Amazon's Shipping Costs Are Soaring. Should Investors Be Worried?
E-commerce was supposed to be cheaper than operating a retail store, the traditional thinking went. Online sellers can save money by avoiding pricey commercial rents and a staff devoted to assisting customers.
Despite the conventional wisdom, that hasn't always been the case, and shipping costs are a primary reason why.
Amazon.com(NASDAQ: AMZN) spends billions more on shipping than it brings in in charges and fees, and many brick-and-mortar retailers have complained that e-commerce sales, though accretive to overall revenue, come with a lower margin than in-store sales. With networks of stores across the country, incremental sales in stores cost those retailers almost nothing in operating costs, but each e-commerce sale needs to be picked, packed, and shipped.
Image source: Getty Images
For Amazon, shipping costs have long been a concern for the company. In recent years, Amazon has made efforts to diversify its logistics capabilities, entering into a contract to lease 20 cargo planes last year, recently handling its own ocean freight, and also building a $1.5 billion airport hub in Cincinnati. The company sees those investments as necessary to handle spikes in demands that can overwhelm its shipping partners likeFedEx,UPS, and the US Postal Service, especially after thousands after deliveries arrived late for Christmas in 2013. As its retail sales grow by more than 20% a year, it seems logical that the company will have to take more of its logistics under its control.
However, as Amazon's sales have skyrocketed so too have its shipping costs. Those expenses reached $16.2 billion last year, a 40% increase from the year before and accounted for nearly all of the company's $17.6 billion in fulfillment expenses, its biggest line item after cost of sales, or what Amazon pays for the goods it sells. During the same time, net shipping costs, which subtract revenue from shipping fees along with a portion of Prime membership fees, surged 43% to $7.2 billion, outpacing overall e-commerce sales growth of 24.9% last year. That was the fastest growth in net shipping costs since 2011.
Let's take a closer at Amazon's shipping costs to see what investors can expect in the coming years.
Shipping ain't easy
And the recent expenditures are evident based on the explosion in shipping costs last year.
Source: Amazon 10-K Filings. Note: 2011 and 2012 revenue growth figures include AWS.
Note: Figures do not include expense for stock-based compensation. 2010-2012 figures include AWS.
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Jeremy Bowman has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends FedEx and United Parcel Service. The Motley Fool has a disclosure policy.