Amazon to Spend $800M on Free 1-Day Delivery for Prime, Launches Full Truckload Services

Amazon Prime Shipping Getting Faster - Analysts See Challenges for Rivals

As reported by Barrons, news of a whopping $3.56 billion in quarterly profits triggered a significant gain in Amazon.com stock, but a handful of analysts also welcomed planned changes to its shipping policies, raising their price targets for the shares.

Amazon reported the results as cash rolled in from its high-margin cloud and advertising businesses.

In its retailing operation, it said, it will spend $800 million in the current quarter to reduce delivery times for customers using its Prime service to one day from two.

Amazon's One-Day Delivery Plan is a Shot Across the Bow of Retailers

In the video (to the right) Deren Baker, Jumpshot chief executive officer discusses Amazon.com Inc.'s plans to spend $800 million in the current quarter to reduce delivery times for top customers to one day from two. He speaks with Bloomberg's Emily Chang and Brad Stone on “Bloomberg Technology.” (Source: Bloomberg)

In further reporting, Bloomberg's Brad Stone writes that the “Amazon’s One-Day Shipping Is a Perk Few Retailers Can Match.”

“The move eclipsed both the day’s good news (a larger than expected quarterly profit) and the bad (dramatically slowing sales growth). It set Wall Street’s Amazon watchers into a mad scramble to calculate the impact of the projected $800 million it will take over the next few months alone to achieve the accelerated shipping feat.” Stone said.

But Amazon’s announcement likely registered even more loudly in the halls of its competitors: e-commerce companies and old-line retailers that will now have to start investing just as furiously to keep up. For some of them, Thursday’s news was an ominous sign of challenging times ahead.

Over the past few years, two-day shipping had become an industry standard, embraced by Amazon’s rivals and by shoppers who were spoiled by the expectation of speedy delivery times.

Walmart Inc. launched two-day shipping without an annual membership fee in 2017 for orders over $35. Target Corp. introduced it last year over the holidays. If anything, Prime’s $129 price tag, which entitles members to a selection of movies, TV shows, music, and ebooks, was starting to look a little hefty.

Read: Could Amazon Be Worried About The “Walmart Effect”?

Bloomberg's Rita Devlin and Matthew Boyle's article “Walmart Teases One-Day Free Shipping in Response to Amazon” claims that the retail giant appeared to be taking a jab at its rival with a tweet on Friday, teasing one-day free shipping without a membership fee.

One-day free shipping…without a membership fee. Now THAT would be groundbreaking. Stay tuned.

— Walmart (@Walmart) April 26, 2019

“One-day shipping is neither shocking nor difficult for retailers at scale,” Brandon Fletcher, an analyst at Sanford Bernstein, said in a note Friday.

Fletcher, who previously worked in Walmart’s strategy and operations departments, said the retailer’s existing network of 156 distribution centers, combined with the fact that much of the U.S. population is concentrated in urban areas, means that it wouldn’t require much investment to build out a one-day service. He cited previous research conducted by consultants A.T. Kearney - where Fletcher also briefly worked a decade ago - that showed Walmart could get to one-day shipping with only eight additional distribution facilities.

Read: 2018 Letter to Shareholders by Jeff Bezos

Analysts Welcome Planned Changes to Amazon's Shipping Policies

Amazon's shipping announcement was one factor behind a call by JPMorgan Chase analyst Doug Anmuth who raised his price target to $2,200 from $2,050.

“We like that the spend is success based, but we also expect the $800M to ramp in 3Q/4Q as Amazon expands 1-day selection and geographic reach, we believe the move is consistent with Amazon’s longstanding goal of convenience selection, but also likely reflects the increasingly competitive retail environment.”

Baird Equity Research analyst Colin Sebastian was more direct in lifting his price target to $2,100 from $1,902.25. “Prime one-day shipping will pressure margins, but may pressure the competition even more,” he said in a note Thursday, calling the move essential for the Seattle-based e-commerce giant.

Raymond James analyst Aaron Kessler noted, “While near-term this will lead to higher expenses (incremental $800M in 2Q), we are optimistic one-day shipping will drive incremental share gains, particularly from traditional retail.”

PiperJaffray analyst Michael J. Olson also noted the wide range of Amazon services that contributed to its $59.7 billion in first-quarter revenue. Amazon’s online stores and subscription services beat Wall Street estimates, he wrote, while Amazon Web Services, bricks-and-mortar stores, third-party seller services, and other businesses were either in line with the consensus or slightly below it.

Amazon shipping was the chief takeaway for Stifel analyst Scott Devitt, “We see the move as an important step in Amazon widening the convenience gap versus competitors, which have improved shipping capabilities in recent years.”

Amazon’s Original Air Network

Jerry Hempstead, president of Hempstead Consulting talking to Logistics Management's Jeff Berman, explained that this development is, in a sense, an extension of Amazon’s original air network.

“This is just Amazon turning up the heat on other retailers”Jerry Hempstead, president Hempstead Consulting

In offering up an example, he posited how Amazon uses DHL's hub to sort their air business and because DHL needs its hub at night for their core business Amazon sorts during the day when the DHL hub would otherwise be idle, which precludes its air network from being used for next day.

Alternatively, he said Amazon could double-trip their aircraft and get better utilization of the assets and instead of flying to Cincinnati to the DHL hub at night, it can fly a few miles more to Wilmington Ohio to the legacy Airborne Hub (formerly Clinton County Air Force Base) and is also the home of ATSG one of the airlines that operate for Amazon and do an overnight turn for it.

“Amazon will just be utilizing existing assets (planes and building) although the automated sort will most likely be state-of-the-art Amazon, this is just Amazon turning up the heat on other retailers. Either join their switch or suffer the consequences. Amazon has been very vocal that they need their delivery partners (UPS & USPS in particular) and that this is not a fundamental attack at their core business or a threat. As Amazon grows so do their partners in my humble opinion.”

Parcel consultancy Shipware observed that with both Amazon and Walmart ostensibly committed to one-day free shipping in the future, they are each leveraging their major respective assets, with Amazon’s being a vast e-commerce fulfillment network and for Walmart, a vast store footprint.

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