In April, Amazon announced it would roll out one-day shipping for all of its Prime members – a feat that would cost the company $800 million in the second quarter of 2019 alone.
Even for a giant retail-cloud-computer-advertising-media-et al. company, $800 million is quite a lot to spend in a single quarter. And on July 25, when Amazon announced its 2019 second-quarter earnings, Chief Financial Officer Brian Olsavsky said it cost even more than $800 million. (He didn’t provide a specific number)
The costs of shrinking two-day shipping to 24 hours are only going to increase, according to Youssef Squali, the managing director and global head of internet and media-equity research at SunTrust. All told, Amazon will spend upward of $3 billion this year on one-day shipping, Squali said.
The one-day-shipping announcement will drive an upswing in Prime sales for the next year and a half as consumer excitement for even-faster cheap shipping takes hold. “The move to Prime one-day delivery is an overnight sensation,” Cowen’s e-commerce analyst team wrote to investors on July 26.
But some are questioning why the massive spend is even necessary. Squali said Amazon was already dominating the market with a massive array of products and two-day shipping – and wondered what other e-commerce market share Amazon could feasibly snag.
“None of the other online players can even match their two-day shipping, let alone one-day shipping,” Squali told Business Insider. “So they’re really looking into just grabbing more market share from retail.”
The billions are going to Amazon’s last-mile network
That $3 billion-plus isn’t going toward building up logistics partners, but into Amazon’s last-mile network. The retailer has scorned some of the logistics community by scaling back relationships with big names like XPO Logistics. FedEx also outright dumped Amazon as an air-cargo customer after months of insisting that the retailer really isn’t a big customer.
Months before the one-day-shipping announcement, Olsavsky pointed to Amazon’s internal delivery network earlier this year – which he highlighted as cheaper, more precise, and all around just better.
“We can also invest selectively because we have more perfect information,” Olsavsky said. “We know where our demand is; we know where we’re moving things between warehouses and sort centers.
“And by not involving third parties all the time, we found that we can extend our order cutoffs, and we’ve done that over the last few years,” he added. “So that’s also another helpful side benefit for consumers when we are doing our own logistics – excuse me, transportation, final delivery.”
There are definitive cost savings for Amazon when it moves its own packages instead of relying on traditional delivery partners. Amazon can save considerably when it moves packages itself. It costs Amazon $6 to move a single box through its own network, versus $8 to $9 to move it through UPS or FedEx, Ravi Shanker, Morgan Stanley’s head logistics analyst, said.
But the unforeseen costs and speed bumps that are accompanying Amazon’s move to one day suggests that the remarkable pace that the company is in-housing its delivery capabilities might be causing problems for the one-day pledge.
“They’re in the process of trying to rationalize their logistics partners and build their own; replace more and more with their own capabilities,” Squali said. “To me, it’s like trying to land a jumbo jet on a dime or a nickel.”
Colin Sebastian, an analyst from Baird, highlighted that tension between cutting off delivery partners while also putting pressure on faster deliveries during the July 25 earnings calls. He asked:
But my main question is just looking ahead of the holiday period, given some of the moving parts and 3PL and shipping ecosystem and then of course with the transition to one-day, are you confident that there is enough capacity from your own first-party logistics as well as third-party partners to meet that seasonal demand? And should we now expect a faster ramp in Amazon Air as the means to move cargo between fulfillment centers?
Olsavsky still emphasized Amazon’s internal network in his response – but he pointed to delivery partners as well.
“We are working very hard to expand our one-day capacity, add carriers, add delivery partners at our own Amazon Logistics capability and have our partners expand their capabilities as well,” Olsavsky said.