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.
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…
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