Merchant Innovation

Could Prime Air Flip The Profit Switch For Amazon?

Bringing Amazon’s Prime Air drone delivery program to life may actually result in big profits for the company down the line, The Verge reported yesterday (June 3).

With recent announcements like free Prime same-day delivery and free shipping for small items less than 8 ounces and without a minimum order size, Amazon could be setting the scene for future profits. But the company will first need to overcome the numerous technological and regulatory hurdles keeping Prime Air from launching.

According to a report from Tasha Keeney, an analyst at ARK Investment Management, Amazon has the potential to make significant profits upon receiving clearance for a commercial rollout of its drone delivery program. Based on Keeney’s estimates, consumers could expect to pay as little as $1 for having a five-pound package delivered and Amazon’s internal rate of return on its drone investments may exceed 50 percent.

The assumptions have drawn some doubts from industry drone experts and Amazon has remained mum on the topic, but The Verge reported Keeney’s calculations as being “reasonably conservative.”

In a breakdown of the potential expenses The Verge shows how Amazon’s Prime Air could deliver in terms of profit: “The drones themselves, based on what Amazon has shown, are cheap quadcopters, costing around $1,000 to $3,000. Let’s start with 30 deliveries per drone per day, assuming they can’t operate at night or in bad weather, and each delivery takes roughly half an hour. It would take a fleet of 30,000 to 40,000 drones to move all that merchandise. Give them two batteries each at $200 a pop for a grand total of $80 million in equipment. That’s $150 million in overall capital expenditures, not a prohibitive expense for Amazon, which has billions in free cash flow.”

“High return is achievable even with estimates for infrastructure, drone investment, and operating expenses, which are primarily labor driven,” Keeney said in the report.

Of course there are many assumptions at play, but the argument shines a light on the possibility of Amazon seeing an end to the days of producing little to no profit.

 

For more on the impact of digital and other innovations in the retail industry, join PYMNTS this August 3-5 in Chicago for Retail Reinvention, a two-day experience designed to help merchants navigate the current and future wave of disruption across the retail payment and commerce landscape.

Click here to reserve your spot today!

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