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Amazon's Profits Hit By Investments In One-Day Delivery With 21% Cost Rise

Amazon's Profits Hit By Investments In One-Day Delivery With 21% Cost Rise Inc issued a profit warning for the current quarter while reporting a first in two years miss of profits for the most recently ended June quarter. The company cited its rapid and aggressive investment in its one-day delivery policy to increase sale growth to be one of the factors for the reduction in profits.
The company however also said that it has started to reap the benefits of the investment in the one-day delivery policy as its revenues increased by 20 per cent at $63.4 billion for the second quarter of 2019. That was more than the estimate of analysts expectations for  revenue growth and more than the 17 per cent the company clocked in the previous quarter.
The results however prompted a drop in Amazon shares by 1 per cent.
During the quarter, its launch of original TV shows has enabled it to draw more than 100 million paid subscribers to its loyalty club Prime, said the Seattle-based Amazon. It also said that it had added its voice assistant Alexa to many more gadgets and was offering fast shipping for hundreds of products including groceries from its subsidiary Whole Foods Market.
Currently, the company is investing heavily in reducing the delivery time for its Prime members by 50 per cent to just one day to continue to hold an edge over rivals such as Walmart Inc that has offered to draw no subscription fees for a two-day shipping of products. Amazon however has been able to include slightly more than 10 million items in the one-day delivery package which is a fraction when compared to the more than 100 million goods that it offers for a two day delivery in the US.
Amazon’s Chief Financial Officer Brian Olsavsky said on a call with reporters that the costs of the company of the one day delivery had slightly exceeded its forecast of $800 million that it had said it would be investing in the system in the second quarter.
"Right now we are seeing an increasing and ramping cost penalty, and that's what's built into the Q3 guidance," Olsavsky said. The company is yet to embark on most of the work for a roll out single-day delivery outside the United States, he added.

During the quarter, the company reported profit of $2.6 billion which was slightly short of the expectations of analysts at $2.8 billion.
According to Neil Saunders, managing director at research firm GlobalData, the fact that the world's largest online retailer is investing so much money into its delivery clearly shows that it can also be pressurized by competition.
"It is a necessary evil," Saunders said. "Amazon exists in a world where a lot of retailers have the advantage of allowing customers to pick things up the same day in stores," with far larger brick-and-mortar footprints than Amazon can boast.
The evolving nature of e-commerce business is also partly responsible for the slowing revenue growth of Amazon. The company has adopted a strategy of slowing shifting to a marketplace business model from a low-margin retail model, wherein the company thrives on fees from allowing other companies and sellers to use its platform, ship their products and advertise and promote their products.

Christopher J. Mitchell

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