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Amazon profits pinched by speedy shipping push

The e-commerce giant’s investments in delivering packages in one day as it ramps up for the holiday shopping season continue to bite into its profit margins.

Packages move along a conveyor at the Inc. fulfillment center in Robbinsville, N.J., in June. (Bess Adler/Bloomberg News)

The holiday season has gotten particularly expensive for Amazon this year.

The e-commerce giant pioneered speedy shipping with its Prime subscription program more than a decade ago, which now counts more than 100 million members. The company announced plans earlier this year to get packages to customers in one day, rather than the two that has long been its standard for Prime members.

But that’s come at a cost, as Amazon spends more on transportation, as well as pushing more products out to its warehouses to get inventory closer to its customers.

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The price tag for those moves startled investors Thursday, as the company reported its third-quarter results. Amazon said it plans to spend about $1.5 billion more in the current quarter to get packages from its warehouses to its top customers in one day, rather than two. That’s on top of massive spending to boost shipping speeds in the second and third quarters.

“There’s a lot of cost in the short run,” Amazon finance chief Brian Olsavsky said during a conference call with journalists.

The payoff, Olsavsky said, will be worth it. Faster shipping will translate into high sales and more loyal customers. Still, the continued cost of speeding up delivery disappointed investors, who hammered the company’s stock in after-hours trading.

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(Amazon chief executive Jeff Bezos owns The Washington Post.)

Because of those additional costs, the company told investors to expect fourth-quarter operating income of $1.2 billion to $2.9 billion, compared with $3.8 billion a year ago.

The increased costs paid off in customers buying more items, Olsavsky said. “We see a lot of traction with customers,” he said.

Three months ago, Olsavsky noted that the company blew past plans to invest $800 million in the second quarter to speed up its shipping. At the time, he said the company also adjusted its third-quarter guidance to account for higher-than-anticipated costs.

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Amazon also noted it now has 750,000 full-time employees, up 22 percent from a year ago, another added cost.

Amazon has endured periods of significant spending in its quarter-century as a company, a strategy that distinguished it from retail rivals that haven’t dared run up such expenditures. In recent quarters, Amazon has been able to offset such lavish spending with gains from its lucrative cloud-computing and advertising businesses.

While the cloud business, Amazon Web Services, continues to be the company’s most profitable division, its growth and margins are slowing.

Operating income at AWS, whose services are used to run technical infrastructure at companies including Unilever and Pinterest, jumped 9 percent from the same period a year ago to $2.3 billion. Sales rose 35 percent to $9 billion. Just three months ago, the unit’s operating income climbed 29 percent as sales rose 37 percent.

Amazon’s digital advertising business, which sells space to big brands as well as merchants hawking wares on its retail site, posted big gains, too. In the period, Amazon’s “other” category, which is primarily derived from advertising, grew 45 percent year over year to $3.6 billion.