Dive Brief:

• Amazon's shipping costs increased 57% YoY in Q3 to reach $15 billion, the company reported Thursday. Shipping costs grew faster than online sales (up 38% YoY) in the same period, which contained an unusually late Prime Day.
• Operational costs related to COVID-19 have added up to $7.5 billion for the year so far, according to comments by Chief Financial Officer Brian Olsavksy on the Thursday earnings call. The expenses include new procedures to facilitate social distancing in fulfillment centers, ramp-up costs for new facilities, an influx of roughly 250,000 new employees' training and onboarding costs, enhanced cleaning, and personal protective equipment. The company expects to spend $4.5 billion on incremental COVID-19-related operational costs in Q4, Olsavsky said.
• The company pulled forward some spending on logistics capacity building planned for next year to Q4 to meet the seemingly endless demand. "We're not trying to cut it close, and we're erring on the side of having too much capacity, and we think that's the right call," Olsavksy said

Dive Insight:

Olsavsky confirmed that the company is on track to grow fulfillment and logistics infrastructure 50% this year, as he forecast in July. Most of the new square footage opened late Q3 or early Q4. Half of the new spaces are delivery-focused facilities, either sort centers or last-mile delivery stations, Olsavsky said.

"We feel good that we've been able to develop that capability a lot of this year, because we needed it, and we're going to need it in Q4," he said. The fulfillment network is where it needs to be to finish the year, he said, but logistics and delivery capacity may be stretched inside and outside Amazon.

In a recent PwC survey, 61% of respondents said they expect to do most of their holiday shopping online, and carriers are building capacity. DHL expects a 50% YoY bump in peak volume, and UPS, FedEx and DHL have announced hiring blitzes. DHL will add two wide-bodied aircraft in the next month to its fleet to contend with the volume. UPS is consulting with shippers on how they might defer some of their parcel volume through other omnichannel offerings, such as buy online, pickup in-store.

"It's going to be tight for everyone ... it's advantageous to the customer, and probably to the companies, for people to order early this year," Olsavsky said. Ordering early will help, but early evidence from Prime Day suggests logistics providers are still able to flex up even after multiple quarters of peak-like e-commerce volume.

Prime Day is no longer an Amazon-only event, and analysis from FourKites Chief Technology Officer Vivek Vaid shows that retail shipments jumped 10% YoY during the week of the event. Vaid noted, however, that dwell time for retail shipments decreased during the same week, which he took as evidence that carriers can still plan and prepare as U.S. consumers break more e-commerce records. Dwell time the week of Oct. 11 was 19% lower than the previous week.

Transportation capacity (for internal use) will be a major target for investment for the years to come at Amazon, Olsavsky said. Over the last several years, Amazon began the work of hiring out its logistics capacity in direct competition with carriers like UPS and FedEx. The company paused that effort in April.

"Going forward, these investments will continue and Q4 will further illuminate the costs of growth for revenue as we expect the combination of Prime Day and the holiday season to weigh heavily on retail profitability," Charlie O’Shea, Moody's lead analyst for Amazon, said in an email.