retail news in context, analysis with attitude

Amazon announced that its Q3 net sales increased 24 percent to $70.0 billion, up from $56.6 billion in the same period a year ago. However, profit for the quarter was down 28 percent, to $2.1 billion … a reflection of the investments that Amazon has been making in its business, such as moving from two-day shipping to one day of Prime purchases - essentially buying growth at the expense of profitability.

The New York Times writes that "Brian Olsavsky, the company’s finance chief, said the offering had increased sales to Prime customers. 'They are buying more often, and they are buying more products,' he said.

"Amazon expects to spend about $1.5 billion for one-day delivery during this quarter, which includes the holiday season, Mr. Olsavsky said. That includes costs for faster shipping as well as other expenses, like the lost revenue from customers who used to pay extra to get something in one day.

"The one-day offering lets Amazon get a bigger piece of consumers’ wallets on products typically bought at grocery stores or pharmacies. A typical order for items shipped in two days or more is $23.33, and Amazon spends $5.08 to fulfill and ship the items, according to a Morgan Stanley analysis. But for one-day shipping, the typical order is $8.32, and Amazon spends $10.59 to fulfill and ship it, meaning it loses money on many sales."

The Times also writes that the increased expenses extend to Amazon’s cloud computing services, where "the company is spending to hire for sales and marketing, the types of work that Jeff Bezos, its founder, long eschewed but that have become necessary as Amazon looks to sign up bigger legacy businesses."
KC's View:
While this news may not be welcomed by investors, it all seems sort of in character for Amazon, which founder-CEO Jeff Bezos has long valued growth over profit … short-term investors should look elsewhere, he always has argued.

Especially as the competition gets more intense, Amazon no doubt feels that it needs to keep innovating and investing to maintain the advantages it has. I'd guess that Bezos has long seen this coming … it was inevitable that the competition would get better and tougher. Standing pat just isn't an option. (And besides, Amazon still had $2.1 billion in profits, which ain't nothing.)