Amazon plans to cut shipping times to one day for members of its Prime programme, in a move that will drive up its spending and put further pressure on its bricks-and-mortar rivals.
“Our goal is to evolve the two-day free shipping programme into a one-day free shipping programme,” Brian Olsavsky, chief financial officer, told analysts on the company’s earnings call on Thursday. He described the offer as “the best deal in retail”.
Amazon will spend $800m in the second quarter to roll out the change, which is expected to weigh on operating profit in the quarter. Shares rose as much as 2 per cent in after-hours trading in New York before paring gains to trade up half a per cent, at $1,912.
The company did not give a time frame for when it expected the offer to be available to all members, or how many products would become eligible for one-day shipping. Some items are already available for one-day or even same-day delivery, and Prime members in countries, including the UK, get free one-day shipping by default.
Prime members in the US, Amazon’s largest market, currently get free two-day shipping. The company has already begun to roll out one-day delivery by investing in fulfilment and transportation in the country. “Most of the spend we are seeing in [the second quarter] is starting in North America, but this intended to be a global improvement in speed,” said Mr Olsavsky.
Amazon is betting that by offering faster delivery, it will encourage customers to do more of their shopping on its website. “By going to one day, that increases the convenience and it increases the available selection [of products] into the consideration set [for shoppers],” said Mr Olsavsky.
The announcement came as Amazon said profit more than doubled in the first quarter thanks to lower than expected costs, offsetting its slowest rate of sales growth in four years. Net income more than doubled to $3.6bn, or $7.09 a share, from $1.6bn, or $3.27 a share, in the same quarter last year, well above Wall Street’s estimate of $4.65 a share, according to S&P Global Market Intelligence. Christopher Rossbach, chief investment officer at J. Stern & Co, said: “The higher profitability of Amazon’s advertising business and AWS [Amazon Web Services] has helped Amazon to achieve operating income that is well ahead of market expectations.”
Revenue rose 17 per cent to $59.7bn, in line with analysts’ consensus estimates and near the high end of the company’s guidance range of $56bn to $60bn. That was the lowest year-on-year growth rate since the first quarter of 2015. The company had raised alarm in January when it issued a cautious first-quarter sales forecast that it pinned on factors including regulatory changes in India and said it would ramp up spending this year after pulling back on hiring and capital expenditures in 2018. But while revenue growth decelerated across its businesses, the anticipated spending surge did not materialise.
Operating expenses rose 13 per cent to $55.3bn, down from 41 per cent growth in the first three months of 2018. “We overestimated on what we would spend and hire in the first quarter,” Mr Olsavsky told reporters. “We’re banking the efficiencies of prior investments continued [into the first quarter],” he said, but added: “We are still forecasting that costs in these areas would go up in back end of the year.” Recommended Lex Amazon: shipping shape In the first quarter, delivery costs rose 21 per cent to $7.3bn in the quarter, down from increases of more than 30 per cent in 2017 and early 2018. Revenue at Amazon Web Services, the company’s highly profitable cloud computing arm, jumped 41 per cent to $7.7bn. Operating profit surged 59 per cent to $2.2bn. In Amazon’s North American retail business, revenue rose 17 per cent to $35.8bn, a slowdown from the 46 per cent rate reported a year ago.
Operating profit nearly doubled to $2.3bn. Other revenue, consisting mainly of its growing advertising business, was up 36 per cent to $2.7bn. International revenue rose 9 per cent to $16.2bn, slower than last year’s 34 per cent. Operating losses shrank from $622m to $90m. Mr Olsavksy said the regulatory changes in India, which forced Amazon to pull some products to comply with new rules over foreign investment in ecommerce, had not had a material impact during the quarter. He said Amazon was continuing to see the fastest growth in Prime membership there of any country in its history.
In its outlook for the second quarter, Amazon said it expected net sales to rise between 13 per cent and 20 per cent, to $59.5bn to $63.5bn. Operating income is expected to come in between $2.6bn and $3.6bn, compared with $3bn a year ago. Wall Street analysts were forecasting second-quarter net sales of $62.4bn and operating income of $4.2bn.
