Amazon’s Spending On Shipping Hurts Profits

Amazon.com Inc.’s (NASDAQ: AMZN) bold plan to speed up its shipping is costing it a lot of money. Its expenses have risen so high that its third-quarter earnings badly missed expectations, despite better-than-expected sales. Investors were not happy and the company’s shares plunged 7 percent in after-hours trading.  

According to the company’s earnings report, Amazon spent $9.61 billion on shipping in the third quarter, up from $6.57 billion the year earlier. That was a 46 percent increase year-over-year. Based on its guidance and historical trends, Amazon’s fourth-quarter shipping costs could come close to $11 billion.

Amazon ships around 10 billion packages per year and now, many more of those packages qualify for free one-day delivery with no minimum purchase. While parcel carriers charge more for faster delivery, that is only one component of the cost increase. Amazon recently made a number of low-cost items, like deodorant, bars of soap, makeup, and dental floss, eligible for free shipping, increasing its costs while depriving itself of that shipping revenue.

Amazon’s Chief Financial Officer Brian Olsavsky said that the company’s fourth-quarter cost for one-day shipping will be nearly double the $800 million the company spent during the second quarter. Amazon’s volume increases 50-60 percent in the fourth quarter versus the second quarter, leading to higher quarterly costs for the company. The company is also spending billions of dollars to boost its transportation and warehouse infrastructure and increase its inventory to bring popular products closer to customers.

For the third quarter, Amazon posted a profit of $2.1 billion, or $4.23 a share, on revenue of $70 billion. Last year in the same quarter, the company posted a profit of $2.9 billion, or $5.75 a share. Wall Street had predicted earnings of $4.62 a share on revenue of $68.8 billion. The company’s prediction for the fourth quarter is $80 billion to $86.5 billion in sales, below the $87.4 billion analysts expect.