Amazon's Profits: Why Its Big Logistics Bet Is Paying Off

Following Amazon.com’s surprise quarterly profit announcement and better-than-expected sales figures reported last month, international e-commerce delivery specialists ParcelHero contends that the US Internet-based retail giant’s continued massive investment in its revolutionary logistics plans are beginning “to pay off” and its logistics investment shows no sign of stopping according to the UK courier firm.

Retail Week, the UK retail trade journal, revealed just yesterday that Amazon will lease a former Tesco warehouse in Surrey (UK) from this September for a 10-year period. It was thought this signalled and paved the way for the launch of Amazon’s Fresh service in the UK.

Specifically, Amazon is taking a lease on Logicor’s 304,751 sq ft warehouse in Weybridge, Surrey – empty since Tesco departed the location late last year. And, it has agreed a lease on another warehouse (c.258,000 sq ft) in Leicestershire in the English Midlands.

Amazon Fresh, a subsidiary unit of the Amazon.com AMZN -0.46% main group, delivers same day and early morning fresh produce and meals from local shops and restaurants. The initiative was beta tested back in 2007 in Seattle, where Amazon’s global headquarters are located, prior to being expanded to cities including Los Angeles, New York and San Francisco.


An Amazon Fresh truck arrives at a warehouse in Inglewood, California. (Photo by Kevork Djansezian/Getty Images, June 2013).

David Jinks, a spokesman for ParcelHero, which provides parcel delivery services to more than 220 countries worldwide and partners with the likes of DHL, UPS and DPD, says: “For Amazon’s investors, it has always been the promise of ‘jam tomorrow’ that has kept them holding on, through the considerable expense of building a radical new supply chain. Now that Amazon’s logistics arm is finally in place, its shareholders can finally enjoy their jam today.”

Mind you the stock price hasn’t been doing too badly lately. Since I wrote about Amazon on 26 April 2015 on Forbes (‘Amazon’s Stock Could Rise 20% To $535 As Shopping ‘Revolution’ Snowballs’), the shares that trade on Nasdaq have perked up and risen almost US$80 (c.+18%) from around US$445 to US$524 as of the close yesterday. They even nudged above the US$541 mark earlier this August.

Amazon reported a US$92m profit (equivalent to $0.19 per diluted share) on 23 July 2015 for its second quarter ended June 30 2015 compared with a US$126m loss (US$0.27 per diluted share) for the corresponding period a year ago and US$57m for Q1 2015. Sales rose 20% to US$23.18bn for the quarter versus US$19.34bn for Q2 2104.

Among highlights cited in the latest quarterly results Amazon celebrated Prime Day on July 15, a global shopping event that offered Prime members more deals than Black Friday and customers bought more units on Prime Day than Black Friday 2014. Amazon also launched Prime free ‘same-day’ delivery in 14 US metropolitan areas, serving more than 500 cities and towns. Prime members can select from over a million items and order as late as noon to receive their order(s) on the same day.

Jinks says: “The secret behind the surprise profits is that Amazon continually invested significant sums in order to deliver its new Amazon Logistics arm. With this in place it can service its Prime members, a hugely loyal and lucrative market.”

He adds: “It can now deliver Prime Same Day, Same Hour and even Fresh services in many areas of the US. And, thanks to its warehouse investment in the UK just revealed – in London as well – bypassing traditional delivery companies such as FedEx FDX -1.85%, UPS and the UK’s Royal Mail.”

ParcelHero has been saying for some time that Amazon stands to save US$3bn globally, and £122m (c.US$190m) in the UK alone, by cutting down on the use of external delivery companies. And, the US player could look to its logistics arm becoming a net income source rather than a US$5.13bn yearly expense.

Jinks notes additionally that: “Last month’s figures show some of its long-term logistics plans beginning to come good and win the company significant savings.” ParcelHero recently marked Amazon’s 20th anniversary with an industry report, ‘Amazon’s Prime Ambition’, which revealed the scale of Amazon’s plans to become the conduit through which all aspects of e-commerce and logistics flows.

It was in 2005 that Amazon announced the creation of Amazon Prime, a membership offering free two-day shipping to contiguous US states plus Washington D.C. on eligible purchases for a flat yearly fee of US$79 as well as discounted one-day shipping rates. Subsequently it launched in in Germany, Japan and the UK in 2007, France in 2008 (as Amazon Premium), Italy in 2011 and Canada during 2013.

The introduction of Amazon Same Day and Fresh services overseas was predicted in ParcelHero’s aforementioned report, which shines a spotlight on the extent of Amazon’s plans to revolutionise the global supply chain and cut out the middleman.

Looking forward and in terms of guidance on Amazon’s third quarter 2015, which are due out late this October, the company expects net sales to range between US$23.3bn and US$25.5bn – or to grow by between 13%-24% compared with Q3 2014.

At the operating income (loss) level the figure is put between -US$480m and +US$70m (Q3 2014: -US$544m). But as Amazon acknowledge, their forward-looking statements “are subject to substantial uncertainty” and their results are “inherently unpredictable”. One quarter isn’t necessarily a trend so it will be interesting to see just how the Q3 numbers stack up.

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Amazon is growing day by day, no doubts to it really.

 

 

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