The 2020 Mid-Year Economic Update_long

Amazon Raises the Bar… Again

Prime one-day shipping slated for $800-million investment in Q2.

Last week Amazon reported first-quarter revenues of $59.7 billion, up 17% year to year, compared with $51.0 billion in first quarter 2018. Net income increased to $3.6 billion in the first quarter, up from $1.6 billion in the first quarter of 2018. Its North American business, which includes its retail and third-party marketplaces, reported first-quarter revenues of $35.8 billion, also up 17% year-to-year from 2018 first-quarter revenues of $30.7 billion. 

Truly impressive growth numbers. Analyst sound bites focused overall on slowing revenue growth with higher profits. The bigger news for distributors was the company’s announcement that it would invest $800 million in this current quarter to create even faster delivery performance capabilities. On its first-quarter earnings call last week, Amazon CFO Brian Olsavsky announced that over the next year Amazon will reduce its Prime two-day free shipping benefit to a one-day shipping offering. 

While the company has been pushing that envelope with one-day or same-day shipping in select markets, Olsavsky said the company has already begun to invest heavily in April to add the infrastructure and capacity to reorient to the one-day shipping model, as the company is currently tooled for the two-day service option. “By going to one-day, it increases the convenience and it increases the available selection into the consideration set. Although, we have many items that are available in one to two hours, and also same day, the vast majority of our selection is available to you in two days.

“If we get that to one-day, we literally cut it in half. … [W]e think that that will open up a lot of potential purchases and it will open up convenience to those customers,” Olsavsky said. “So, we've been experimenting on a lot of different formats as you know — two-day, one-day, same-day, two-hour, stores; these are all types of being there for the customer, when they need us at different points in their consideration set.”

Olsavsky also said that Amazon would implement the one-day shipping program “using all of the available levers that we have right now,” including its own logistics as well as its third-party carriers — USPS, UPS and other shipping services. He said he would advise on the next quarterly call as to the impact of its current actions, and the outlook for future quarters for the program’s rollout.

Amazon Day Delivery Program Launches

Amazon also said that its Amazon Day, which gives Prime members the option to choose a day of the week for their packages to arrive, became available to all U.S. Prime and Business Prime members. It goes beyond scheduling convenience; it allows Prime members to self-select or self-segment their delivery options, i.e. whether to retain the free two-day option, or aggregate purchases for a single delivery day for their convenience. The service option provides an opportunity for Amazon to reduce costs by shipping in fewer boxes for a designated delivery day, and to better manage default two-day — and soon to be one-day — default free Prime delivery guarantee.

It seems that every quarter Amazon ups the ante on its customer-obsession orientation by providing new tools and services that add to its value proposition. This is a company with a core research and development culture and focus. While most people interpret that in the ways it has leveraged technology on behalf of the customer, it keeps extending additional service aspects, such as delivery infrastructure and service options, that strengthen its core easy-to-buy-from position that has disrupted traditional distribution.

It’s hard not to think back to how Grainger’s “Red Book” catalog was for a long time the paradigm of customer convenience and high-margin competitive advantage. The company then disrupted itself in the 1990s as the innovator in CD-ROM and then online catalog tools. Amazon has taken this to a whole new level, but I wouldn’t throw in the towel. 

We are still early stage, markets are incredibly fragmented, and we are already seeing new alternative platforms and value propositions emerging. MDM will be reporting on these throughout the year, and we’ll be focusing a lot on the specific impacts on distributors and the emerging digital competitive landscape at our Digital Distributor Summit, Jun. 18-20, in Denver. It will be a great conversation and I’m looking forward to hosting that event.

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