Fulfillment center costs and spending on video content cut into Amazon's profit in the second quarter of 2017. The e-commerce giant reported much lower earnings than expected. Amazon reported net income of $197 million, on sales of $38 billion, a profit decline of 77% from the same quarter a year ago, while analysts on average expected Amazon to report earnings of $1.41 a share on sales of $37.2 billion, according to MarketWatch.
Amazon continues to invest in fulfillment capacity and logistics services, digital video, Echo and Alexa, and India. It takes up to three years to get to network efficiency for a new fulfillment facility, according to the retailer.
"A large percentage of our new fulfillment centers are coming online in the second half of the year, a lot of them in Q3," said SVP and CFO Brian T. Olsavsky. "So, to give that some perspective, the Amazon-fulfilled network, or the combination of retail and Fulfillment By Amazon (FBA) shipments coming out of our warehouses has been nearly 40%. It was that last year, and it's continued through this year. Last year we added 30% additional square footage to handle that additional shipping volume, and about 80% of that went into service in the back end of last year."
Olsavsky said the company is very happy with the FBA program and they think Prime and FBA are self-reinforcing.
"We know customers really like it, the additional selection that FBA provides," he said. "So we like those combined, and we are working very hard to match that with capacity in an efficient manner."
This year Amazon will have about 80% of its increase in square footage for fulfillment and shipping coming online in the back end of the year. The company also stepped up video content and says it will be increasing investments in video.
Whole Foods Market
Olsavsky noted that once the Whole Foods Market deal closes, there is no one solution in mind for the integration of Amazon Fresh and Prime Now.
"We're experimenting with a number of the formats from physical pickup points in Amazon Go to online ordering and delivery to your door through Prime Now and Amazon Fresh," he said.
Amazon Go is not out of beta yet. Prime Now, which offers free two-hour delivery on tens of thousands of items, is now available in 50 cities across eight countries, with the launch of Prime Now in Singapore the latest.
While Olsavsky noted customers love Prime Now, but the service is expensive and Amazon is constantly working on cost of delivery and route densities, and will be working very hard on making it a lower cost offering.
Olsavsky said of the acquisition of Whole Foods that the company believes the grocer is very customer-centric, "just like us" and that Amazon is looking forward to adding the Whole Foods team and their reputation for quality customer service.
"They've built a great business, focus around quality and customer. So we're really glad to join up with them," he followed.
Amazon Web Services
Amazon Web Service (AWS) stepped up its run rate from a $14 billion run rate last quarter to $16 billion and saw the largest quarter-over-quarter and year-over-year increase in revenue in that business.
Usage in all of AWS large services are accelerating and they're growing at a rate higher than its revenue growth. AWS will be opening five regions in the near future in France, China, Sweden, Hong Kong and a second government cloud region in the East.
In the last few months the company launched more than 400 significant AWS features and services and migrated more than 7,000 databases using AWS Database Migration Service.
In 2018 AWS will open a new infrastructure region in Hong Kong and a second GovCloud region in the U.S. AWS currently operates 44 Availability Zones across 16 infrastructure regions worldwide, with announced plans for another 14 Availability Zones across five AWS Regions.
Brick and Mortar
In the last few months, Amazon opened three new Amazon Books stores in Lynnfield, MA, Paramus, NJ, and New York, NY, and now has eight bookstores across the U.S. with five more stores coming soon.
Olsavsky said the company is experimenting with a number of physical formats and the customer experience derived from them is a benefit to the company.
"I went into the [bookstore] in Seattle last week and I saw about a third of the people were standing around the device table learning how [the Echo devices] work, how they interact with devices," said Olsavsky. "So, I saw firsthand the customer experience, I think, that's what we're seeing as a benefit to the physical stores right now."