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Is free shipping to hurt Amazon?

There has to be a lot going on from the time you click 'Place an order' on Amazon.com until the day your items arrive at your front door a day or two later. There are Amazon workers who need to get the item out of the bin where it's stored, workers packing it in a box, and people driving the trucks (or flying the planes) that make that box from the warehouse to one Bringing Sort Center

Although these workers do not necessarily make a lot of money – Amazon announced last week that their employees' median salary is $ 28,466 – delivering these packages is a costly undertaking. In 2017, Amazon spent $ 21

.7 billion on shipping costs, according to its most recent annual report, nearly twice as much as in 2015. Some of these costs are undoubtedly due to the fact that Amazon is spending a lot of money on the free shipment of $ 100 million is spent by Prime members around the world. This is a wise strategy in some ways. Prime customers have become so used to free shipping that they simply buy everything on Amazon. "They're trying to make you depend on convenience," said David Vernon, an analyst with Bernstein. "Once the Prime ID is in your wallet and you hit the buy button, are you really paying attention to the price?"

But many of these customers could be unprofitable prime customers like me. Although I pay the annual Prime membership fee, I give back so many orders that I'm not sure they'll cover my shipping costs. In the last two weeks alone, I've ordered and returned two items, which means that Amazon paid the package four times and did not sell. As shipping costs increase, Amazon could find more and more of its customers similarly unprofitable.

This may be the reason why Amazon seems to find more ways to get its customers and sellers to subsidize the cost of free shipping. On Thursday, during the company's quarterly earnings distribution, Amazon said it would increase the cost of annual prime memberships from $ 99 to $ 119. The increase in cost comes as 100 million items are now available for two-day shipping from 20 million in 2014, said Brian Olsavsky, Amazon's Chief Financial Officer, on the call. In January, Amazon also charged seller fees for different clothing categories. He charged fees for book and video sellers last year.

Some analysts believe Amazon's rising shipping costs will be a problem. After all, shipping is a "variable price", meaning that the more physical goods the company sells, the more it has to spend on shipping. (Fixed costs, on the other hand, are the same regardless of how much a company sells or does not sell.) "I see no end to Amazon's increasing fulfillment costs," wrote Robert Hetu, research manager at Gartner I in an email. "I see that as a huge risk for Amazon, because at some point they have to make it much more expensive to be a Prime member and at this point lose a large part of the value equation for the customer."

The Costs Shipping a parcel – without the cost of shipping in a warehouse and preparing for mail – depends on the size of the parcel. Small items cost around $ 2 per parcel, while mid-sized boxes cost about $ 3 to $ 4, according to amber analyst Vernon. It is possible that Amazon will reimburse part of this cost because the company's markup for items is higher than the shipping cost. But these shipping costs will certainly rise in the next few years. With low unemployment, carriers like FedEx and UPS have to pay higher wages to attract new employees, Vernon says, and they could pass the cost of those higher wages on to Amazon and other e-commerce companies. The US Postal Service, which provides many Amazon packages, could also raise interest rates: President Trump ordered the creation of a task force to investigate the beleaguered government agency that he has repeatedly attacked on Twitter.

Vernon wrote that he expects shipping costs to increase by 7 percent a year, a figure that companies like Amazon continue to absorb. "We think we're in the midst of costing e-commerce, and the market as a whole underestimated how expensive the convenience of buying everything online will ultimately be," he wrote. 19659002] Amazon does not break exactly how much it costs to bring an item from its warehouses to the front door of a customer. It reports "fulfillment expenses", ie the costs of running its warehouses, after-sales service centers and stores, and reports on the "cost of sales", which includes, among other things, the purchase price of products as well as incoming and outgoing transportation costs. Fulfillment will certainly be more expensive if the company reaches more customers. In the first quarter of 2018, equipment costs increased by 66 percent compared to the same period of the previous year. This is a faster rate than net sales from North America and abroad over the same period, up 42 percent year-over-year. "We expect our shipping costs to continue to rise as our customers increasingly accept and use our shipping offerings," said Amazon in its annual report.

So far, however, these rising costs have not hurt the profits of the company. Amazon had a huge first quarter in 2018. The company said it made a profit of $ 1.6 billion in the first three months of the year, more than double that of the same period last year. Amazon reported earnings per share of $ 3.27, much more than analysts expected of 1.26. While spending was disproportionate in its international segment, where Amazon is investing heavily in infrastructure development, the North American segment was able to increase its sales faster than spending. Operating income in North America was $ 1.1 billion in the first three months of 2018, up 93 percent year-on-year.

Some of these figures support the success of Amazon companies that do not ship packages to customers These include Amazon's advertising business and Amazon Web Services, the company's highly profitable cloud computing platform. However, analysts say Amazon is gaining something substantial in binding customers to Prime, even though it may be losing money for many of these clients right now. Prime customers spend more than the average customer, studies show. "They have a very valuable mousetrap," says Josh Olson, an analyst with Edward Jones Research. These customers are also likely to sign up for other Amazon offerings that could eventually generate money, such as food delivery. Olsavsky also said that the company saw a stronger cooperation with Prime, which resulted in customers buying other things like music and movies.

And even if not, Amazon has many options to offset these rising shipping costs. It is already charging higher fees for its third party vendors using Amazon's fulfillment network to send articles to Prime and other customers. The company also offers incentives to Prime customers who choose to receive their items in one week instead of two days, which is likely to continue. And in the future, it could offer lower prices to customers picking up goods in stores or in central locations, rather than delivering packages to their doors.

That analysts and investors do not seem particularly worried about rising shipping costs speaks for itself of the Amazon investor. They are more likely than many other retailers to pay high expenses if they think that will pay off in the long run. After all, the company made big investments before it looked like they were paying off, and then, Olson said. Originally launched to support retailers, Amazon Web Services has now taken in thousands of other businesses and is now one of Amazon's key earnings drivers. When it expanded its warehouse network for the holiday season and then looked for ways to fill that place all year, Amazon began selling more and more third-party vendors, which has become another profitable business.

"The shareholder base is driven by a forward-looking view that says Amazon may eventually shut down its investment and cut its expenses and generate more profitability," Charlie O & # 39; Shea, an analyst at Moody & # 39; s told me , "If another trader does that, his shareholders react differently."

It's too late for Amazon to resign its commitment to free two-day shipping for Prime members. But maybe it does not have to be. Customers may be so used to the convenience that they are willing to pay more and more, even if the company is not.

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