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The Ratings Game: Amazon’s move to one-day shipping shows the competition is catching up

Amazon is trying to stay ahead of traditional retailers by investing $800 million to make one-day shipping standard, halving the previous two-day shipping promise. Read More...

Amazon.com Inc. is transitioning to free one-day shipping, faster than the previous two-day promise to Prime members, a move that analysts think indicates just how much the competition has accomplished in its efforts to catch up to the e-commerce giant.

Amazon’s AMZN, +2.54%   Chief Financial Officer Brian Olsavsky announced the move to one-day shipping on the first-quarter earnings call, saying that the company had set aside $800 million to spend on the effort in the second quarter. The company will continue to offer same-day and Prime Now one-hour delivery as well.

“[W]hile our 20-year head start in investments in logistics and fulfillment capacity and partner networks that we’ve built are helping us, we also do have a network that is tuned to two-day delivery right now,” Olsavsky said, according to a FactSet transcript. “So we do need to build out more one-day capacity along with our transportation partners.”

Read: Amazon to give Prime customers one-day shipping, cutting free delivery time in half

Analysts see the move as a good one despite the price tag as it maintains the convenience edge Amazon has over its competitors in e-commerce. But it’s also an indication that all of the investment and effort that competitors like Walmart Inc. WMT, -1.92%  , Target Corp. TGT, -5.65%   and others have made to improve their own online operations is working.

“We believe the move is consistent with Amazon’s long-standing goal of convenience and selection, but also likely reflects the increasingly competitive retail environment,” wrote J.P. Morgan analysts, who rate Amazon shares overweight and raised their price target to $2,200 from $2,050.

John Zolidis, president of Quo Vadis, notes that Walmart and Target still have the benefit of same-day pickup, and Target has same-day delivery through Shipt. While one-day shipping will be even more enticing to existing Prime members, he says the other players shouldn’t be discounted.

“[I]t would be a mistake to sell large retailers on this announcement as they have anticipated this for some time and are already rolling-out corresponding services,” Zolidis said in a statement. “Further, we believe that a total offer that gives consumers the option to get product when and where they want it, either at home or in the store, is superior to a delivery-only option.”

Nevertheless, Walmart stock is down 2.2% in Friday trading, and Target shares have slumped 6%.

Amazon’s stock edged up 0.7% in morning trade, after the company reported late Thursday earnings that doubled, to well-above expectations, while revenue rose in line with forecasts.

GlobalData Retail data shows that both Walmart and Target have lifted their share of shoppers over the past three months, Neil Saunders, managing director, wrote in a note. Nearly three-quarters of those shoppers (72%) are also Amazon regulars.

“While this should not be taken to mean that Amazon is losing all their spending, it is clearly losing a share of wallet among some segments of the population,” Saunders said. “As much as this is offset by gains elsewhere, it is extremely unhelpful to growth. In our view, the trend is only likely to accelerate going forward and it will put Amazon under more competitive pressure than it has seen before.”

See: Amazon profit doubles to a record high, Prime customers to get free one-day shipping

By jumping out ahead with one-day standard shipping, Amazon is once again raising the competitive bar just when other retailers and brands thought they were on to Amazon’s logistical game.

“[T]he move will widen the convenience/logistical gap with competitors, which had narrowed in recent years as other retailers enhanced their shipping capabilities,” Stifel analysts led by Scott Devitt wrote. “Amazon is early in ramping up this initiative and the total cost to offer the service is difficult to estimate at this time. Relative to previous investment cycles, Amazon is in a more favorable position from a margin standpoint given the development of AWS and its emerging advertising business.”

Stifel rates Amazon stock buy with a $2,300 price target.

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There were a few sour notes during the quarter that Benchmark’s Daniel Kurnos points out, among them a deceleration in international revenue growth and a miss in physical-store sales despite additional price cuts at Whole Foods Market as some purchases have moved online.

But even with those negatives, Amazon has the edge with one-day shipping.

“This move should only solidify Amazon’s dominance in the marketplace, forcing competitors to react with less supportive infrastructure backbones, and while likely to be expensive over the medium-term, Amazon has already shown increasing economies of scale even as delivery times shrink,” Benchmark wrote.

“After a year in which offline retailers were lauded for evening the playing field, Amazon once again will likely retake share, solidifying what should remain a high-teens/low-twenties percent revenue growth rate.”

Benchmark rates Amazon stock buy with a $2,300 price target.

In all, 13 analysts surveyed by FactSet raised their stock price targets, while one lowered, to lift the average target to $2,184.54, from $2,128.32 before the earnings report.

Amazon stock has rallied nearly 30% for 2019 so far while the Amplify Online Retail ETF IBUY, +1.13% has experienced a 27.5% gain. The S&P 500 index SPX, +0.47%   is up 17.3% for the period.

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