It's no secret that Amazon.com (NASDAQ: AMZN) is the largest e-commerce player worldwide -- becoming the world's sixth-largest retailer in the process. One of the biggest secrets to the company's success has been its Prime loyalty program, which offers free two-day or faster shipping on over 100 million items -- and a host of other benefits -- for a $119 annual fee, or monthly payments of $12.99. However, some argue that Amazon's gains have come from selling some items at or near cost, sacrificing profitability for market share.
Recently, though, Amazon has begun to focus more on its bottom line, weeding out a host of unprofitable items by changing how and when they are eligible for free shipping, working with merchants to develop more shipping-friendly packaging, and eliminating some items entirely. This could lead to a significant boost in the company's profit margins and provide greater returns for shareholders.
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Quit selling CRaP
Certain items are at odds with Amazon's free shipping and focus on profits, according to a report in The Wall Street Journal (paywall). Many of these products are bulky or heavy items that are expensive to ship, and company insiders refer to these items as CRaP (Can't Realize a Profit).
Amazon has taken a number of steps to address the issue, which includes removing unprofitable items from its digital shelves, or increasing the quantities consumers must purchase to qualify for free shipping. The company has also enlisted the cooperation of manufacturers in shipping more items directly to consumers. Amazon has reassigned certain products to its Prime Pantry service, which requires customers to fill a box with designated items in order to defray higher shipping costs.
Rethinking packaging for the digital age
Amazon has also used another approach, enlisting the aid of manufacturers to change how they think about packaging. The vast majority of products have containers that were originally designed for brick-and-mortar retail, rather than online sales. In September, Amazon announced a new program that offers financial incentives to merchants that are early adopters, challenging them to design packaging that is easier to ship and more environmentally friendly. Any product that ships in its own packaging can reduce the need for additional packing materials, saving the e-commerce giant money.
One example of how manufacturers are responding to the growing adoption of e-commerce is the new Tide Eco-Box designed by The Procter & Gamble Company (NYSE: PG). The package is designed specifically with shipping in mind, with ultra-concentrated detergent in a sealed bag housed in a shipping-safe cardboard box. The packaging contains 60% less plastic and 30% less water than its current 150 oz. size. Because the package was created with e-commerce in mind, it doesn't require reboxing or bubble wrap to withstand the rigors of transport.
Amazon's Frustration-Free Packaging initiative has been around for years, and some merchants have realized significant benefits from the program. Leading toymaker Hasbro (NASDAQ: HAS) collaborated with Amazon over several years to reduce waste and create more consumer-friendly packaging. To use one product as an example, the company produced measurable improvement for the packaging used for its popular Baby Alive doll. Hasbro reduced the materials used by more than 50% -- realizing significant savings on its packaging costs while decreasing the amount of time consumers spend unboxing the product.
The increasing focus on profits
It has long been theorized that Amazon was willing to sacrifice profitability in its e-commerce operations to gain market share, but those priorities appears to be changing. During the third quarter, the company produced year-over-year margin improvements in each of its business segments.
Operating margins in North America grew by 13 times to 5.9%, from just 0.4% in the prior-year quarter. The International business continues to be a drag, but its operating margins crept closer to profitability, improving from negative 6.8% in the year-ago quarter to negative 2.5% currently. Amazon Web Services (AWS) also added more to the bottom line, with segment margins that grew from 25% to 31%.
Amazon's new focus on eliminating unprofitable items and working with merchants to decrease shipping and packaging costs could truly be a win-win. If the company is ultimately successful in its mission to improve profits -- and there's no reason to think it won't be -- shareholders will be rewarded as well.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Danny Vena owns shares of Amazon and Hasbro and has the following options: long January 2020 $50 calls on Hasbro. The Motley Fool owns shares of and recommends Amazon and Hasbro. The Motley Fool has a disclosure policy.