(Bloomberg) -- Amazon.com Inc. will spend $800 million in the current quarter to reduce delivery times for top customers to one day from two, trying to revive its main e-commerce franchise and ward off greater competition.
The announcement came after the online retailer Thursday reported first-quarter profit that exceeded analysts’ estimates, demonstrating the company’s focus on cloud-computing, advertising, and other high-margin businesses continues to pay off.
Amazon Chief Financial Officer Brian Olsavsky later put the attention back on Amazon Prime, the subscription program that helped make the company the world’s largest online retailer. Amazon charges Prime customers monthly and annual fees -- typically $119 in the U.S. -- in exchange for shipping discounts and access to music and video programming. It offers free two-day delivery on many items.
That benefit is less of a draw now than when it was first launched in 2005. Established retailers and startups have closed the gap on Amazon’s offer of convenience. Walmart Inc. is delivering from its giant store network, as well as enticing people to order items online and pick up in stores. Over the holiday shopping season, Target Corp. made waves by scrapping minimum order sizes to qualify for free shipping.
The news bolstered Amazon’s shares, sending them up almost 1 percent to $1,919.97 at 9:33 a.m. in New York Friday. At the same time, Target and Walmart fell 5.4 percent and 3 percent, respectively.
“To the extent it is able to fulfill this promise or, at least, the perception it is able to do, it will place a lot of pressure on the competition, most of which is still trying to ramp its 2-day efforts," analysts at D.A. Davidson wrote in a note to investors.
Amazon’s e-commerce business saw unit sales grow 10 percent during the first three months of the year. That was the lowest ever. Total revenue increased 17 percent, the first year-over-year gain of less than 20 percent in a quarter since early 2015. Olsavsky said faster delivery times will increase the number and types of products customers are willing to buy from Amazon.
“We really think it’s going to be ground-breaking for Prime customers,” he said on a conference call after the results were released. “We have the capability because we’ve been at this for more than 20 years.”
Olsavsky didn’t offer a timeline for the project’s roll out, which will begin in the U.S., saying “we expect to make steady progress quickly and through the year.” He also didn’t outline the extra ongoing costs Amazon will bear to take the program global .
Recently, the company started encouraging Prime members to group their orders for delivery on a single day. That helps Amazon consolidate shipping -- and, if customers follow through -- may hold down the cost of the new one-day pledge.
Amazon kept a lid on delivery costs in the period ended March 31, spending $7.3 billion in the quarter. That’s a gain of 21 percent from a year earlier, but well below the pace of the increases seen in recent years.
Still, expenses related to the new Prime perk, and the suggestion of more to come in a profit forecast that fell short of estimates, contributed a dour note in Amazon’s otherwise upbeat earnings.
First-quarter earnings were $7.09 a share, the Seattle-based company said in a statement. Analysts had projected $4.67 a share. Sales were $59.7 billion, compared with $51 billion in the period a year earlier -- in line with the average estimate of analysts compiled by Bloomberg.
The retailer has been buoyed in recent quarters by increasing sales in cloud-computing, digital advertising, and services for third-party sellers on Amazon’s retail site, all of which are more profitable than the company’s central online business. Chief Executive Officer Jeff Bezos for years pumped most of the cash generated from Amazon’s operations back into new initiatives. That led to prodigious revenue growth, but little income left over for investors. Now shareholders are seeking greater profit, much of which comes from the Amazon Web Services division, the leader in the growing market for selling computing power and data storage.
“The bottom line is almost doubling,” said Brent Thill, an analyst at Jefferies LLC. “And everyone thought this was the story that could just grow and grow and not produce profits.”
AWS revenue gained almost 42 percent from a year earlier to $7.7 billion. The unit’s operating income was $2.2 billion, half of Amazon’s total.
Sales in Amazon’s “other” segment, which is mostly advertising, increased 34 percent, to 2.72 billion. The company’s digital advertising franchise has grown into the third largest in the U.S., trailing only Alphabet Inc.’s Google and Facebook Inc., EMarketer estimates.
Growth in those segments means more predictable revenue, a contrast to Amazon’s retail business. That has given investors confidence the company can continue to expand its profitability, even as fellow technology giants like Alphabet and Facebook see their margins narrow, Thill said.
Amazon’s gross margin in the period was a record 43 percent.
Olsavsky said the company overestimated how much it would spend on hiring in the first quarter. Those costs, he said, “will be going up in the back half of the year.”
Technology and content expenses, which is primarily payroll for research-and-development work, and the cost to stow, pack and ship inventory, grew at a slower pace than in recent quarters. Amazon’s headcount increased 12 percent to 630,600 employees.
Losses narrowed considerably in Amazon’s international unit. The company, which had been spending heavily in a bid to grab market share in India’s emerging online retail sector, was dealt a setback by regulations that limit the ability of foreign marketplace operators to take stakes in local merchants or ink exclusive deals with local sellers.
Amazon’s international operating loss came in at $90 million compared with $622 million in the period a year earlier.
(Updates shares of Amazon and retailers in fifth paragraph.)
To contact the reporters on this story: Matt Day in Seattle at mday63@bloomberg.net;Spencer Soper in Seattle at ssoper@bloomberg.net
To contact the editors responsible for this story: Jillian Ward at jward56@bloomberg.net, Andrew Pollack, Alistair Barr
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