Delivery Costs Lead To Amazon Earnings Failure

The increase in the company's delivery costs have led to the failure of its earnings.

Amazon was unsuccessful in meeting the estimations of analysts. The quest of the American e-commerce company to deliver goods to customers faster resulted in an earnings miss that dropped its stock after the closure of market Thursday. The company divulged record revenue and profit in the holiday quarter yesterday with sales revenue of $35.7 billion and earnings of $1 per share. Those results were not as robust as analysts were expecting, nevertheless, with especially low profit.

FactSet forecasted average sales revenue of $35.7 billion and profit of $155 per share. Profit was cut down by a huge increase in fulfillment costs and approximately 25% for the entire year. The Seattle based company made an expenditure of $4.55 billion in the final quarter for fulfilling the orders of customers, up from $3.4 billion in the same period one year ago. This increase cannot be explained by the increment in the sales of the business, as the proportion of sales revenue spent to ship the products also jumped up to 12.7% from 11.6%.

The organization also provide free 2 day shipping of all orders to members of Amazon Prime, which costs $99 per year, and stated Thursday that Prime membership had increased by 51% in the last year. It also said outside party sellers on its marketplace are increasingly depending on Amazon for the fulfillment of their orders, with almost half of outside party sales delivered and packaged by it, more than 1 billion units.

Amazon is also developing its own delivery facilities, including Prime Now, an offer that promises to deliver in an hour in specific major cities. “Delivering for free in two hours is hard and expensive, but customers love it,” Chief Financial Officer Brian Olsavsky, told while addressing a conference call on Thursday. The program was recently expected to have 54 million members, which means over $5 billion in subscription fees per annum rolling into the company’s coffers.

Customers who usually order low-margin or cheap products to be shipped in 2 days – or 2 hours – free of charge could stick Amazon with an overall loss for their membership. Brian seemed to be suggesting the scenario in the conference call on Thursday mentioning that fulfillment cost per unit delivered declined. It there was a decline in the costs of per unit but the fulfillment costs’ ratio to revenues jumped up, this would suggest that boxes of Amazon were delivered with low cost merchandise in them.

Despite the fulfillment costs eroding profits during the most successful quarter of the organization up till now, the chance of the company to cut back on its struggle to supply goods cheaper and faster is not likely to cease.