Amazon changed shopper habits — at a steep cost
By offering Prime subscribers one-day shipping instead of the standard two, Amazon saw a dramatic change in shopping behavior — and a corresponding rise in costs.
Free one-day shipping was noted as the primary accelerant to a North American 20% revenue growth during the second quarter, even as it negatively impacted operating expenses. Amazon had reported earlier that it was spending $800 million in the second quarter to improve warehouses and delivery infrastructure to shorten deliveries to one day for Prime members.
“If we were to point to one thing that was different in Q2 it was the introduction of one-day [shipping]. The change in consumer buying behavior as a result of the one-day shipping has been quite dramatic. What you’re seeing is a lot more products in the [purchase] consideration set,” said Brian T. Olsavsky, Amazon's CFO, during a Thursday conference call to discuss earnings.
While Amazon’s third quarter began July 1, Olsavsky noted that the one-day shipping feature that is free to Prime members was instrumental in Amazon's best-ever Prime Day sale on July 15 and 16. Amazon reported that over the two days its sales surpassed those of last year’s Black Friday and Cyber Monday combined.
When asked if free one-day shipping could be maintained without any problems in the fourth quarter holiday, Olsavsky was quite emphatic that Amazon would be able to handle it and that it was working to expand delivery partnerships and investing in the infrastructure to support it. Olsavsky noted that Prime Day was a test for the company to see if it could handle a mass rush of orders and that Amazon had done well.
Net income increased to $2.6 billion in the second quarter, or $5.22 per diluted share, compared with net income of $2.5 billion or $5.07 per diluted share, in second quarter 2018.
According to Zack’s Investment Research the earnings per share (EPS) consensus estimate of 14 stock industry analysts was $5.29 per share, or 7 cents higher than what was delivered.
International lagged in revenue growth for the quarter coming in at 12% growth compared to the second quarter of 2018 and losses widened for that segment as well.
While Amazon does not report U.S. and Canadian sales separately, Amazon Canada does offer free Prime one-day shipping in some major Canadian cities. Amazon net sales increased by 20% to $63.4 billion in the second quarter of 2019, compared with $52.9 billion in the second quarter of 2018. The company reported that if it had excluded an $814 million unfavorable impact from year-over-year changes in foreign exchange rates throughout the quarter, net sales would have increased by 21% compared with second quarter of 2018.
Amazon reported that it was making significant investments in North America and Internationally as well as spending more sales and marketing dollars for its product and Amazon Web Services businesses. Sales at AWS for the second quarter were up 37% compared to the same quarter in 2018, and operating income grew by 29% for the same time period.
Executives noted that there were significant investments being made in AWS, Alexa and Echo devices, video content and marketing to drive future revenue growth. Amazon plans to hire 12,000 more employees in Europe by the end of 2019 and has started to hire for its Arlington. Virginia, headquarters. The expansion of Prime internationally was also highlighted as Olsavsky mentioned that it had just launched Prime in the UAE and that Amazon doubled the number of Prime members in India over the last year.
Significant emphasis was placed on the success of Alexa’s adoption beyond the Amazon home speaker but with third-party devices and the integration with automotive manufacturers such as Lexus, Toyota, BMW and Mini.
“Alexa is in more places. We’ve seen a lot of good partnerships and arrangements with BMW and not just in the U.S. but also in Europe,” said Dave Fildes, director of investor relations at Amazon. “We are seeing a lot of good momentum. And its underpinned by Alexa getting smarter.”