Amazon's Short Term Loss for Long Term Gain

Amazon has always been the darling of Wall Street, even in the face of being unprofitable at times. However, the company recently experienced something rare - a down quarter. While no one actually believes the viability of Amazon's business model going forward is flawed, the higher-than-expected costs of their ambitious shipping strategy took investors by surprise - perhaps it even took the company by surprise, too. But Amazon, unlike a lot of other companies, can afford it. Their concern isn't the short term expectations of Wallstreet investors, but the long term goals they have set out. As a result, Amazon is fully capable of absorbing a small short term loss for a greater long-term gain.

Amazon's Shipping Network

Amazon has almost single-handedly changed consumers' expectations when it comes to not only overall shopping experience but shipping as well. One or two-day shipping is now expected for all eCommerce orders, a change that has strongly been associated with Amazon. This new expectation has pushed other retailers to pressure their carrier partners to provide the same kind of service. Amazon's reliance on third-parties for their shipping has caused the company, as well as their partners, issues in the past. As a result, the company has been putting greater focus on building out its own delivery network.

Shipping's Impact on the Bottom Line

One of the major causes of Amazon's poor performance in the previous quarter was the great-than-expected costs associated with its plan to make one-day shipping as a standard for all Prime members. The company had put aside $800 million to transition warehouses and moving inventory closer to customers, as well as ramped-up logistics operations, leasing more planes and providing financial support for employees' local package-delivery businesses.Even that eye-popping number was not enough to support their plan. The increased costs were probably buoyed, in part, by this year's historic Prime Day. According to one analyst, this quarter's result is "an example of short-term pain for long-term gain, and is a necessary strategy to compete with brick-and-mortar's speed advantage to the customer."

Amazon Can Deal with Short-Term Pain

While the massive cost of implementing standard one-day shipping had a considerably negative impact on Amazon's bottom line, the company did say that the model is starting paying off - stating that tens of millions of items are already available for one-day shipping. According to Amazon's Chief Financial Officer Brian Olsavsky, "Customers are responding to Prime's move to one-day delivery — we've received a lot of positive feedback and seen accelerating sales growth, free one-day delivery is now available to Prime members on more than ten million items, and we're just getting started."The extent of Amazon's one-day delivery puts into context the ongoing war that Amazon has waged with other retailers. In May of 2019, Walmart fired back - they announced that they too would be offering one-day delivery, but only in selected cities and with much smaller available items for that service.