Amazon appeared to pay a hefty price for its move to speedy shipping, as the online giant reported profits below expectations as it ramped up for one-day deliveries.
Profits edged up just 3.6 percent to $2.6 billion in the past quarter, a figure below most Wall Street forecasts.
Revenues rose 20 percent to $63.4 billion in the April-June period for the company, a dominant force in retail with its Prime subscription service which is moving from two-day to one-day delivery on most items.
“Customers are responding to Prime’s move to one-day delivery – we’ve received a lot of positive feedback and seen accelerating sales growth,” said chief executive Jeff Bezos in a statement.
“Free one-day delivery is now available to Prime members on more than ten million items, and we’re just getting started.”
But analysts said the costs of ramping up infrastructure were eroding profits.
“The additional shipping expenses have taken their toll on the bottom line,” said Neil Saunders of the research firm GlobalData Retail, who added that Amazon is being forced to make these investments due to tougher competition from rival retailers like Walmart and Target.
“Traditional retailers like Walmart and Target are ramping up their e-commerce efforts and have the advantage of being able to offer collection from stores for shoppers wanting to obtain products quickly,” Saunders said.
“By and large, Amazon has no such benefit, so it had to neutralize it by offering faster shipping for free.”
Moody’s Amazon Analyst Charlie O’Shea said Amazon profits were hit by “margin compression in North America due to the investments in next-day Prime delivery.”
O’Shea said the shift to one-day delivery for many Prime items “is an example of short-term pain for long-term gain, and is a necessary strategy to compete with brick-and-mortar’s speed advantage to the customer.”
On a conference call, Amazon chief financial officer Brian Olsavsky said investments to speed up shipping have hit profits but that this would pay off in the long run.
“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,” he said.
“But when the dust settles, we will regain our cost efficiency over time.”
Amazon Web Services, the cloud computing division which is a key profit driver for the company, saw revenue gains of 37 percent in the quarter.
O’Shea said AWS “continues to chug along and provide a significant buffer to the retail operations.”
Amazon — which has expanded from its origins in e-commerce to cloud services, streaming media, artificial intelligence and brick-and-mortar grocery stores — saw shares slip 0.5 percent in after-hours trade on the results, which showed profits below forecasts but better-than-expected revenues.
The latest results did not include sales from Amazon’s big Prime Day two-day sales event, said to have been a record.
Amazon has been delivering consistently robust profits in recent quarters after years of thin margins, as the company has grown into one of the world’s most valuable, making Bezos the world’s richest person.