Amazon is spending billions of dollars and hiring tens of thousands of people this year to maintain its edge in delivery speed over retail rivals that are pressing to close the gap.
After years of offering two-day shipping for customers who pay for its $119-a-year Prime shipping and media program, Amazon in April pledged to accelerate the standard speed to one day.
It is reconfiguring warehouses to store more inventory closer to population centers, and adding new shifts and schedules to get the goods out the door more frequently. It is spending more on its own already massive transportation network, as well as third-party contractors, some of whom have spotty safety records. And it is once again sacrificing profits — a hallmark of Jeff Bezos’ way of running the Seattle-based e-commerce juggernaut.
Amazon’s third-quarter profit of $2.13 billion was down 27% from $2.88 billion in the same period a year ago. The company also said profits in the current quarter would be slimmer than anticipated as it pours another $1.5 billion into one-day shipping.
The company reported a global workforce of 750,000, up 22% from a year ago and not including contractors or seasonal temporary workers.
Throughout Amazon’s history, founder and chief executive Bezos has been willing to spend the company’s ample cash flows in pursuit of long-term business aims rather than fattening the quarterly bottom line. The approach has tested shareholder patience before, and there was skepticism among investors as the latest price tag of one-day shipping was revealed in Amazon’s results Thursday. Amazon shares lost nearly 7% in extended trading, finishing at about $1,660.
But Amazon executives say that the one-day shipping offer is having its intended effect: Sales at the company were up 23.7% to a better-than-expected $70 billion in the quarter. Some analysts view it as a strategic necessity, particularly with the likes of Walmart offering free two-day shipping without an annual membership fee and improving its use of physical stores to facilitate online order pickup.
Bezos said the company now has millions of products available for one-day shipping and billions of these items have been ordered by customers.
“It’s a big investment, and it’s the right long-term decision for customers,” he said in a statement Thursday.
The company first made its one-day shipping pledge during a quarterly financial report in April, and it has been the hot topic on its conference calls with journalists and Wall Street analysts in the subsequent two reports, effectively turning these sometimes mundane recitations of sales and profit numbers into a commercial for the new offering.
Those analysts probed chief financial officer Brian Olsavsky for details on the duration of the spending increases and the payback they may reap. Amazon shipping costs increased nearly twice as fast as sales during the third quarter, to $9.7 billion. It spent more on infrastructure, too. And Amazon is foregoing revenue it previously collected by charging extra for one-day shipping, he said.
“We’re still learning here about the one-day costs as we go, about what the long-term cost structure will be,” Olsavsky said, calling it a “drastic change.” He added, “We’ve been down this road before on a number of different incarnations in Amazon’s history.”
There are other costs that don’t appear in the company’s financial reports. Two investigations published last month by ProPublica and BuzzFeed News documented a spate of injuries and deaths involving drivers delivering Amazon packages. They work for third-party contractors, insulating Amazon from liability. The company cut ties with some of those contractors after the reports.
Amazon said sales for the fourth quarter are expected to be $80 billion to $86.5 billion, up 11% and 20%, respectively. Operating income is expected be down at least $900 million compared to the fourth quarter of 2018, coming in at between $1.2 billion and $2.9 billion.
Amazon grew its global work force by some 96,700 full and part-time employees in the quarter. It now has 750,000 workers. Much of the increase, Olsavsky said, was due to hiring in support of faster shipping, but it also hired software engineers and salespeople for its cloud computing business, Amazon Web Services (AWS).
That business continues to grow steadily and generate outsize profits for the company, although the profit margin in AWS slipped slightly to 25.1%. AWS sales were up 35% in the quarter to nearly $9 billion.
Also in the third quarter, Bezos committed the company to become carbon neutral by 2040, a goal that some observers think will be more difficult to achieve with the move to faster shipping. As part of its climate-change reduction goals, Bezos announced plans for 100,000 electric delivery vehicles by 2030.
Bezos made the counterintuitive claim that accelerated shipping speeds can lower carbon emissions because one-day shipping requires goods be staged closer to customers in advance. There’s not enough time to fulfill a one-day order by flying it in overnight, Bezos said in September. That’s also part of the logic behind Amazon’s expansion into warehouses closer to urban centers.
To take stock of Amazon on its 25th anniversary, The Seattle Times plans a series of stories over the coming year, starting with an overview looking at the company and its place in business and Seattle history.
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