This week, Amazon reported financial performance for the June ending quarter, with headline being disappointment in profitability growth. While online retailer’s revenues grew by a significant 20 percent to just over $63 billion for the quarter, overall profitability declined due to a number of factors, the most prominent by a rise in customer distribution and shipping costs.
The online retailer has been aggressively investing in making one-day, vs. two-day shipping, the standard for Amazon Prime members. CFO Brian Olsavsky told analysts and investors: “We expect we’ll be working through that for a number of quarters, but when the dust settles, we will regain our cost efficiency over time.’
By some estimates, Amazon’s move to one-day shipping will save on overall customer fulfillment costs because the online retailer has determined that per-package costs
will be cheaper than utilizing contracted carriers such as UPS or the USPS.
Potential Growth Slowdown for the Cloud Business
As pointed out in our prior blog commentaries related to Amazon, Amazon Web Services (AWS), the company’s Cloud computing infrastructure business has served as the cash cow and banker for many of the online retailer’s investment needs including customer fulfillment.
In the latest report of financial performance, the AWS business reported $8.38 billion in revenues, reflecting a 37 percent growth rate in the quarter, which was below analyst consensus. That raised analyst concerns given that competitor Microsoft’s Azure Cloud infrastructure business recently reported a 64 percent revenue growth. While AWS generated $2.1 billion in operating profit in the quarter, analysts expected more. Whether that implies reaching a growth slowdown is subject to speculation, but the AWS performance has caught investor attention, along with implications of Amazon’s online business being able to invest beyond cash flow.
Additional Last Mile Customer Fulfillment Investments
The Business Insider site indicated this week that Amazon has procured more than 2000 large delivery vans from Spartan Motors.
The report was prompted by the specialty vehicle manufacturer’s press release indicating that its Spartan Fleet Vehicles and Services business unit that produces Utlimaster delivery vans, announced that it had been: “..awarded a 2,237-unit walk-in van order from North America’s leading online e-commerce and fulfillment company.”
The order reportedly called for a stated minimum of 2237 walk-in vans to be built by the second quarter of 2019 at Utlilmaster’s Bristol Indiana manufacturing facility. The release also states that Spartan had exclusively produced cargo van orders for this customer, and that they are customized for last-mile delivery needs.
The Business Insider report quotes Morgan Stanley’s head logistics analyst as indicating: “We continue to see Amazon emerging as a significant player in the industry and believe its ambitions go beyond insourcing to third-party delivery as well, which could bring a new level of risk to numbers at both UPS and FedEx.”
Supply Chain Matters is of a similar view in that the size of these designated vans is far larger than the upwards of 20,000 Mercedes Sprinter delivery vans contracted in September of 2018. Such larger cube, last-mile delivery capability reinforces Amazon’s intent to not only move to single day Prime delivery, but to also displace existing parcel carriers in such delivery capability.
Spartan itself told investors on a financial performance briefing in May that the “large online, North American customer” that had been ordering their vans was likely to keep buying.
What It Means
What Amazon’s Q2 financial performance and report of added investment implies is that the online retailer is indeed moving rather quickly to have both one-day Prime, as well as expanded last mile parcel delivery capabilities somewhat operational by this year holiday fulfillment peak that occurs from October thru December, and likely fully deployed in 2020. Once again, that is a significant sign for existing online retailers, in their ability to match both Amazon’s one-day deliver capabilities and potential cost advantage in doing so. Many will not be able to match Amazon’s financial resources and will instead have to partner.
We expect further industry developments in the months to come.
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