Amazon Prime customers are gleefully buying more and more because of its one-day delivery announcement - even though the service barely exists right now
- Amazon announced that it was rolling out one-day shipping for Prime subscribers in April.
- Despite the headwinds associated with the new service, Amazon has already reported a huge surge in retail sales.
- Analysts credited that boost to Amazon's one-day shipping announcement, even though most consumers don't enjoy consistent one-day shipping yet.
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Amazon's one-day Prime shipping promise, announced in April, has seen a few hiccups in its implementation.
Originally slated to cost $800 million in Q2 2019, one-day shipping ended up costing the company a little more than that. Amazon's warehouses were also hampered by some productivity issues, Amazon CFO Brian Olsavsky told investors in a conference call on July 25."(I)t does create a shock to the system," Olsavsky said during the call, which followed Amazon's disappointing Q2 earnings report. "We're working through that now. We expect we'll be working through that for a number of quarters, but when the dust settles, we will regain our cost efficiency over time."
The $1.1 trillion megaretailer and cloud-computing company will need until Q4 2019 to wholly implement one-day shipping, as Olsavsky said in the April announcement. Olsavsky underlined that again on July 25.
But, though one-day delivery doesn't exist yet for most Prime customers, the shipping promise is still driving demand. Year-over-year core retail growth hit 18.5% in Q2 2019, when one-day shipping was announced. The same time period saw growth of only 16.1%.
For the next year-and-a-half, Morgan Stanley's internet analyst team forecasts that year-over-year retail growth will spike because of the one-day delivery promise, hitting 21.5% in incremental demand by early 2020. It will be resettling into normal growth by the end of 2020."The move to Prime one-day delivery is an overnight sensation," Cowen's e-commerce analyst team wrote to investors on July 26. "The move to Prime 1 Day delivery, announced on the 1Q19 earnings call, certainly delivered, with even greater initial success than we anticipated."
The analyst and consumer glee about one-day shipping lies in contrast to the fact that customers don't have one-day shipping in most product categories and locations. After all, Olsavsky emphasized in the initial April announcement that the speedy shipping will "a significant amount of time to achieve."
Amazon's announcement is pressuring other retail giants
Amazon simply had to announce that its rolling out one-day shipping in order to drive remarkable sales growth among its Prime subscriber base. The boost in sales likely only aggravates retail incumbents - particularly as it comes days after the US Treasury Secretary Steve Mnuchin declared that Amazon "destroyed" retail.
That explains why, weeks later, Walmart announced its own one-day shipping promise for digital orders of at least $35. The service markedly undercuts Amazon Prime's $119 annual subscription fee.
Walmart ecommerce CEO Marc Lore told Business Insider's Hayley Peterson that the timing of Walmart's rollout was "a mere coincidence," but that didn't stop the massive big box retailer from engaging in a tweet war with Amazon after its one-day Prime pledge.
In the shipping wars, Amazon has a $438 billion edge against Walmart - Amazon Web Services, its cloud-computing platform. As SunTrust analysts wrote to investors in April, Amazon is able "to offset the cost associated with 1-day shipping via higher margins in other services (i.e. AWS) vs. competitors."
Meanwhile, an extensive Recode investigation pointed out this month that Walmart's digital side is bleeding money trying to catch up to Amazon. Walmart's digital side has grown significantly over the past year, but it's mostly in the low-margin area of grocery pickups.Nationwide, one-day shipping is still elusive for Amazon and Walmart alike. But, once it's implemented at Amazon, Morgan Stanley wrote that the benefits to the e-retailer's bottom-line will only uptick. "We see this as a multi-quarter (potentially year) tailwind to growth as the company is still rolling it out in the US."