Shipping costs: Another thing to worry Amazon

London United Kingdom
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Joined: Mar 11, 2014
Shipping costs: Another thing to worry Amazon
18 Dec 2014
For a company that dominates as much as Amazon does, its profits are paltry compared to its revenues. Between 2007 and 2013, its revenues grew from $14.8 billion to $74.45 billion. But in that same time, Amazon saw its profits drop from $436 million to $273 million.

These relatively small profits are due in no small part to Amazon continuing to invest in new enterprises, but Amazon’s shareholders up to now have been exceptionally patient. However, Amazon’s stock is down 18%, and investors are not now quite so optimistic about the future of the company.

Profitability is now a big issue, and much time has been taken and effort made to develop the front end of the Amazon website to improve things in that area, and appease any disgruntled shareholders. Other measures adopted include raising the price of its prime membership and re-categorizing many products from ‘prime’ to add on items.

But on the horizon is another potential headache for Amazon – shipping. FedEx have announced plans for dimensional weight pricing on all ground shipments (due to take effect from January 1st). The effect of this is that Amazon – along with other e-Commerce providers – will be under increased pressure to get the packaging of customers’ orders right. Given Amazon’s almost infinite assortment of products, this is no minor task.

Amazon has tried to address this by filing a patent for what they call an “anticipatory shipment algorithm” – in other words, attempting to calculate a formula that will provide a solution to this profit sapping dilemma. Up to now, no solution has come forth.

As such, Amazon appears to find itself in a vicious cycle - one of flat lining profits. Jeff Bezos’s famous line “Your margin is my opportunity” was based on the premise that by continually increasing the economies of scale that Amazon can operate within, eventually, this would pay off in a big way. However, though an increase in shipping costs was to be expected as the scale of operations became bigger, disproportionately higher costs were not. Factor in unexpected external issues like FedEx’s new “dimensional weight pricing” policy, and the problems become trickier.

All this has led to the increased perception that Amazon is fundamentally an unprofitable business model. There’s very little room for manoeuvre in terms of increasing its net profit, and what little room there is leaves the company vulnerable to losing customers to the increasing competition from other marketplaces.

Amazon hopes its new shipping policy will break the cycle. It has recently sent an email to third party sellers informing them of tighter shipping policies that are taking effect. One of these was put in place on 13th November 2014, removing the one day shopping option as a US domestic shipping option for your merchant fulfilled items on Amazon also last month changed the way it calculates sellers’ late shipment rate (LSR), a metric factored in to their Order Defect Rate performance standings.

It seems that Amazon is finally feeling the pressure that comes with disappointing profit margins, but some commentators are surprised at how long it’s taken to get to this point. The question is, how will Jeff Bezos and the other key decision makers in the organisation look to arrest this perceived decline? It will be interesting to see whether the culture of this e-commerce giant is about to be re-defined.
Luke Trayfoot
0207 801 3022
United Kingdom United Kingdom
Kudos: 223
Joined: Sep 16, 2014
Re: Shipping costs: Another thing to worry Amazon
21 Dec 2014
@World First Maybe Amazon, while happy to continue to reinvest in their own company might decide to generate more profit through acquisition of profit-making firms? Focussing purely on profit is also to ignore benefits such as increased job creation.
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