Amazon's prime service may be too much for the tech giants.
The offer has won about 100 million subscribers. In turn, this sizeable customer base has led to an increasing number of third-party resellers being acquired as Amazon fulfillment service customers. That's because products offered by vendors participating in this program receive Prime's free shipping offerings.
So far, so good, right? Prime is bringing more customers to Amazon, attracting more merchants, helping Amazon expand its product offering, which is likely to attract more buyers and encourage existing customers to buy more items on Amazon.
The problem for the company is that shipping costs are rising, limiting its profits and making the free shipping offers more expensive. Amazon's fulfillment costs were already growing faster than sales, said Dan Morgan, a senior portfolio manager for Synovus Trust, which owns Amazon shares.
One of the key questions for the company, he said in an email, is, "How can Amazon offset its fulfillment / shipping costs with an increased order volume from Prime members?"
Free shipping is expensive for Amazon.
Morgan is a longtime cop on Amazon. However, his optimism is mainly due to the cloud computing business of Amazon Web Services and the emerging advertising business. He sees the prospects for the traditional retail business more skeptical.
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its main subscription. But about half of that amount is used by the cost of free shipping for customers, Morgan estimates.
These costs could continue to rise.
Amazon spent $ 25.2 billion on compliance costs in 2017, an increase of 43% over the previous year and 14% of the company's total revenue. This amount is expected to increase to $ 35 billion, or 15.1%, of the company's total revenue in 2018 and is expected to increase to $ 43.3 billion or 15.4% of revenue, benchmark analyst Daniel Kurnos estimates a recent report.
In fact, Kurnos feared that the shipping-related factors could have impacted Amazon's results over the holidays. While Wall Street analysts overall bet that the company generated operating income of $ 3.7 billion in the fourth quarter, Kurnos forecasts $ 3.2 billion.
Amazon is expected to announce the holiday season results on Thursday.
"We are a bit reluctant … given the external pressure on delivery costs and the significant increase in shipments between two days on the same day," he said.
Amazon faces price increases
Part of the problem that Amazon is facing this year is that all three major domestic freight forwarders – the US Postal Service, FedEx and United Parcel Service – have just raised their prices , Amazon has recently adjusted its own trading fees for its fulfillment services. However, it is unclear whether the higher costs will fully cover the increased costs. Regardless, these fees apply only to third-party merchants, not to products sold by Amazon itself.
Add it all together, and Prime's free shipping offer will be a better deal for customers – and a worse deal for Amazon.
"Increasing compliance costs not only impact the operating margin, but they also detract from Prime members' revenue, as the annual fee income of $ 119.00 declines with rising shipping costs," Morgan said.