Free delivery for Prime members is anything but free for the company doing the shipping
Amazon's Sales Growth Costs a Fortune in Shipping and Fulfillment
As could have been expected, e-commerce behemoth Amazon logged another monster quarter of earnings last week. Coronavirus-concerned consumers drove a 37% year-over-year increase in the company's top line for the three-month stretch ending in September. North America remains Amazon's biggest market for physical and digital goods, but Amazon Web Services (AWS) and international operations saw the most relative growth.
It would be naive, however, to look past the fact that Amazon's impressive expansion isn't taking a toll. Namely, fulfillment and shipping expenses continue to rise much faster than the company's top-line revenue. Last quarter was no exception.
Getting expensive
In step with last quarter's 37% year-over-year top-line growth is a 57% year-over-year increase in shipping costs, and a 45% increase in fulfillment costs. Fulfillment expenses include the cost of offering some digital services, but mostly reflects spending linked to picking and packaging online orders. Shipping obviously includes payments made to delivery service providers, but also includes sorting and inbound deliveries.
Were those big increases in costs a one-off, it arguably wouldn't matter. They aren't one-offs, though. Costs related to selling more staples and discretionary goods have outpaced revenue growth for a while now, and particularly since Amazon expanded the number of goods eligible for one-day shipping to Prime subscribers in June of last year. Adding to its total cost was the removal of the minimum-order size for the perk. The graphic below tells the tale -- or at least part of the story.
Perhaps more important to shareholders, the cost of shipping and fulfillment as a percentage of sales has been on rise again, eating into margins.
It's not necessarily the end of the world. As is also illustrated, greater spending on shipping more boxes with less stuff per box has been offset by sheer scale. Total operating income has swollen as Amazon has scaled up. High-margin subscription revenue has helped on that front. Subscription revenue of $6.6 billion last quarter was up 33% year over year.
But for a company that regularly produces net profit margins of less than 5%, every penny counts.
Abatement ahead, maybe
It remains to be seen if Amazon's growing delivery costs will perpetually outpace sales growth. The program as it stands now only came into existence in June of last year. We may start to see this spending slow down beginning next quarter, now that we're past the one-year mark.
The company may also still be streamlining the expanded fulfillment and shipping spending in a way that will curb these increases. Indeed, Amazon has said as much, in the fine print of last quarter's filing: "We seek to mitigate costs of shipping over time in part through achieving higher sales volumes, optimizing our fulfillment network, negotiating better terms with our suppliers, and achieving better operating efficiencies."
It would also be naive to suggest the coronavirus pandemic hasn't changed how consumers shop. Once past the pandemic, Prime customers may not place as many single-item orders as they do now.
If Amazon plans to lean on the free one-day shipping as the primary vehicle for adding new Prime customers, though, shareholders will want to keep close tabs on these shipping and fulfillment costs.
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