Oh Goodie, Amazon Finds a New Way To Pressure Its Margins
Amazon.com (AMZN) seems to be on a mission to compress its margins. It’s selling Kindles at a loss. It’s making it easy to share Prime memberships. And now the New York Times has a story about how Amazon is building at least seven new warehouses in a “multibillion-dollar building frenzy.”
According to the Times, “Amazon hopes the warehouses will allow it to provide better service” – which according to chief Jeff Bezos means one-day or even same-day delivery. The timing comes as Amazon “is about to lose perhaps its biggest competitive edge,” the fact its customers haven’t been paying sales tax.
Bezos seems intent on making his online superstore competitive with every retailer on the block, but this is expensive.
The theory seems to be that people will be more inclined to buy stuff on Amazon if that stuff arrives faster, which makes it look like Bezos only watches the top line, not the bottom one.
This gets to why people buy stuff on Amazon. It may not be the delivery time or, for that matter, the ability to avoid sales tax. To be sure, both are important, but the biggest advantage it offers is the convenience of being able to shop from home at any time of day or night – even to order while sitting on the couch, watching television. Amazon’s putting brick and mortar stores like Best Buy (BBY) out of business. Its advantage is being online, not being next door.
Some of the people who need stuff immediately, in under two days, won’t even want to wait a day, or an afternoon. Amazon will be essentially racing that customer home from work or an errand, trying to catch that customer before he or she stops by a brick-and-mortar store. And every time Amazon loses this race, it risks having the item returned.
Meanwhile, shipping is already expensive for Amazon. According to the latest quarterly filing, Amazon took in $930 million in shipping revenue in the first six months of 2012 but spent $2.2 billion on outbound shipping costs. million on free shipping. Last year it had shipping revenues of $1.5 billion but spent $3.9 million.
And there are unintended risks that go with new building and complexity. Take it from Amazon, whose own filings explain it best. “As we continue to add fulfillment and warehouse capability or add new businesses with different fulfillment requirements, our fulfillment network becomes increasingly complex and operating it becomes more challenging.”
This could be an expensive lesson that eats into its already tiny profit margin, maybe even pushes it into negative territory.