Dive Brief:
- Amazon's shipping costs climbed to $12.8 billion for the fourth quarter of 2019, a 43% increase year-over-year (YoY) for the quarter that includes peak season. Full-year 2019 shipping costs reached $37.9 billion, according to the company's earnings released Thursday.
- Q4 shipping spend was slightly lower than the e-tailer's expectations, CFO Brian Olsavsky said on a Thursday earnings call. Costs including vehicle purchases and inventory positioning came slightly under the projected $1.5 billion mark for the quarter. Net sales also beat expectations, growing 21% YoY to $87.4 billion in Q4.
- The number of items available for one-day Prime shipping quadrupled YoY in Q4, CEO Jeff Bezos said in a statement.
Dive Insight:
Amazon has been through similar shocks before, said Olsavsky in an attempt to allay concerns about mounting costs. He likened the transition to one-day Prime shipping to Amazon's move from only selling media to selling "almost every product you can imagine."
Work to develop the three prongs of the one-day transition — transportation capacity, fulfillment network growth and inventory positioning — will continue for the foreseeable future, but the company isn't offering guidance beyond Q1 when it expects to spend another $1 billion on the one-day transition.
"We will have to scale our fulfillment center network further. We grew the square footage for fulfillment and transportation by 15% each of the last two years," said Olsavsky, emphasizing that ramp-up has to come before the new capacity reaches its potential for efficiency. And transition costs aren't likely to stop there as Amazon still has much work to do internationally to bring the same offering to more customers outside the U.S. — particularly in Europe and Japan.
The second quarter of 2020 will mark the anniversary of the one-day transition, but the company still has more capacity to build so onlookers shouldn't expect that line item to stabilize any time soon, said Olsavsky.
"We believe the rate of growth in incremental spend will be slower in [the second half of 2020], thus increasing the likelihood of margin stabilization," analysts at MKM Partners wrote in a research note issued after the call. MKM called Amazon's Q4 margins "less worse" in Q4 2019, mostly due to accounting changes.
Though the $37.9 billion figure would give most retailers sticker shock, analysts and investors are unfazed. Moody's analyst Charlie O'Shea told Supply Chain Dive via email that faster Prime shipping is important to keep existing Prime members and convert new ones.
"More people joined Prime in Q4 than any other quarter before," Olsavsky said. Amazon stock was up more than 10% in pre-market trading Friday morning.
