Amazon's Prime Service may start to become too good for a technology giant.
The offer has attracted about 100 million subscribers. This large customer base, in turn, prompted more and more third-party merchants to sign up as Amazon service executives. This is because the products offered by vendors who are part of this program are eligible for Prime Free Shipping offers.
So far so good? Prime attracts more customers to Amazon, which lures more traders who help Amazon expand its product offering, which is likely to attract more buyers and encourage existing buyers to buy more items from Amazon.
The company's problem is that shipping costs are increasing, reducing its profits and making its free shipping offers more expensive. Amazon's execution costs have already risen faster than its revenue, said Synovus Trust's senior portfolio manager Dan Morgan, who owns Amazon shares.
One of the company's key issues, he said in an email, is "How can Amazon balance its performance / delivery costs with increased order volumes from Prime members?"
Free shipping is expensive for Amazon's offer
Morgan is a long-lasting bull on Amazon, but much of his optimism about the company is related to the Amazon Web Services cloud computing business and its rapidly growing advertising business. He is more skeptical about the prospects of a traditional retail company.
Read more:Gold mines are buried "under the weeds" on Amazon – here's why the company could take over the business for more than $ 1 trillion.
Amazon charges customers $ 119 per year for their Prime Subscription. But about half of this amount is now consumed by offering free delivery to customers, Morgan estimates.
These costs could continue to grow.
In 2017, Amazon spent $ 25.2 billion in costs, up 43% on the previous year and reaching 14% of the company's total revenue. This amount may have increased to $ 35 billion, or 15.1% of the company's sales for all 2018, and may jump to $ 43.3 billion, or 15.4% of sales this year, in a benchmark analyst Daniel Kurnoss evaluates the recent report.
Indeed, Kurnos was concerned that shipping-related factors could have reduced Amazon's results during the holidays. Although Wall Street analysts generally believe that the company has earned $ 3.7 billion in operating income in the fourth quarter, Kurnos is forecasting $ 3.2 billion.
Amazon has reported on its holiday period on Thursday.
"We are a little cautious … taking into account the external pressures on delivery costs and a significant increase on the same day to two days," he said.
Amazon is facing price increases
Part of this year's problems with Amazon is that all three major local shippers – the US Postal Service, FedEx and United Parcel Service – simply moved their prices. Amazon has recently adjusted its payments to commercial customers using their performance services. But it is not clear whether its higher costs will fully cover its increased costs. And yet, these fees apply only to third-party merchants, not to products sold by Amazon.
Add it all and Prime Free Shipping offers customers better deals – and worse – Amazon.
"Rising performance costs not only damage the operating margin, but also reduce revenue from prime ministers, as annual revenue of $ 119.00 evaporates as shipping costs increase," said Morgan.