Amazon is morphing Prime from a two-day free shipping program to a one-day free shipping program, the company said Thursday, upping the ante for retailers trying to keep up with the e-commerce giant. Amazon plans to spend around $800 million in Q2 in the effort, CFO Brian Olsavsky said during Thursday's Q1 earnings conference call.
"We're able to do this because we spent 20-plus years expanding our fulfillment and logistics network, but this is still a big investment and a lot of work to do ahead of us," Olsavsky said.
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Free two-day shipping is one of the key benefits of the Prime subscription program, which also offers customers access to services like Prime Video, Prime Music, Prime Pantry and Prime Now. Prime members can already get one-day shipping in some cases, as well as one- to two-hour delivery for Prime Now.
"But this is all about the core free two-day offer morphing into or evolving into a free one-day offer," Olsavsky said. "We've already started down this path. We've, in the past months, significantly expanded our one-day eligible selection and also expanded the number of ZIP Codes eligible for 1-day shipping. So we're taking a significant steps."
As Amazon rolls out the program, it will need to make changes to its supply chain, and it will depend on the external support of transportation partners like the US Postal Service, Olsavsky said.
"We're going to be using all of the available leverage we have," he said.
Amazon saw more people sign up for Prime in 2018 than any other year before, Olsavsky said. Additionally, engagement -- measured by metrics such as shipping, hours watched on video and hours listened to on music -- "are trending in the right direction and continue to get more and more sticky."
Evolving the program to one-day free shipping "will open up a lot of potential purchases," Olsavsky added, making Prime "even more 'the best deal in retail,' as we say."
Analysts said that the next-day Prime effort will widen the gap between Amazon's "convenience gap" vs. competitors.
Stifel analyst Scott Devitt said:
This is the first major move in delivery speed in some time for Amazon and could lead to better top-line growth resulting from increased convenience, selection, and conversion. In addition, the move will widen the convenience/logistics gap with competitors, which had narrowed in recent years as other retailers enhanced their shipping capabilities. Amazon is early in ramping up this initiative and the total cost to offer the service is difficult to estimate at this time.
Analysts were also quick to note that Amazon is in a better position to invest in its shipping program because it has other high margin businesses to offset costs. Those higher margin businesses are AWS as well as Amazon's ad business.
Nevertheless, analysts are expecting Amazon's shipping expenses to continue to rise. The $800 million incremental expense in the second quarter will lead to another $300 million in the third quarter and $450 million in the fourth quarter just for outbound shipping, according to Macquarie Capital analyst Benjamin Schachter.
The bottom line is that Amazon is building on its fulfillment capabilities. We've spent time in multiple distribution centers recently and we believe that Amazon has a unique capability to deliver on one-day shipping for its Prime members (it will also clearly continue to push for even faster times for certain customers and products with Prime Now). While this definitely announces that Amazon is in another investment phase, we think it is another example of Amazon building long-term sustainable competitive barriers.