Amazon Fulfillment Costs Rising

Investment Analysis Clubs Saul’s Investing Discussions
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Of all the bear cases for Amazon, I thought this was an interesting one from foolish contributor Travis Hoium. As Amazon gets larger, you would think economies of scale would kick in and their fulfillment costs would go down as efficiency went up. So far, that hasn’t happened. Which is worrying to a certain extent.

At the core of Amazon’s (NASDAQ:AMZN) online retail model is the idea that scale in both online sales and fulfillment will eventually lead to lower costs and rising profits for investors. To that end, the company has built out a massive distribution infrastructure and has recently been building a delivery network to cut the power UPS (NYSE: UPS), FedEx (NYSE: FDX), and the United States Postal Service have in the supply chain.

While the story of scale as an advantage sounds good, the reality has been very different for Amazon. Over the past five years, the cost to fulfill each order has risen and shows no sign of stopping. This is despite the company’s enormous scale and Amazon itself delivering more and more packages. And if you’re an Amazon investor it’s a trend worth watching.

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Amazon reports fulfillment costs in its quarterly reports and it is one of its biggest operating line items. But to get a better picture of proportion we need to pull out AWS, its cloud services business, which doesn’t require shipping. Then we can look at how much it costs Amazon to fulfill orders from its website. Amazon started reporting revenue from AWS two years ago, so we can pull that out of the total for those quarters, but it’s worth noting that the figures below include AWS before Q4 2014, although AWS was only 5% of sales at that time.

And fulfillment costs have been rising. In the third quarter of 2016, fulfillment costs were 14.7% of retail sales, which is up from 12.3% in Q4 2014, when the company started reporting AWS separately. Both figures are also up significantly from fulfillment costs of 9.8% of overall sales in Q1 2012 (which included AWS).

You can read the entire article at http://www.fool.com/investing/2016/12/22/amazons-fulfillment…

Matt
Long AMZN
MasterCard (MA), Nestle (NSRGY), PayPal (PYPL), and Verizon (VZ) Ticker Guide
See all my holdings at http://my.fool.com/profile/CMFCochrane/info.aspx

5 Likes
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Matt, that’s no mystery. It seems obviously because they are trying now for shorter delivery times, which they feel is worthwhile because it brings more sales, and more Prime customers. Just saying…

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It seems obviously because they are trying now for shorter delivery times, which they feel is worthwhile because it brings more sales, and more Prime customers.

Saul, they’ve been doing two day Prime shipping for years now. I know they have begun Amazon Prime Now more recently, but that is still found in very few cities. Could the costs of such a limited program affect their fulfillment costs this much? If so, is the program even worth it?

Are their retail operations going to be a loss leader forever? They don’t even charge the cheapest prices for products any more. At some point, I would like their numbers on the retail side to at least be moving in the right direction.

Matt
Long AMZN
MasterCard (MA), Nestle (NSRGY), PayPal (PYPL), and Verizon (VZ) Ticker Guide
See all my holdings at http://my.fool.com/profile/CMFCochrane/info.aspx

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One thing I noticed when ordering direct from Amazon (as opposed to its 3rd party sellers) is that a single order can arrive in several packages from several different locations, so your shipping charge doesn’t come close to covering their cost, especially if you’re getting free shipping, which is fairly common.

I would guess that right now it’s also more expensive for them to use their own delivery service instead of UPS/USPS/FedEx, because of its smaller scale and start-up costs.

By contrast, I sometimes buy car parts from Rock Auto. When my order includes items from more than one of their warehouses, they have separate shipping charges for each warehouse, and they do not offer free shipping.