Amazon Prime is marketing genus. Like most of you I have a Prime membership and use it a lot. I mean a lot. While I am a good customer of Amazon I am very sure that I am not a profitable one. Fulfillment costs are skyrocketing for ecommerce and multichannel retailers alike. Amazon’s latest earnings show growth in net sales of 21.8% while shipping costs grew 37%. I have been tracking the cost of shipping at Amazon for some time now and it regularly outpaces net sales increase. According to this chart obtained from Statista.com the ever widening gap between shipping revenue and shipping costs now indicates that just over half of the costs are covered by revenue:
Amazon is not alone, multichannel retailers are experiencing significant cost increases as they adjust to support consumer demands for multiple pickup and delivery methods in addition to traditional shopping. A recent Wall Street Journal article notes:
The added expense of e-commerce is a bigger burden for traditional retailers, whose stores saddle them with higher fixed costs than online-only sellers, industry experts say. A new survey of retailers by JDA Software Inc., said 68% of the respondents report rising costs for fulfilling orders. The highest costs were for e-commerce shipping and returns and shipping online orders to stores for pickup. More than half said their biggest pressures come from price, and offers of same-day and next-day delivery by Amazon.
Clearly there are some inherent problems with these new models. Prime, a master piece of loyalty marketing, also encourages mission driven shopping. I do not sit down and create one massive order from Amazon, rather I simply hop on when I see fit and place an order for 1 or 2 things. I may do this 2-3 times per week. Under the Prime scenario there is no motivation for me to save up and order several items at one time. They have even made this easier with one-click shopping. Consequently I get multiple packages delivered to my home every week. While this is great for loyalty, the current shipping paradigm leads to increasing costs. New delivery models such as using Uber will work in the cities, but in more rural areas this is not an option.
This causes me to continue wondering if there is a tipping point, and if so will it occur before the camel’s back breaks? With roughly 7% of total retail sales driven through ecommerce, presumably most of that delivered via UPS, FedEx, and USPS, my guess is that costs will continue to rise sharply until we pass some volume threshold. Drones are a possible solution but I still question the ubiquity of their use. Already we see mail rooms in office and apartment buildings that are struggling with volume and refusing to hold packages. In my rural neighborhood we have a set of lockers for bulk delivery. This past holiday they were overwhelmed and unable to accommodate the volume of USPS packages, thus requiring a trip to the post office. Seeing all this I wonder at what level direct to consumer home delivery becomes cost effective?
As with all change there are growing pains. In this case I wonder if 15% of sales through ecommerce would break the camel’s back before reaching critical mass?