Amazon free shipping promotion could cost company big bucks: Moody's

E-commerce giant Amazon announced a new holiday promotion on Monday that could cost the retailer big bucks during the coveted holiday season.

The company said it will offer free shipping, with no minimum purchase, on orders scheduled to arrive before Christmas. It is the first time the company is making such an offer – non-Prime members are generally required to reach a purchase minimum of $25 to qualify for free shipping.

The promotion, however, will likely cause the company to incur increased expenses, according to Moody’s Investors Service.

The credit ratings agency noted that in the fourth quarter of 2017 alone Amazon’s shipping costs amounted to $7.4 billion. Amazon paid about $22 billion in shipping expenses for the full year in 2017 – double what it paid in 2015.

“Free shipping is one of the easiest promotions to execute for a retailer, and is certainly popular among consumers, however it is a very costly initiative to undertake,” Moody’s Lead Retail Analyst Charlie O’Shea said in a statement.

Amazon’s stock was trading lower during Monday’s session.

TickerSecurityLastChangeChange %
AMZNAMAZON.COM, INC.3,000.46+22.89+0.77%

Despite cost-related concerns, O’Shea noted that the company is unique in that it has the flexibility to execute such a deal.

“Amazon’s patient and seemingly profit-agnostic shareholder base provides the company with the flexibility to offer this type of costly promotion, which is a unique competitive advantage,” he said.

The company said during its most recent annual report that it expected shipping costs “to continue to increase to the extent our customers accept and use our shipping offers at an increasing rate, we reduce shipping rates, we use more expensive shipping methods, and we offer additional services.”

Amazon may receive more orders as a result of the promotion, which could end up offsetting some of the increased expenses.

The announcement comes in the wake of free shipping promotions at Walmart and Target. Retail sales this holiday season are expected to rise by as much as 4.8 percent in 2018, according to the National Retail Federation, as the U.S. economy continues to strengthen.

Amazon’s promotion begins on Monday and is expected to cover hundreds of millions of items on the site.