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Amazon Earnings Disappoint, and One-Day Shipping is to Blame

Amazon’s one-day Prime shipping is eating into profits, but the company plans to stay the course as it continues to wage war against competitors.

In an earnings call Thursday, Brian Olsavsky, the company’s CFO, revealed that Amazon’s second quarter profits rose 3.6 percent to $2.6 billion, from the same period a year ago. That brings cost per share to $5.22 (up from $5.07 a year ago), dashing Wall Street’s loftier projection of $5.57 per share. The discrepancy has stock market analysts feeling anxious.

A large culprit in Amazon’s earnings miss is the massive increase in shipping costs. In late April, the company announced that Prime member purchases would be delivered within one day, instead of the requisite two. The ambitious change in strategy caused the platform to incur massive, if anticipated, losses. The company projected at the time that the roll-out of the new shipping strategy would cost Amazon around $800 million. Olsavsky admitted Thursday that costs have exceeded that sky-high figure, though he wouldn’t say by how much.

“It does create a shock to the system, we’re working through that now, and we expect we will be working to that for a number of quarters,” the CFO said on Thursday. “But when the dust settles, we will regain our cost efficiency over time.”

Free, one-day shipping is now available to Prime members on about 10 million items across multiple categories. And while the logistics behind the move are proving costly, Olsavsky insisted that the move toward greater efficiency is worth it.

When asked about the benefits of continuing to roll out one-day shipping to other markets, the CFO said, “I think what that does is, again it strengthens your purchase decision, it strengthens the need to not have to go elsewhere to buy a product because you need it quickly.”

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The subtle acknowledgement of competing business’ role in Amazon’s aggressive strategy is a telling one, especially in the wake of the newly-announced antitrust investigation into U.S. tech companies by the U.S. government.

On Wednesday, Treasury Secretary Steve Mnuchin voiced his support for the probe (which will affect Google, Facebook and Apple as well), telling CNBC, “I think if you look at Amazon, although there are certain benefits to it, they’ve destroyed the retail industry across the United States, so there’s no question they’ve limited competition.”

He went on to compare the e-commerce giant to Walmart, the big box chain that was once the retail sector’s leading pariah. “People had those concerns about Walmart,” he told the news network, countering, “Walmart developed a business where small business could continue to compete with them.”

Amazon wasted no time in firing back, retorting that “Small and medium-sized are thriving with Amazon.”

The company told MarketWatch that independent sellers account for 58 percent of the company’s physical gross merchandise. “Amazon’s retail business competes in a worldwide market for retail sales and represents less than 1 percent of global retail and less than 4 percent of U.S. retail,” the company said.

E-commerce accounted for 14.3 percent of total retail sales in 2018, totaling $513.61 billion in online sales, according to data from the U.S. Department of Commerce. By the end of 2019, Amazon will officially own more than half of the e-commerce market in the U.S. The e-tailer is set to  reach 52.4 percent market share, up from 48 percent in 2018.