime members at no additional charge.)

The company had estimated logistical costs of $800 million to support one-day delivery, adding in its Q2 call with analysts that it had spent “a little bit higher than that number in total cost” with its global shipping expenses climbing 36% in the quarter. However, Amazon is still betting on its investment to solidify its place on the front lines of the retail wars both online and in stores.

“We’ve seen this before,” said CFO Brian Olsavsky, citing the introduction of its two-day Prime shipping service in 2005. “It does create a shock to the system… But when the dust settles, we will regain our cost efficiency over time.”

The online giant expects to see the biggest change in its North American market, where the standard has been two-day shipping. With the faster delivery option, Olsavsky explained, customers might be persuaded to spend more of their hard-earned dollars on Amazon.com versus other e-commerce players as well as brick-and-mortar rivals like Walmart and Target.

“It strengthens your purchase decision,” he said. “It strengthens the need to not have to go elsewhere to buy a product because you need it quickly. So I think it becomes a part of your routine.”

Last year, Amazon raised its annual Prime membership from $99 to $119 as it continues to expand on perks such as free access to streaming TV and films, unlimited reading and exclusive deals as well as same-day delivery for eligible zip codes.

“I think what you’re seeing is just a lot more products enter the consideration set for our customer, so things that maybe they can’t wait two days on, they can wait one day — and it lights up a whole separate usefulness for the Amazon site,” Olsavsky added.

Overall, Amazon’s Q2 revenues increased 20% to $63.4 billion — a bright spot for the company on the heels of a successful Prime Day event and ahead of the crucial back-to-school and holiday shopping seasons.

“The first time we started discussing the rollout of one-day, our first thoughts went to Q4 of this year and our capability for holiday as much as Q2 and Q3, so we are confident that we will have the ability to handle seasonal demand,” Olsavsky said.

As of Friday morning, Amazon’s stock was down 2% to $1,932.

Watch the highlights at the 2018 FNAAs.

Want more?

How Prime Day 2019 Stacked Up Against Years Past — For Amazon and Its Rivals

Amazon Prime Day Wars: Do Competing Sales Really Work?

Access exclusive content