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Amazon – Caveat emptor

Last week Amazon announced its third quarter financial results, revealing a decline in profits. Operating income decreased to $3.2 billion in the third quarter, compared with operating income of $3.7 billion in third quarter 2018. Net sales increased 24% to $70.0 billion in the third quarter, compared with $56.6 billion in third quarter 2018. Excluding the $500 million unfavorable impact from year-over-year changes in foreign exchange rates throughout the quarter, net sales increased 25% compared with third quarter 2018. Whilst sales blew past analyst expectations, thanks largely to a record-setting Prime Day, the profit came in far under.

The culprit for this decline in profits is higher shipping and other fulfillment costs that Amazon is now incurring in its quest to deliver ever more packages at higher frequency. The company said it spent nearly 50 percent more on shipping and fulfillment in the last three months than this time a year ago, up to $9.6 billion. That includes not just the cost of getting the packages to the customers’ doors through a variety of methods, but also its expansion – on air, land, and sea – in logistics businesses.  Amazon recently reported that it was on track to operate 70 planes by 2021.

“We are ramping up to make our 25th holiday season the best ever for Prime customers — with millions of products available for free one-day delivery. Customers love the transition of Prime from two days to one day — they’ve already ordered billions of items with free one-day delivery this year. It’s a big investment, and it’s the right long-term decision for customers. And although it’s counterintuitive, the fastest delivery speeds generate the least carbon emissions because these products ship from fulfillment centers very close to the customer — it simply becomes impractical to use air or long ground routes.” Jeff Bezos, Amazon founder and CEO was quoted as saying.

Whilst faster delivery speeds generate the least carbon emissions, the waste generated by shipping in smaller quantities, more frequently creates significant packaging material waste and this is something consumers and the industry need to contend with – and address.

It’s logical to assume that this drive to edge out the competition or to compete with brick and mortar business also means that Amazon, will seek to not only drive out but also drive down costs by pressing vendors for both the physical products it sells and it’s Logistics service providers to reduce prices for goods or services they provide. FedEX for example, earlier this year announced that they would not renew a contract with Amazon to provide express delivery for the e-commerce giant’s packages in the United States.

For the short to medium term, consumers benefit from the range of products available, short delivery times and attractive prices. Its’ a dog-eat-dog world where one marketplace pulls out all the stops to gain market share and edge out competitors. In the long term though somethings got to give. Investors or owners of marketplaces cannot just continue to invest to gain market share. Eventually, like any business, you will need to deliver profits and not just growth and revenue and when that happens, after the competition has been eliminated, the consumer will be the one that has to pay the (higher) price with fewer or no alternatives left for you to choose from. Caveat emptor.

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