Amazon has confirmed plans to expand its logistics activities to ‘supplement’ but ‘not replace’ delivery partners amid soaring distribution costs that held back profit growth in the final quarter of 2015.
The world’s largest e-commerce company increased net sales by 22% to $35.7 billion in the October – December peak season quarter, with operating profits up 88% to $1.1 billion and net profits that more than doubled to $482 million.
In 2015 as a whole, net sales increased 20% to $107 billion. Operating income was $2.2 billion, compared with operating income of $178 million in 2014, while net income was $596 million compared with a net loss of $241 million.
On the cost side, however, Amazon’s fulfilment costs surged by 33% to over $4.5 billion in the final quarter of 2015 and by 25% to $13.4 billion in the year as a whole, leading analysts to question whether deliveries are being subsidised to win and retain customers.
Worldwide membership of the Prime customer loyalty programme, which includes diverse free or cheap delivery options, increased 51% last year. The Prime Now rapid delivery service launched in December 2014 now covers more than 25 metropolitan areas across the U.S., U.K., Italy, and Japan, while Prime Same Day, launched in the U.K. and Germany last year, offers Prime members unlimited free same-day delivery on a million items.
The company’s Fulfillment by Amazon (FBA) service expanded its active customer base by 50% and shipped over one billion units on behalf of sellers last year.
Against the background of diverse recent reports about Amazon looking at setting up an air cargo operation, expanding its logistics network and moving into own deliveries, CFO Brian Olsavsky told analysts on a Q4 results conference call that the company needed to add its own logistics capacity to support parcel carriers who “are just no longer able to handle all of our capacity that we need at peak” due to its strong volume growth.
“What we found in order to properly serve our customers at peak, we’ve needed to add more of our own logistics to supplement our existing partners. That’s not meant to replace them,” he was quoted as saying. Most of the logistics expansion was for transportation between warehouses and sorting centres, and not for final-mile delivery, he explained.
In the UK and Germany, however, the company is currently rolling out its own delivery operation through subcontractors to complement traditional deliveries through parcel carriers.
Looking ahead, Amazon said that it expects net sales to grow by between 17% and 28% to between $26.5 billion and $29 billion in the first quarter of 2016, with operating income between $100 million and $700 million, compared with $255 million in first quarter 2015.
