Amazon’s Shipping Costs Likely to Surge With Holiday Orders – Wall Street Journal
Amazon.com Inc.’s shipping costs are likely to spiral higher in the fourth quarter because of the combination of more expensive fast shipping and greater holiday-related volumes.
The online-retail firm has been rolling out free deliveries in as fast as an hour to its Prime members, most of whom pay a $99 annual fee. But Amazon said on Thursday that the faster deliveries are costing it a lot of money—and as online orders surge during the holidays, its shipping costs could top the $3.9 billion it spent in the third quarter.
Amazon’s stock was trading down more than 5% Friday after the company reported increased spending on shipping, opening warehouses and other investments, and disappointed on its outlook for the fourth quarter. Its wide guidance range on operating income—forecast between zero and $1.25 billion—prompted concerns about its spending. Its shipping costs jumped 43% in the third quarter, Amazon said Thursday.
Amazon’s spending on shipping will increase in the fourth quarter in line with volume, Robert W. Baird & Co. analyst Colin Sebastian said in an email. But Amazon is trying to drive down those costs and better manage its volume through using its own logistics network and the U.S. Postal Service for more deliveries, he said.
Already, the company is leasing 40 planes and buying truck trailers, and it is also delivering some of its own packages. “We want to control our own destiny,” Amazon Chief Financial Officer Brian Olsavsky said on a media call Thursday.
Amazon is just one of the companies expecting a delivery rush this holiday season. On Thursday, United Parcel Service Inc. said it is gearing up for a 14% increase in packages to more than 700 million deliveries between Thanksgiving and New Year’s Eve. FedEx Corp. and the USPS haven’t yet released their projections.
Mr. Olsavsky said that the company has been working with its shipping partners globally to line up delivery capacity for the holiday season, in addition to adding to its own delivery capabilities.
“We feel very confident we’re looking forward to a great holiday,” he added during an earnings call with analysts Thursday.
“Amazon is a wild card” in its delivery needs, said Ivan Hofmann, a former FedEx executive and transportation-industry consultant. Its volume can fluctuate wildly and can be hard to forecast.
Adobe Systems Inc.’s Digital Insights, which measures online transactions from top retailers, is projecting holiday sales will grow 11% year over year, reaching $91.6 billion overall in the months of November and December.
Amazon is spending heavily to roll out services such as Prime Now, Amazon’s one-to-two hour delivery offering, which is now in 40 cities world-wide versus 17 a year ago, and could favor last-minute holiday shopping. The service will offer deliveries until midnight Christmas Eve, something the company dubs “procrastinator’s delight.”
Fast, so-called last-mile deliveries for services such as Prime Now are often the most expensive, according to industry experts, as it eliminates the option of filling up a truck with packages and running them along a more efficient route. Instead, drivers with a handful of deliveries drive point-to-point, which adds miles and time.
Amazon advertises on its site that drivers from its Flex program, which relies on citizen couriers to make Prime Now deliveries, can earn up to $25 an hour.
It still charges for some deliveries, as well as collecting the fee for its Prime membership, so shipping revenues for that segment will also increase and help recoup some of those costs. In the third quarter, Amazon reported shipping revenue increased 44%, to $2.15 billion.
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