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Amazon's Costly Push For Last-Mile Warehouses Sent Profits Down 26%

An Amazon fulfillment center

Amazon is finding out the hard way that last-mile warehouses are among the most complex and costliest elements of industrial real estate.

The e-commerce giant suffered a 26% year-over-year decline in profits in the third quarter, breaking a streak of year-over-year profit growth that stretched back to 2017, The Wall Street Journal reports. Overall incoming revenue increased 24% to $70B over the same time period.

In an earnings call, Amazon Chief Financial Officer Brian Olsavsky told analysts that the drop is due to aggressive spending in the company's drive to make one-day delivery the new standard for Amazon Prime customers, the WSJ reports.

Amazon overshot the $800M it expected to spend in Q2 on the one-day delivery initiative, Olsavsky said on the call, and spent even more in Q3. The company expects to surpass Q3 by spending $1.5B in Q4 spending to support one-day delivery through the busy holiday season, Olsavsky said.

Last year, Amazon struggled with the logistical load of record activity around the holidays, in some cases being forced to erect massive tents to house temporary fulfillment centers. To make matters worse, shipping giants like FedEx, UPS and the U.S. Postal Service were unable to supply enough trucks to meet demand.

Finding and leasing warehouses close enough to population centers to pull off one-day delivery has proven more expensive than Amazon projected, Olsavsky said on the earnings call. The company remains committed to the one-day model, but does not have a sense of its long-term cost, the WSJ reports.

Adding to the cost of the initiative is the elevated labor requirement of last-mile logistics, which has led to a sharp increase in hires in Q3, Olsavsky told analysts. The creation of Amazon's own shipping subsidiary has also been a costly bit of infrastructure, especially as it resulted in FedEx cutting business ties.

Though the huge expenditure has produced sizable growth in online sales — 22% year over year, double the jump from Q3 in 2018 — according to the earnings report, cloud computing arm Amazon Web Services remains the company's biggest profit driver, the WSJ reports. AWS sales rose 35% year over year last quarter, a drop from 37% in Q2 and below its longtime average of 40%.

While its least customer-facing business slowed growth slightly but remained robust, Amazon's attempts to reach customers more directly have been less fruitful. The online merchant's physical stores, including Whole Foods, saw the biggest drop in sales of any segment of Amazon's business, the WSJ reports.

CORRECTION, OCT. 29, 11:30 A.M. ET: A previous version of this article contained an inaccurate version of Amazon's projected spending this year. This article has been updated.