(Reuters) – Chief Financial Officer of Amazon.com Inc on Thursday said the cost of the daily shipping program will increase to around $ 1.5 billion over the holidays as the online retailer accelerates free delivery to woo shoppers and stun rivals Walmart Inc and Target Corp.
FILE PHOTO: Amazon packages are viewed at the new Amazon store during the opening message on the outskirts of Mexico City, Mexico on July 30, 2019. REUTERS / Carlos Jasso / File Photo
Amazon's Fourth Quarter Cost of One Day Shipping Will Be Almost double the $ 800 million the company spent during the second quarter, said CFO Brian Olsavsky during a conversation with reporters. The company began rolling out a one-day delivery without a minimum purchase early in the second quarter.
Airlines like United Parcel Service Inc charge more for faster delivery, but it is just one component of Amazon's cost increase, which sends about 10 billion packages a year.
Another is "advance shipping revenue," Olsavsky said.
"Now that it's free, people don't pay to get product in one day," he said. Before, "you had to pay an extra fee to get a day or faster" shipping.
Logistics experts, who noted that volumes are increasing during the holidays, took Amazon's shipping cost report in stride.
"That's to be expected," said ShipMatrix founder Satish Jindel, who added that Amazon saw a similar increase in costs as it rolled out free two-day shipping for Prime members in 2005.
Amazon's volume increases 50-60% in the fourth quarter versus the second quarter, and more packages mean higher costs, Jindel said.
Based on the guidance and historical trends, Amazon's fourth-quarter shipping costs "will exceed $ 10 billion, perhaps coming close to $ 11 billion," said Cathy Morrow Roberson, founder of Logistics Trends & Insights.
It will be felt on Amazon's bottom line, Baird analyst Colin Sebastian said in a note.
"Significant investments related to the rollout of a day's shipment will depress Q4," Sebastian wrote.
Olsavsky's comments came at the height of Amazon's third-quarter earnings report, where the company said overall shipping costs rose 46% in the third quarter.
Amazon spent $ 9.61 billion on shipping in the third quarter, up from $ 6.57 billion the year before.
“Customers love the transition from Prime from two days to one day – they have 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, "Amazon CEO Jeff Bezos said in a statement.
Amazon recently made low-cost products such as deodorant, soap bars and dental floss that were eligible for free shipping – which added to the cost.
"Whether all the extra investment will be worth it in the end may be open to question, especially given the lackluster sales guidance for the next quarter," said Hargreaves Lansdown analyst Nicholas Hyett.
Meanwhile, Amazon's faster freight forwarding increases next delivery business at UPS.
Reporting by Lisa Baertlein in Culver City, California; Additional reporting by Akanksha Rana in Bengaluru; Editing by Greg Mitchell and Lisa Shumaker