In its relentless bid to maintain a lead in online commerce, Amazon said Thursday it will shift to one-day shipping as the standard delivery speed for members of its Prime subscription program.
The company currently offers two-day shipping standard as part of the $119-a-year Prime subscription, which also includes media and shopping discounts. The Seattle-based commerce giant intends to spend $800 million in the current quarter to deliver twice as fast.
“We think that that will open up a lot of potential purchases, and open up convenience to those [Prime] customers,” Amazon chief financial officer Brian Olsavsky said.
The announcement came after Amazon reported a record first-quarter profit of $3.6 billion, or $7.09 a share, rocketing past analyst expectations. Net sales for the first three months of 2019 rose 17% from the year-earlier period to $59.7 billion, at the high end of the company’s revenue guidance and in line with analyst expectations.
Olsavsky said the outsize profit in the quarter was a result of operating efficiencies and slower cost growth in Amazon’s network of warehouses and logistics operations, employment and infrastructure investment. Spending growth in those areas had declined significantly in 2018 from the previous two years, when Amazon built up capacity. That decline continued through the beginning of this year.
“We probably overestimated a bit how much we would spend and hire in the first quarter of the year,” Olsavsky said. He added that the company expects to increase spending to build out warehouse and logistics capacity in the future for initiatives such as the move to standard one-day shipping.
“But right now, we’re on a nice path where we’re getting the most out of the capacity we have,” he said.
The one-day shipping program — which will expand in selection and geographic availability over the course of the year — puts more daylight between Amazon and its biggest online retail rivals. Walmart, for example, offers free two-day shipping on orders of $35 or more.
But the greater impact could land on the physical retailers that have struggled most with the shift to online commerce. The move could win Amazon more of the purchases that people might make at a nearby store when they can’t wait for two-day shipping or don’t want to pay extra for one of Amazon’s faster shipping offers, helping accelerate growth in its core North American retail business.
“I think it’s worse for the mall,” said Tom Forte, managing director at brokerage D.A. Davidson.
That said, there continue to be large product categories where Amazon is not an effective competitor, no matter how fast it can deliver the goods, he said.
“Being able to get an unfashionable piece of women’s clothing one day faster will not be the death knell for a physical store retailer who sells fashionable women’s clothes,” Forte said.
Moreover, the current two-day shipping from Amazon doesn’t always live up to expectations. “The reality is, it’s a broken promise many times over,” he said.
Olsavsky said Amazon will use its third-party logistics vendors, such as FedEx, UPS and the U.S. Postal Service, as well as its own growing delivery services in the shift to one-day delivery.
The company said it expects sales to grow in the current quarter by 13% to 20%, reaching $59.5 billion to $63.5 billion.
Olsavsky said Amazon’s decision not to build a major office in New York City will not have a meaningful effect on its capital spending this year. Spending on Amazon’s so-called HQ2 expansion, which is going forward in Virginia, is yet to come.
“A lot of that is going to be in future years,” he said. “We’re just getting going with planning and lining up temporary office space for the most part in 2019.”
Amazon’s cash-gushing cloud-computing business brought in $7.7 billion in revenue, up 42% year-over-year, excluding foreign-exchange impacts. It generated more than half of Amazon’s $4.4 billion operating income while accounting for only 13% of the company’s net sales.
Amazon’s “other” business segment, which primarily includes advertising — a closely watched source of growth and profit margin for the company — grew at its slowest rate in the last six quarters. Revenue from other businesses was $2.7 billion, up 36%.
Olsavsky said accounting changes mask what’s really going on with the advertising business. While it appears to be slowing on a reported basis, “Advertising is actually growing faster than this,” he said.
Shipping costs continue to outpace revenue growth, amounting to $7.3 billion in the first quarter, up 21%.
Sales in Amazon’s fleet of physical stores, including Whole Foods Markets, grew just 1%, to $4.3 billion. There again, Olsavsky said Amazon’s revenue recognition practices mask stronger growth at Whole Foods: Online orders for goods from Whole Foods don’t count toward physical store revenue.
Counting those orders, physical store sales growth would have been closer to 6% in the quarter, Olsavsky said.
The company reported 630,600 full- and part-time employees, not including contractors or temporary workers, a 12% increase from a year ago. That’s a slight slowdown from 2018, when the year-over-year employment growth rate was 14%, but Olsavsky sees hiring accelerating again.