Amazon's Shipping Costs Likely to Surge With Holiday Orders
October 28 2016 - 4:54PM
Dow Jones News
By Laura Stevens
Amazon.com Inc.'s shipping costs are likely to spiral higher in
the fourth quarter because of the combination of more expensive
fast shipping and greater holiday-related volumes.
The online-retail firm has been rolling out free deliveries in
as fast as an hour to its Prime members, most of whom pay a $99
annual fee. But Amazon said on Thursday that the faster deliveries
are costing it a lot of money -- and as online orders surge during
the holidays, its shipping costs could top the $3.9 billion it
spent in the third quarter.
Amazon's stock was trading down more than 5% Friday after the
company reported increased spending on shipping, opening warehouses
and other investments, and disappointed on its outlook for the
fourth quarter. Its wide guidance range on operating income --
forecast between zero and $1.25 billion -- prompted concerns about
its spending. Its shipping costs jumped 43% in the third quarter,
Amazon said Thursday.
Amazon's spending on shipping will increase in the fourth
quarter in line with volume, Robert W. Baird & Co. analyst
Colin Sebastian said in an email. But Amazon is trying to drive
down those costs and better manage its volume through using its own
logistics network and the U.S. Postal Service for more deliveries,
he said.
Already, the company is leasing 40 planes and bought truck
trailers, and it is also delivering some of its own packages. "We
want to control our own destiny," Amazon Chief Financial Officer
Brian Olsavsky said on a media call Thursday.
Amazon is just one of the companies expecting a delivery rush
this holiday season. On Thursday, United Parcel Service Inc. said
it is gearing up for a 14% increase in packages to more than 700
million deliveries between Thanksgiving and New Year's Eve. FedEx
Corp. and the USPS haven't yet released their projections.
Mr. Olsavsky said that the company has been working with its
shipping partners globally to line up delivery capacity for the
holiday season, in addition to adding to its own delivery
capabilities.
"We feel very confident we're looking forward to a great
holiday," he added during an earnings call with analysts
Thursday.
"Amazon is a wild card" in its delivery needs, said Ivan
Hofmann, a former FedEx executive and transportation-industry
consultant. Its volume can fluctuate wildly and can be hard to
forecast.
Adobe Systems Inc.'s Digital Insights, which measures online
transactions from top retailers, is projecting holiday sales will
grow 11% year over year, reaching $91.6 billion overall in the
months of November and December.
Amazon is spending heavily to roll out services such as Prime
Now, Amazon's one-to-two hour delivery offering, which is now in 40
cities world-wide versus 17 a year ago, and could favor last-minute
holiday shopping. The service will offer deliveries until midnight
Christmas Eve, something the company dubs "procrastinator's
delight."
Fast, so-called last-mile deliveries for services such as Prime
Now are often the most expensive, according to industry experts, as
it eliminates the option of filling up a truck with packages and
running them along a more efficient route. Instead, drivers with a
handful of deliveries drive point-to-point, which adds miles and
time.
Amazon advertises on its site that drivers from its Flex
program, which relies on citizen couriers to make Prime Now
deliveries, can earn up to $25 an hour.
It still charges for some deliveries, as well as collecting the
fee for its Prime membership, so shipping revenues for that segment
will also increase and help recoup some of those costs. In the
third quarter, Amazon reported shipping revenue increased 44%, to
$2.15 billion.
Write to Laura Stevens at laura.stevens@wsj.com
(END) Dow Jones Newswires
October 28, 2016 17:39 ET (21:39 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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