Amazon’s shipping spend remains in lockstep with its expectations

In case you have not noticed, there is really only way global e-commerce giant Amazon likes to do things: big. In fact, that may be the understatement of the year. The most recent reason, or example, of that stems from the Seattle company’s third quarter earnings announcement that was issued yesterday.

While Amazon’s earnings are typically astronomical, and the third quarter was no exception, with revenue up 23.7% annually, what truly stood out in supply chain circles is the company’s ongoing and intense focus on all things shipping and logistics.

This was highlighted by Amazon executives noting the company will spend roughly $1.5 billion (yes, billion) for its One-Day Shipping push efforts, replacing its ubiquitous Prime Two-Day Shipping program.

Amazon Founder and CEO Jeff Bezos said that the company is ramping up to make its 25th holiday season the best ever for Prime customers, with millions of products available for one-day delivery. 

“Customers love the transition of Prime from two days to one day — they’ve already ordered billions of items with free one-day delivery this year. It’s a big investment, and it’s the right long-term decision for customers. And although it’s counterintuitive, the fastest delivery speeds generate the least carbon emissions because these products ship from fulfillment centers very close to the customer — it simply becomes impractical to use air or long ground routes. Huge thanks to all the teams helping deliver for customers this holiday.”

The top Amazon executive’s comments reinforce some key themes, when it comes to how Amazon has approached shipping and logistics, especially in recent years, in that it is not slowing down, nor taking any shortcuts, in its ongoing quest for “customer obsession.” And that motivation continues to be increasingly coming in the form of tactical logistics moves geared towards constantly meeting and exceeding customers expectations, which are firmly in the crosshairs of its competitors, too.

As for its third quarter performance and approach its One-Day Shipping efforts, Brian Olsavsky, Amazon senior vice president and CFO, said on the company’s earnings call yesterday that Amazon has made rapid progress on its One-Day Shipping efforts, adding that it will be a great additional service for customers in the fourth quarter.

Addressing the $1.5 billion spend figure for the third quarter, Olsavsky explained it represents the “cost of shipping, which is essentially transportation costs, the cost of expanding out transportation capacity, things like adding additional poles and shifts in our warehouses, because of forward deploying inventory closer to customers. There's a lot of tangential costs, but…in a way the biggest expenses is on the actual transportation cost.”

And part of that investment focuses on what the long-term structure will be, as it relate to those costs. Olsavsky said Amazon has temporary short-term costs, as it goes about things like forward deployed inventory and boost inbound flow into warehouses, sent up new capacity for Amazon Logistics, staffing and shifts, and also be able to have later pull times to meet One-Day cut offs and add sorting centers. What’s more, these efforts represent what he called a “drastic change” to the Amazon network topology, which it is approaching head on.

From a competitive perspective, these efforts do not disqualify Amazon from outsourcing logistics services where and when needed, with Olsavsky saying Amazon will leverage a combination of its own capacity resources, coupled with using third-party carriers and large carriers it has used in the past.

“We see a role for all carriers,” he said. “In fact, including the Delivery Service Partner program we’ve developed to help spur small business to help fill this need as well.

Jerry Hempstead, president of Hempstead Consulting, pointed out that on its earnings call Amazon was careful to say they will not be coming after their transportation partners, including UPS, DHL, OnTrac, and LaserShip, among others. And he added that Amazon is relying on its organic growth to fill its capacity needs, which seems to be based on its increase in sales in the third quarter.

In a research note, Neil Saunders, managing director of GlobalData Retail, commented that while the transition to free one-day shipping was a “classic Amazon move, it comes with some significant costs, with Amazon’s shipping costs up 46% annually, which impacted operating income and net income by 14% and 26%, respectively.

As for the higher shipping costs it will absorb, Saunders said that is not necessarily something that will “spook” Amazon, rather it sees the higher shipping expense as an investment in the Prime platform and a way to retain the loyalty of its shoppers.

“As the top line results testify, there is some merit in this argument,” he wrote. “However, one of the issues is that delivery is the new battleground for all online players. As such, it has not taken long for others such as Walmart and Best Buy to roll out their own versions of one-day delivery. Other retailers, like Target, are equally ramping up efforts around same-day in-store collection and free shipping for the holidays. Where Amazon leads, others quickly follow.”

The earlier reference to Amazon going “big” remains as clear as day, when it comes to its shipping spend, as well as vision. Amazon is going big to get goods into our homes. That is not a secret, nor has it ever been one. With the busiest shopping, and shipping, period of the year pretty much here, it figures to be an exciting and hectic time, to say the least.