Are Amazon and Its Rivals Being Killed By All Those 'Free' Shipping Costs?

Amazon, Google, eBay, Walmart and everyone else in the business of selling merchandise to consumers is trying to outdo their rivals by offering better service at faster speeds with lower costs.

Which has been great for consumers so far. But like so many things that seem to good to be true, this one could be financially damaging to the companies in question.

The result is likely to be either higher fees or a scaling back of these ambitious offerings.

Amazon's financial results have appeared 'subdued' relative to some of its high-flying tech rivals because the company continues to invest in its capacity and capabilities. This is a long-term strategy undertaken in defiance of investors who want to know what public companies have done for them two nano-seconds ago. But there does appear to be a point at which losing $1 billion a year becomes insupportable as Amazon is reportedly doing in supporting its Prime customer service program. The theory behind Prime and competitive offerings is that it builds loyalty, which is consistently more profitable for those enterprises that can afford to invest in such programs.

That even a company as well-capitalized, positioned and managed as Amazon is now taking a look at its economics suggests that sustainable limits may have been reached or will be very soon. JL

Barney Jopson reports in the Financial Times:

Amazon is reviewing the economics at the heart of its business model by asking whether higher shipping costs warrant it charging customers nearly 50 per cent more for its Prime delivery plan.

Prime offers customers unlimited shipping at no extra cost for an annual fee of $79, but Amazon said on Thursday it was considering increasing the fee – for the first time in nine years – by between $20 and $40. In a highly competitive online retail market, Amazon’s rapid growth in the US and Europe depends in large part on its ability to ship goods more quickly and reliably than many of its rivals.In December, Amazon said it was developing unmanned aerial drones to deliver packages to consumers. The price review shows that Amazon is grappling with the same problems faced by other retailers that have wooed shoppers by offering low-cost shipping that undermines their profitability only to find consumers now expect it as standard.
“We haven’t done a price increase in nine years. Shipping costs have gone up,” said Tom Szkutak, Amazon’s chief financial officer.
“Customers like the [Prime] service. They’re using it a lot more. We have a lot more [product] selection ... And so that’s the reason why we’re looking at the increase,” he said.
The move could boost the company’s meagre profitability, but it would risk a backlash from customers who might decline to renew their subscriptions at a higher price.

On Thursday, Amazon reported a net profit of $239m – or 51 cents per share – for the three months to December 31 having made a loss in the previous two quarters. Its profitability has been held back for several years by investments in new warehouses that enable it to get packages to shoppers more quickly.

The disclosure of the price review was unusual for a company that usually refuses to discuss its future plans and could be a ploy to gauge customer reaction.
Mr Szkutak declined to answer a question on a call with analysts about whether Amazon would consider offering different levels of Prime service at different price tiers. The company says it has “tens of millions” of Prime customers worldwide.
In a sign that it is reviewing all aspects of the Prime model, the company said in its earnings release: “In December, Prime was so popular that Amazon limited new Prime membership sign-ups during peak periods.”
News of the Prime review helped to reverse a 10 per cent drop in Amazon’s share price after its results showed its sales growth was slowing. In the past quarter sales rose 20 per cent from a year ago to $25.6bn – good by the standards of most retailers, but weaker than the 22-24 per cent growth of the previous four quarters.
Amazon shares were down 4 per cent at $386.90 by early evening in New York.