Amazon (NASDAQ: AMZN) has cracked down on items on its CRaP (can't realize a profit) list. These are items that are expensive to ship but don't cost very much -- think a bag of chips or a bottle of water. The goal of the company is to increase its overall profitability. In addition, the retailer has pushed fulfillment for some items back to vendors, which could lead to higher prices for consumers.
A full transcript follows the video.
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This video was recorded on March 26, 2019.
Shannon Jones: Let's kick things off with the first story. Of course, that comes from none other than Amazon, AMZN. Reports have come out over the past week primarily of Amazon's newest profitability push, which has really been ramping up on its, for lack of a better term, CRaP on its website. Dan, what exactly is this CRaP on Amazon's website? What is it that they're actually attempting to do here?
Dan Kline: I am someone who has bought a ton of crap from Amazon. We've talked about it on other shows -- sometimes I get package notices from my building, and it's a mystery. What did I order? Is it something I actually need? But they're not talking about that. Amazon unofficially uses the term CRaP for "can't realize a profit." That's an item that, no matter how they ship it, it's not going to work. Picture something heavy, like a bottle of water; or something that's like both fragile and not very expensive. A bag of Doritos, that's really awkward to ship. If I decide at 2 a.m. that I need Doritos two days from now, Amazon is trying to either very much downplay those items by not allowing ads for them or just not taking them anymore because there's simply no way to make money on them.
Jones: Exactly. In 2018, you saw Amazon starting to push back on a lot of these vendors, saying, "You need to rethink your pricing." Now we've got word that not only are they saying, "Rethink your pricing," but also, "You're no longer going to be able to have ads. You're not going to be able to pay for ad space on our site if your products are not profitable for us." What's so interesting is, when you look at their ad business, Dan, it's not like the ad business is struggling by any means. Ad sales actually doubled in 2018, totaling over $10 billion for 2019. You've got some analysts saying that could jump 50% to 60%, and their ad business could even surpass the more lucrative AWS, Amazon Web Services, by 2021. It's not necessarily like the ad business is struggling. What's really behind this, Dan?
Kline: I think the ad business gives them some leeway. If there's a product that would be breakeven or lose a tiny bit of money, but it's being advertised and that pushes it overall into profitability, Amazon might be ignoring that. They haven't explained exactly what hits this list.
The other thing they've done is, they've pushed back to vendors and taken certain items and said, "We're not going to fulfill these anymore. These aren't going to be Amazon Prime items. You're going to fulfill them." What that does is, it forces the vendor to look at the pricing and say, "OK, now I have to bear the cost of shipping. I have to deal with all this." It's going to force some prices higher.
This is really just Amazon doing what any store does. If you walk into a grocery store, are they going to devote an endcap to something that they only make a couple of cents on? Or are they going to devote an endcap to a high-margin product or a product that's a gateway to others? If you buy chicken broth, you might need noodles and carrots and who knows what else? Amazon has a harder time doing that. If I buy a bag of Doritos, I'm not necessarily going to buy 16 other things with it. I might take advantage of being a Prime member and just buy a $2.99 bag of chips, and they're going to lose money. So, that's the motive of all this. It's just to right-size some of their business.
Jones: But yet, still, you're hearing the headlines about this just because Amazon has been touted, and they've really been all about creating this frictionless shopping experience, whether that's from a vendor's perspective or from a customer's experience. So now that you see them starting to get much more targeted in terms of what they're actually advertising on their site, you're starting to hear the people lament.
I have to wonder, though, and I think this is what it comes down to at the end of the day, and you started to hint at it, what does this mean for consumers?
Kline: It's bad. Amazon has over 100 million items available for Prime. Let's pretend this gets rid of 2% of the items. It's not going to be a disaster. It's not like you're going to go on to Amazon and be like, "I want shampoo," and all of a sudden they don't sell shampoo anymore. But you might find that they don't sell shampoo in the exact size bottle you want, or, in the brand of your choice, they only have certain sizes or certain availability. That can happen in grocery stores. If you go to a grocery store, they're only going to have that double-big-size box of cereal for certain brands.
So, again, it's going to impact consumers, because some things that were very, very cheap are probably either going to go away or get more expensive. But I don't think your average person is really going to notice. It's a lot like grocery store pricing. It's something you don't think about that often.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Daniel B. Kline has no position in any of the stocks mentioned. Shannon Jones owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.