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Cost of delivery delays Amazon earnings growth


Despite record results announced yesterday, Amazon is being hampered by delivery costs, eating into the e-tail giant’s Q4 profits and causing a drop in its share price.
Earnings for the last quarter of 2015 were $35.7bn, Amazon said in an analyst briefing call, but profit was stunted by a significant rise in fulfilment costs, which were up 32.8% year-over-year in 2015.

The retailer moved into the black, with net income of $596m (£415.3m) from a loss of $241m (£167.9m), last year, as reported by our colleagues at InternetRetailing. Fourth-quarter and full-year figures show the US retail giant, which is the largest e-tailer in the UK and an Elite member of the IRUK Top500, recorded sales of $107bn (£74.5bn) in the year to 31 December, 20% up on the previous year.

Brian Olsavsky, Amazon’s chief financial officer, said: “Delivering for free in two hours is hard and expensive, but customers love it.”

As we have reported previously, speculation in the industry is running high that Amazon intends to make moves into the carrier sector itself. With the increasing pressures and costs from the ongoing expansion of its Prime Now service, through to alleged battles with incumbent carrier partners over service levels and customer satisfaction, delivery has probably never been more central to the Amazon proposition than it is now.

But if fulfilment costs continue to negatively impact profit growth, there has to be a point – even if it is way off in the future – when the cry of enough is enough will be heard from, if not from Amazon itself then potentially from its investors; Amazon’s long-adopted strategy of growth now, profit later cannot hold out indefinitely.

Other speculation surrounding Amazon recently is that it is about to set up an air freight division. Although Amazon never allows itself to be drawn into commenting on what it refers to as “rumour and speculation” there are several seemingly well-placed sources in the US claiming the retailer is in the process of leasing as many as 20 freight jets. This, however, would give Amazon a fleet around one tenth the size of UPS, one of its key air freight carrier partners. As much as this kind of move might give Amazon more control over the business of delivery, it would also straddle the company with an almost unimaginably high cost base – everything from recruiting and retaining pilots, through to leasing and running the aircraft. It would also be subject to exacting levels of bureaucracy and regulation, which would also sit as substantial costs on its balance sheet.

Other Amazon news, which is not directly related to the announcement of financial results or fulfilment costs, comes from our colleagues at Tamebay, who have reported a number of Amazon sellers claiming to have been overcharged for use of the Fulfilled by Amazon (FBA) service. Perhaps as many as 100 incorrect transactions have been identified, Tamebay says, with Amazon blaming the error on a database glitch.

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