Amazon logistics spending continues to grow

Amazon has a claim to have one of the largest logistics operations in the world. However the success of the enterprise is unclear with the latest set of results displaying a continued absence of profits. Last week the company reported an increase in losses for the quarter, with net sales up by 23% to $19.34bn but operating profit negative by US$15m. The same period last year saw an operational profit of $79m.

Amazon’s accounts do not give the sharpest picture of the internal cost dynamics of its operations, it being hard to differentiate the performance of different parts of its business. However bearing in-mind that 67% of sales are made by the ‘Electronics & Other General Merchandise’ segment of the corporation –which is the core internet retailing activity, rather than the IT services or electronic media business- it is reasonable to suggest that it is this division that drives much of the entire company’s results including its logistics performance.

Operational logistics costs are very substantial, accounting for more than twice Amazon’s spending on marketing and more than the entire costs of the ‘technology and content’ business. Already high at over 14% of sales, the past quarter has seen logistics spending edge-up to 15% of sales. It is important to remember that these are operational costs and exclude capital investment.

Amazon is now looking at spending over US$10bn a year on both in-house and out-sourced logistics services worldwide. Using the sales of the ‘Electronics & Other General Merchandise’ part of the business as a guide it is likely that this spending will be split, with two thirds in North America and one third being ‘International’.

Therefore it appears that while Amazon may be increasing its sales of goods its related costs are increasing even faster. It might have been hoped that with rising volumes semi-fixed costs such as logistics would have eased as a proportion of sales. Yet the reverse is happening. Admittedly Amazon is restructuring its operations through the construction of ‘consolidation centres’ in order to bring in-house more of the customer facing logistics operations. This might increase costs in the short-term, however it is hard to be certain.

What such numbers imply is that either Amazon is investing to cope with an enormous increase in sales volume the medium term or its cost base is not under control.