Amazon’s Already Large Distribution Empire Keeps Expanding

Online shoppers want their packages -- now. And Amazon is spending heavily to make sure that happens. Amazon's Prime service has, at heart, always been about free two-day shipping.

The $99 annual subscription includes a variety of other goodies, but the near-instant gratification of fast, no-extra-cost delivery was the program's original draw, and remains central to its appeal for its estimated 60 million subscribers.

But fast delivery -- everything from Prime's two-day service to one-day or one-hour options, grocery delivery and delivery for third party sellers -- doesn't come cheap. In the April-June quarter, for instance, Amazon spent $3.88 billion on its distribution network, or what it calls "fulfillment," up 35 percent from the prior year. The company spent $13.41 billion on fulfillment in all of 2015, up 25 percent from the prior year -- and fully 13 percent of its $104.8 billion in total operating expenses.

"Costs to 'fulfill' products is one of their largest expenses, and they're always trying how to figure out how to manage it better," said R.W. Baird analyst Colin Sebastian. "In the long term, creating more infrastructure for transportation and delivery will help drive more efficiency, but it adds to costs in the near term."

Big Spender

Such heavy investment is a big part of what keeps Amazon's profit margins low relative to other big retailers. That's intentional; the reinvestment has let Amazon open up new business lines such as its Amazon Web Services cloud-computing business, production of original TV shows and movies, and smart-home products such as its Amazon Echo device.

Still, distribution spending remains a priority. Amazon's parcel volume was an estimated 1 billion packages in 2015 -- the same number that FedEx delivered three years earlier for hundreds of thousands of customers, according to Satish Jindel, president of shipping consultant ShipMatrix. With volume growing yearly in the...

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