Are shipping losses the new normal in retailing?

Through a special arrangement, presented here for discussion is a summary of a current article from Supply Chain Digest.

The headline news around Amazon’s recent first-quarter results was that e-commerce’s dominant player just keeps growing. Revenue expanded 28 percent to $29.1 billion. In 2015, Amazon surpassed the $100 billion mark for the first time, reaching $107 billion.

At Supply Chain Digest, we look at Amazon’s actual merchandise sales to gain a view of the most relevant comparisons to the overall retail sector.

In North America, Amazon’s merchandise sales rose an incredible 31.8 percent, to $13.5 billion, as it simply continues to defy the law of large numbers. Internationally, merchandise sales were up 30 percent to over $7 billion, giving Amazon total first-quarter merchandise sales globally of over $20 billion.

Amazon managed some profits for the second quarter in a row, but at $513 million, that represented just 1.7 percent of total sales. However, Amazon’s operating cash flow jumped 44 percent to $11.3 billion for the trailing twelve months.

In terms of logistics, as usual Amazon lost money on shipping. Shipping revenue of $1.8 billion worldwide in the quarter minus spending at $3.27 billion shows a net loss of about $1.4 billion.

That loss on shipping represents a whopping 6.8 percent of merchandise revenue, which we think is a better way of looking at it than in comparison to total revenue, which includes web services, digital media and other categories that don’t use shipping. It used to be shipping was a profit center for most companies — that’s long gone in an e-commerce world.

In addition, fulfillment costs — which don’t include shipping but rather the costs of fulfillment center operations, depreciation on those FCs, and inbound freight — came in at $3.68 billion, or 17.9 percent of merchandise revenue, slightly above what it was for all of 2015, so that number isn’t getting any better.

Together, net shipping and fulfillment costs represent 24.7 percent of merchandise sales.

With gross margins of only about 35 percent, it shouldn’t be any surprise Amazon struggles to make a profit, but a vigorous top line and continued gains in market share keep the stock moving higher.

BrainTrust

"I don’t think all true costs are captured and aligned with the shipping processes accurately in most retailers."

Ralph Jacobson

Global Retail & CPG Sales Strategist, IBM


"The “dirty little secrets” about Amazon include how they are using MarketPlace, Prime and other entities to leverage growth and reduce future costs."

Chris Petersen, PhD.

President, Integrated Marketing Solutions


"Traditional retail financial metrics need to be thrown out and replaced with measurements more in tune with reality."

Peter Charness

Retail Strategy - UST Global


Discussion Questions

DISCUSSION QUESTIONS: Will Amazon have to sharply reduce shipping and fulfillment costs to below a quarter of merchandise revenues to build sustainable profitability into its business model? Is a loss on shipping and excessive fulfillment costs something competing retailers should be ready to absorb in the longer term?

Poll

9 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
Peter Charness
Trusted Member
7 years ago

Traditional retail financial metrics need to be thrown out and replaced with measurements more in tune with the realities of omni channel retailing today.

Fulfillment to the customer door is part of the cost of doing business today so “shipping cost and revenue” and margin needs to be measured a bit differently. By this logic a typical retailer should close DC’s as the revenue generated by those facilities is really really bad, particularly compared to the expense. For the moment perhaps something like “initial product margin” and final margin as % of sales would work better.

If you want to say that Amazon’s total margin as a % of sales is “lackluster” that makes more sense than trying to tie shipping revenue and shipping costs together in isolation.

Max Goldberg
7 years ago

What these numbers don’t factor in are the millions of dollars Prime members pay for the privilege of 2-day shipping and a plethora of other perquisites, or Amazon’s highly successful cloud computing business. Amazon is much more than selling goods, unlike most retailers. And that’s where traditional retailers struggle when trying to compete with Amazon. Retailers need to keep an eye on costs, and they need to streamline processes wherever possible. Right now Amazon is calling the tune, while other retailers try to figure out how to dance.

Bob Amster
Trusted Member
7 years ago

When Sol Price ran the Price Club (since merged with Costco) he wasn’t making money off the merchandise sold, he was making money on the money: Price Club had 22 turns per year and over 90 day terms to pay suppliers, which means he was buying merchandise with the vendors’ money! So, if Amazon is going to continue to lose money on shipping, it has to make it up somewhere else. Membership-fees is one source and some profit on merchandise is another. Simple math: if the sum of these two is larger than all the other expenses, Amazon will continue to exist, if not…

Retailers can’t absorb shipping-and-fulfillment expenses unless they can make sufficiently large margins on the product under which to bury the losses in shipping. Most retailers don’t make those huge margins because they want to stay competitive, and because certain product categories have become commodities.

Chris Petersen, PhD.
Member
7 years ago

The “dirty little secrets” about Amazon include how they are using MarketPlace, Prime and other entities to leverage growth and reduce future costs. In the shipping costs area, Amazon typically pays less than most small retailers, and this does not factor into the value of Prime memberships.

As Peter mentioned, the traditional retail metrics need to be revised for today’s omnichannel competitive environment. As Amazon leverages its growth to further amortize distribution costs, they create a strategic competitive advantage. The real question is not Amazon’s “shipping losses,” but if traditional retailers can keep up as more and more consumers demand low-/no-cost shipping.

Ralph Jacobson
Member
7 years ago

Without singling out any particular online retailer, I see challenges with the metrics being used to measure logistics costs. I don’t think all true costs are captured and aligned with the shipping processes accurately in most retailers.

This can result in inconsistent results from retailer to retailer because it’s not an apples-to-apples comparison. Additionally, I think there are still many aspects of shipping costs that can be reduced and extracted even further, as well as generate more revenue for services provided to also offset the costs.

Naomi K. Shapiro
Naomi K. Shapiro
7 years ago

BrainTrusters wiser than I have given some outstanding answers to this question. For example:

  • “Traditional retail financial metrics need to be thrown out and replaced with measurements more in tune with the realities of omni channel retailing today.”
  • “When Sol Price ran the Price Club (since merged with Costco) he wasn’t making money off the merchandise sold, he was making money on the money.”
  • “The “dirty little secrets” about Amazon include how they are using MarketPlace, Prime and other entities to leverage growth and reduce future costs.”
Mark Price
Member
7 years ago

As Peter says, the old ways of thinking about shipping and fulfillment no longer apply. Consumers are not willing to pay extra for something they can get for free at certain times of the year and through certain retailers. E-commerce companies and bricks-and-clicks must be careful about their margins and make sure to evaluate on 12-month customer value, or they will price themselves right out of the market,

Kim Garretson
Kim Garretson
7 years ago

I think we have to take into account Amazon’s moves into air transport and all the cost-reducing innovations the media is reporting on UPS, USPS and FedEx. What is around the corner that is going help solve this problem? One recent headline on Amazon and air transport: “The online retail giant now owns 10% of plane leasing company Air Transport Services Group. Last week, Amazon said it would lease 20 Boeing 767 planes from ATSG to deliver more of its customers’ orders.”

Arie Shpanya
7 years ago

Amazon also raised its minimum AOV for free shipping a few months back. While customers have come to expect free shipping, they are going to have to spend more to get it. This coupled with the prime revenue that isn’t accounted for in this shipping metric, as others have mentioned, means that number is not as alarming as it may seem, if they are making it up elsewhere.