This week, Amazon.com reported its financial and operational performance for the third quarter that ended in September. The financial headline was one of disappointment because of a significant increase in operating and investment costs. The online customer fulfillment capability headline was similar to that of last year at this time, namely aggressive investing in broader logistics, transportation and last mile fulfillment capabilities for Amazon Prime members.

Financial highlights included revenues of $32.7 billion in the third-quarter compared with $25.4 billion in the year-ago period. Operating income was $575 million while net income was reported as $252 million. What primarily caught the attention of Wall Street was that operating expenses grew to just over $32 billion compared to $25 billion in the year earlier quarter. Transportation costs alone increased to $3.9 billion, 43 percent higher than the prior year quarter. Obviously, not many retail business can afford such a quarterly transportation expense.  Amazon One Cargo Jet_Sized450

The news caused Amazon’s shares to close down over 5 percent on Friday in a collective response to the financial results.

On the online fulfillment capability front, the online retailer has opened an additional 23 warehouses and customer fulfillment centers globally since July and indicated this week that customer fulfillment investments will continue into the fourth quarter.  The Amazon CFO described this effort as a big undertaking. He further acknowledged that while investing in one’s own logistics and transportation capabilities is expensive, customers are embracing more timely and predictive delivery capabilities, and our increasingly demanding faster delivery. Further noted was: “We want to control our own destiny.”

With Amazon Prime membership members now approaching 60 million, and with indications of even more third-party sellers utilizing the Fulfillment By Amazon platform capability, Amazon is obviously preparing for an even bigger holiday fulfillment quarter. Upwards of 120,000 seasonal employees are expected to supplement existing full-time staff. Last year, major investments were made in the long-term leasing of 40 dedicated air freight aircraft along with hundreds of branded tractor trailer units. Executives have indicated to investors that revenues are expected to be in range of $42 to $45.5 billion in Q4, as much as a 27 percent increase over last year’s similar period.

We anticipate that there will be other announcements in the coming weeks regarding new and augmented customer fulfillment capabilities, with more and more Amazon branded delivery vans navigating local and residential neighborhoods.

Another area to watch is increased investment activity in India, which is expected to be the next battleground involving both Amazon and Alibaba for garnering the bulk of online customer wallet share. Amazon’s earning release makes mention that the Great Indian Festival was Amazon’s biggest shipping event ever with customers representing 97 percent of India’s serviceable postal codes placing at least one online order.

One other note related to customer fulfillment relates to Amazon Web Services (AWS), the online retailer’s cloud infrastructure business unit. That unit, which is highly profitable, increased revenues in the quarter by 55 percent, and this most likely represents the banker for the aggressive added investments in customer logistics, transportation and last-mile fulfillment.

Amazon’s corporate DNA has also been contrarian to Wall Street expectations for near-term profits and instead always investing in new and different business segments and industry competitive capabilities. Also this week, Business Insider cited internal Amazon documents indicating that planning for up to 2000 branded brick and mortar Amazon Fresh grocery stores over the next decade. Noted is that the company wants to experiment with different formats that feature both physical presence and online capabilities.

In online customer fulfillment, Amazon will continue to defy the convention for short-term profits in favor of continuous strategic investments that will position the company to be one of the most dominant global retailers. For remaining online and brisk and mortar competitors, Amazon’s continued investments and dominance of the online buying channel are a force to be reckoned with.

Bob Ferrari

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