Amazon’s Shipping Costs Swell in Holiday Crunch

Provided by Reuters Inc.’s biggest quarterly profit and Wall Street’s swift punishment for missing expectations overshadowed a trend that is worth keeping an eye on.

Shipping expenses rose again in the fourth quarter, and by a wider margin than m any analysts expected. Overall shipping costs during the holiday quarter jumped 37% to $4.17 billion, while the cost as a percentage of sales rose to 12.5% from 10.9% a year earlier.

Though such expenses are expected to creep up as Amazon pushes more merchandise out the door, at least one analyst seemed troubled enough by the trend to ask executives about it.

“Any color on the higher shipping costs? And is that percentage of net revenue a new normal?” Cowen & Co. analyst John Blackledge asked Amazon CFO Brian Olsavsky on the company’s call to discuss earnings.

Mr. Olsavsky said the higher costs resulted from more inventory coming in from third-party sellers  who pay to use Amazon’s warehouses and logistics for their merchandise . That influx could have caused Amazon to turn to pricier couriers to help handle the glut.

“It put a lot of demand on our warehouses, we were completely full,” he said.

Mr. Olsavsky also pointed to “the demand from Prime members” because those customers generally don’t pay additional fees for shipping, meaning Amazon may foot the bill .

Amazon has worked to bulk up the $99 Prime membership with free goodies and exclusive offers not available to non-members. That includes its one-hour Prime Now delivery service andstreaming video content like original shows “Alpha House” and “Gortimer Gibbon’s Life on Normal Street.” Yet it hasn’t raised the Prime subscription price in nearly two years.

Mark Mahaney, an analyst at RBC Capital Markets, says the heavier shipping and fulfillment costs is actually a good problem because they resulted largely from excess demand, not because of any structural issues. Amazon “didn’t have the capacity to handle the demand and had to resort to less-efficient/more expensive logistic solutions, because [Amazon] refuses to skimp on customer satisfaction,” he wrote in a report.

Amazon, of course, has a grand plan to cut shipping expenses and lessen its reliance on UPS and others by taking more control over the logistics. In the past year it has experimented with new ventures like citizen deliverers, drone delivery and even leasing airplanes to shuttle its own goods around the country.

Mr. Olsavsky noted in the same call that during the busy holiday season, Amazon had to take matters into its own hands when its contractual partners, such as UPS, FedEx and the U.S. Postal Service, couldn’t handle it all. “And those carriers are just no longer able to handle all of our capacity that we need at peak,” the CFO said. “ W e have had to add some resources on our own.”

Written by Greg Bensinger of The Wall Street Journal

(Source: The Wall Street Journal)

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