Will Costs Overshadow Future Amazon Profits?

Small start to the world’s number 1 internet retailer
Like most commercial success stories, Amazon started up small. It was founded by Jeff Bezos, who is still Chairman, President & CEO, in 1994 and has its corporate headquarters in Seattle. The company has come a long way in the past 24 years and is now recognised as being the largest internet retailer measured by revenue and market capitalisation. However, they are still number two behind China’s massive Alibaba concern as far as total sales are concerned. Amazon also produces their own consumer electronics such as Kindle e-reader and fire tablets. Separate websites have been set up for many countries across the globe and in 2015 Ama-zon put the giant U.S. Walmart into second place as U.S. retailer.
A real success story with revenues totaling US$178 billion in 2017 and a net income of US$3.33 billion. A company who continues to invest massive amounts into their infrastructure and who came under fire from Donald Trump who claimed that Ama-zon misuses the U.S. Postal Service by using them as their cheap ‘Delivery Boy.’

Can costs be contained to ensure profits?
On the face of it it seems that costs are still being held in the lower region.
But, is this changing? When one looks at Amazon’s Q2 2018 results, then it does not seem likely.
Net income in Q2 totaled US$2.53 billion compared to just US$197 million in Q2 of 2017. Revenues for the same period were US$52.88 billion compared to US$37.95 billion in Q2 2017. No reason to worry! Revenues up, net earnings way up.
But, the figures show that worldwide shipping costs are rising considerably. Where-as in Q1 of 2017 shipping cost the company US$4.38 billion, that figure rose in Q2 of this year to just under US$6 billion. Of course, more sales means more shipping! The company needs to start looking at keeping shipping costs at a minimum and to this effect they started a scheme at the end of June whereby they announced that they would support new companies who would start up their own delivery compa-nies and deliver Amazon shipments. They stated that earnings for these small out-fits could amount up to US$300.00 per year. The help Amazon offers is in the form of access to new technology, staff training and arranging for discounts on vehicle acquisition. But, will this in the long run help to push costs down to a minimum?
Amazon’s competitors are moving in fast and the Chinese retail and express companies are the best examples. Amazon will have to keep ahead of them and that means stronger investment in all areas.

Prime Air is good but also costly
The Prime Air carrier was launched in May of 2014 and in 2016 the first B767 freighter operated by Atlas Air took to the skies. In the meantime, Amazon Prime Air’s fleet has grown fast to more than 40 aircraft which are operated exclusively for them by Atlas Air and Air Transport International (ATI). The carrier is seen to be a serious competitor to the traditional parcels carriers such as FedEx, DHL and UPS.
Somewhere along the line Amazon will have to decide whether they take a controlling stake in Atlas or ATI in order to ensure that they hold the reins in their hands. This will cost a lot but give security to Amazon who would be badly hit in the U.S. trans-continental delivery market if one or the other carrier were to go “belly up.”
So far, costs, although dramatically increasing, are under control. The move by Amazon to entice smaller new start-ups to deliver may well be the first internal move to scrutinize costs even further.

John Mc Donagh