• Is now the time to rebalance portfolios towards the highest quality company names that have been left behind by the rally? Read here.

Amazon primes for one-day delivery


Amazon primes for one-day delivery

Just when US retailers had come to accept the table stakes for e-commerce, Amazon has once again upped the ante. In conjunction with its highest-ever quarterly earnings release last week, Amazon announced it would make one-day free shipping the standard for Prime members.

First quarter profit more than doubled to US$3.56 billion, which was apparently too high for CEO Jeff Bezos’ liking as the company announced it was spending US$800 million in the second quarter alone to evolve the current two-day Prime offer into a one-day offer. The ongoing investment is clearly intended to reaccelerate Amazon’s top line which grew at the slowest rate in four years but is also a clear setback to competing retailers.

Our US retail thesis is one of profitless growth – robust top line growth with limited incremental profitability as retailers invest heavily in their online propositions while cannibalising their existing store sales. US retailers have only recently developed their two-day delivery capabilities at great cost, and Amazon’s new push towards one-day free delivery as standard will very likely push industry margins down further as retailers invest to keep up with Amazon (and each other) on convenience.

Unfortunately for most retailers, a consistent one-day delivery offer may prove to be prohibitively expensive. Amazon has spent two decades and billions of dollars developing its expansive end-to-end fulfillment infrastructure, while even the largest brick & mortar retailers have only seriously turned their attention to e-commerce in the last five years. Retailers relying on third-party parcel companies (USPS, UPS and Fedex) may find one-day delivery costs to be entirely uncompetitive as these parcel companies are not optimised for next-day delivery and may not have the capacity or inclination to chase Amazon. Retailers with the greatest scale are in a better position to invest in one-day delivery, but even they will likely see further margin compression for what may be limited incremental sales. The best insulated retailers will be those with a unique offering or differentiated shopping experience and minimum overlap with Amazon’s strongest categories – retailers that don’t need to compete on incremental convenience.

Amazon’s move to one-day free shipping could ultimately degrade the value of convenience. The shift from week-long delivery times to two-day delivery was enough of an increase in convenience to improve a retailers’ overall proposition without improving the underlying retail offer; less so the shift from two-day to one-day. (Free) One-day delivery may become the new table stakes, but a differentiated offering or experience will be more important than ever to compete profitably.

Amazon announced one-day free shipping for Prime members and a first quarter profit that more than doubled to US$3.56 billion. Read our view on US retail. Click To Tweet

Daniel Wu is a Research Analyst at MGIM. Prior to joining MGIM in June 2016, Daniel was an analyst in the investment banking divisions of UBS and Goldman Sachs, where he covered the Infrastructure, Utilities, Technology and Media sectors.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

Why every investor should read Roger’s book VALUE.ABLE


find out more


Post your comments