Late last year, The Wall Street Journal reported on Amazon's (NASDAQ: AMZN) efforts to minimize how much "CRaP" it's selling. CRaP stands for can't realize a profit, a term that encompasses products that lead to a loss for Amazon. These products are typically inexpensive, bulky, or heavy, like packs of bottled water.
The goal of eliminating CRaP is to lower shipping costs and thus boost profits. Amazon spent more than $9 billion on shipping in the fourth quarter of 2018, up 23% year over year, while first-party online sales grew by just 13%. By reducing how much unprofitable stuff it sells, Amazon can slow its shipping cost growth and make its core e-commerce operation more profitable.
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Downside for Amazon, upside for Target
While boosting the bottom line sounds great, Amazon risks making its Prime membership less valuable in the eyes of consumers. While Prime offers benefits beyond free shipping, it's not a stretch to say that free shipping is the main draw. And I would be willing to bet that many Prime members highly value the ability to order heavy, bulky items and have them delivered quickly for free, saving a trip to a big-box store.
Eliminating CRaP items or raising prices to make them profitable could backfire if those changes impact the routine orders Prime members are placing. Prime members that were already on the fence about the membership after the annual fee was raised to $119 may not stick around if the changes are too extreme.
Products that Amazon considers CRaP aren't necessarily CRaP for other retailers, so Amazon's shift away from those types of items could be a boon for some of its competitors. Big-box chain Target (NYSE: TGT) may be the biggest beneficiary, because its online business is almost tailor-made for Amazon's CRaP.
Target sells items online through Target.com, its next-day Target Restock service, and its same-day Shipt service. While Target.com orders are fulfilled from a combination of distribution centers and the company's base of more than 1,800 stores, Restock and Shipt orders come exclusively from the stores.
Using the stores to fulfill orders gives Target an advantage when it comes to shipping heavy, bulky items. For many consumers, Target online orders will be coming from just a few miles away. And shipping from stores allows the company to better utilize assets and employees it already has, instead of needing to spend big on more distribution centers.
During the fourth quarter, Target's stores did the work of 14 fulfillment centers, according to COO John Mulligan. Stores were used to fulfill nearly 75% of all online orders, freeing Target from needing to spend around $3 billion on new warehouses.
Shipping from stores offers savings beyond foregone capital expenditures. Fulfilling items from a store costs Target about 40% less on average than fulfilling those items from warehouses. And if the customer chooses to order online and pick up their order using Target's curbside pickup option, fulfilling that order costs 90% less compared to shipping from a warehouse.
Amazon's warehouses may be more efficient than Target's, but the store base provides huge savings for the retailer. That allows the company to ship items profitably that Amazon may not be able to under its standard Prime two-day shipping. Target Restock, for example, offers a wide variety of items that Amazon may consider CRaP, like giant packs of toilet paper, 12-packs of coke, and heavy jars of pasta sauce.
Amazon sells those types of items through its Prime Pantry and Fresh services, but both require a Prime membership along with monthly fees and other fees, depending on the size of the order. Target Restock now has a $35 order minimum, but it offers free next-day shipping for REDCard holders and members of Target's free-to-join Circle loyalty program.
As Amazon looks to optimize its product mix, it's clear that the company is starting to focus more on profitability. But if that profitability push drives some customers away, Target stands to benefit at the e-commerce giant's expense.
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