Amazon aims to improve shipping profitability (AMZN)

pulse

March 23, 2018 4:47 PM

Amazon has been attempting to curb losses on shipping orders of low-priced items by raising shipping fees for consumer goods suppliers

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Additionally, the e-commerce giant is planning to make it more difficult for shoppers to purchase single, low-priced items, such as toothbrushes or soap, to encourage them to add these items into a larger purchase. Some personal care and health items on Amazon are already restricted as “add-ons,” or items that can only be purchased with a basket size of $25 or more. However, the company is planning on designating more items as "add-ons" by expanding the category to include health and beauty products that cost less than $7.

Amazon is looking to curb costs because its shipping costs are skyrocketing. Although Amazon has been working to optimize its fulfillment network through various initiatives, like extending order cut-off times to eliminate split shipments, its shipping costs are still growing in the double digits. Shipping costs reached nearly $20 billion in 2017 for the e-commerce titan, growing 31% year-over-year (YoY) in Q4 alone. As Amazon looks to grow its Prime Now, one-hour, and two-hour delivery services, while keeping its reputation for free and fast shipping on all orders, its move to improve profitability on consumer goods products is a sensible one.

The retail giant is following Walmart’s move to aim for profitability in shipping online orders. Walmart has already raised prices for some online goods, and recently began to push suppliers to offer more high-priced goods on its e-commerce site. Although these two companies have been in a grid-lock price war, it seems like they've come to a tipping point in terms of shipping costs.

However, each company’s approach has different pros and cons, making it unclear which one will be more successful in optimizing online revenues while minimizing shipping costs.

Amazon risks alienating its suppliers by increasing fees, which is a risky move as its competitors grow their e-commerce sites. Amazon is already known for
Meanwhile, by offering more expensive items online, Walmart risks losing out on sales from its core, price-conscious customer base. Walmart may benefit from taking an “add-on” approach to remain in favor with these customers, and could potentially attract more customers if it keeps the basket size threshold lower than Amazon’s.

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