Amazon Announces a Costly Move to One-Day Prime Shipping

Amazon’s (NASDAQ:AMZN) cloud computing business may be going gangbusters, but the company’s e-commerce sales are slowing. Amazon Prime and its free two-day delivery are not the draw they once were, with rivals like Walmart (NYSE:WMT) expanding their online presence and leveraging vast physical store networks to negate AMZN’s delivery advantage.

Source: Amazon

So Amazon is ramping it up, telling investors it will spend big in the next quarter as it begins to roll out a program that will see Amazon Prime’s two-day free delivery cut to just a single day.

AMZN Announces Plan to Cut Free Prime Shipping to One-Day 

Amazon reported its earnings yesterday. While the company delivered Q1 profits that exceeded analyst expectations — always good for AMZN stock — there were signs of trouble in Amazon’s core e-commerce business. Unit sales saw just 10% growth during the quarter. Revenue growth of 17% marked the first time since 2015 that it has failed to reach the 20% mark. 

During its earnings call, AMZN announced it is tackling the problem head-on and spending big to do so. The plan is to reduce free Amazon Prime shipping times from the current two-day service to a single day. To do so, the company will be spending $800 million this quarter to improve its warehouses and delivery infrastructure. In fact, the first signs of this strategy emerged earlier this week, when it was reported the company began work on fulfillment centers across multiple states, resulting in thousands of employees facing the prospect of having to transfer to other Amazon facilities. 

There isn’t a timeline of when the switch to free one-day delivery for Prime members will begin, but Amazon says the rollout will start in the U.S. and North America, then go global.

As a result of this expenditure, AMZN is expecting lower profits in Q2. 

Amazon Prime Free Two-Day Shipping is No Longer the Lure it Once Was

When free two-day shipping was first introduced as a perk for Amazon Prime members in 2005, it was a big deal. The membership cost $79 for a year, free shipping was unheard of and having your order on your doorstep in just two days felt like the future.

Since then, Amazon’s brick and mortar competition has fought back. Retailers like Walmart and Target (NYSE:TGT) have greatly expanded their online presence. Walmart in particular has gone after everything from Amazon’s expansion into groceries to its domination of the eBook market as it battles to stay relevant. Walmart, Target and other retailers have also leveraged their nationwide network of physical stores to act as distribution centers to cut shipping times and costs, reducing Amazon’s advantage.

Today, an Amazon Prime membership costs $119, but that free two-day shipping perk no longer seems revolutionary — it’s a service level that consumers are increasingly expecting as the norm for online shopping.

Expected Benefits for AMZN

The move to one-day free shipping for Prime members is going to be costly for Amazon. Besides the investment in its own infrastructure, the company will need to pay more for shipping — a service that already cost AMZN $27.7 billion in 2018.

There was no word about whether there are plans to raise membership fees to help pay for the additional cost, but with a price increase in 2018 and pressure from increased competition, another Amazon Prime price hike seems unlikely.

The benefit to Amazon of moving to free one-day shipping is the potential to boost both unit sales and revenue for its core e-commerce business, getting them back to the growth levels investors are accustomed to seeing.

And with the move to free one-day shipping, AMZN may also see a hike in the 100+ million Amazon Prime memberships it currently counts worldwide — free two-day shipping may not be the draw it once was, but free one-day shipping is certain to have more people signing up. 

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

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