The Simple Math Behind Free Shipping — A Lesson in Market Share and Volume

Amazon’s stock took a nosedive last week. In fact, it’s the biggest one-day drop since Amazon went public in 1997. And, what’s astounding is that the drop came on Friday after a positive surge late Thursday as investors predicted strong earnings for the holiday period – in fact, the prediction was that Amazon would beat the bet:

Tuna Amobi of S&P Capital IQ recently told CNBC that Amazon could report its strongest holiday season sales in history.

“I’m expecting to hear very strong results. By all accounts, we think Q4 was Amazon’s best holiday season ever on any number of metrics,” Amobi said.

And here is the kicker:

Amazon did indicate it had a strong holiday season last month, when it announced that its Prime service had record number of units shipped, with more than 3 million new customers joining its Prime membership program, which includes two-day free shipping and access to tons of free video and music content.

But then came the actual announcement on Friday – strong revenue…meaning sales were up and poor conversion as in profit because costs were up even more.

Folks – you must Google AMAZON STOCK PRICE – it’s not only the market that is swinging like a pendulum, you have to read the accumulated and posted wisdom about Amazon that reads equally volatile.

Money Morning
LA Times

How is it that analysts can’t seem to get it right? Or find consensus. Or in my mind even understand the basics that are at work here.

What is wrong with us?

I’m not an economist, I’m not a Wall Street analyst (next life, maybe – having no accountability must lower stress)…who can say what they want on Monday – change it Tuesday – revert Wednesday – obfuscate on Thursday – and then predict again on Friday – and as cynical as I am, that is literally the timeline for last week’s Amazon performance.

Here is what is wrong…in my opinion…the following is from MarketWatch:

Amazon’s total operating expenses rose 21% during the holiday quarter driven by a 33% increase in fulfillment costs as retail sales surged during the holidays. However, the stress on Amazon’s fulfillment network has been pegged as a positive by analysts, with much of the increase in costs coming from the company’s Fulfillment by Amazon program, which charges third-party vendors a fee for storing and shipping their inventory. Last week, Amazon raised fees for the program, citing higher fulfillment, transportation and storage costs.

The company continues to invest in its own fulfillment and logistics capabilities as well — from the Kiva robots that have increased storage space at its warehouses and reduced the need for human intervention at its processing centers, to Amazon-branded delivery people, and in-house trucks that ship goods in between its facilities. Amazon wants to ultimately launch a fleet of delivery drones.

33% in fulfillment costs – but that’s good because they are raising costs…and, oh yeah, they are investing heavily in people and trucks, but no worries because drones are coming…

I love Amazon. I have been buying from them since they went live. They save me time and trouble; they make my life easier and often they are a cheaper alternative.

Yet, as I have written before, what others tout as disruption, I see as obvious evolution aided and abetted by investors who are making a killing predicting impossible returns as even in the Digibabble age profit requires more revenue and less cost…and BTW, growing market share only digs that hole deeper.

Except…that Amazon is already raising prices for its third-party vendors which will suffer profit losses but will do so in the quest for more market share – yet, sadly few of them will have the deep pockets and institutional investors to weather that storm for long.

And, ultimately, Amazon will have us all so hooked and locked in that when they raise prices to turn a real profit, we will have no choice but to pay – and pay we will for the continued convenience and efficiency of it all.

And please, please don’t knee jerk me with the profits they are making from cloud storage…stay focused on retail.

Why do I care? I care because we seem to have lost sight of what’s real and not. Amazon requires a huge amount of “content” (if you will) to function – the machine needs to be fed “stuff” so that we can buy “stuff” and have that “stuff” shipped – if everyone in the chain gets squeezed out of business, all that will be left will be the giant churning engine, lots of empty warehouses, stalled trucks and, yes, some drones…

Same with Netflix and Pandora and Uber et al…free is not a business model. Free might build share as long as someone bankrolls you, but one day someone pays and I believe we will all pay dearly, at which point the models will really be tested and I predict that’s when the next “disruption” will emerge.

My loyal readers know I predicted Amazon stores years ago; just as I now predict Netflix theatres…

Who knows? But do watch Amazon on the Super Bowl…and wonder why…

Bottom line, we line up for free…as one Hollywood actress put it…Listen:

I’ll do anything for free stuff. Sandra Bullock

And there you have it. We do anything for free stuff and some make a killing.

Watch for the next disruption…

What do you think?

P.S. Let’s be clear, Amazon isn’t the only one with a cloudy difference between what’s real and what’s not. Stay tuned as Google reports its Alphabet earnings for the first time today….the Financial Times said it best “Without the ability to hide the losses behind booming internet profits, management will face more pressure to justify the spending and demonstrate a financial discipline that Wall Street long suspected was absent….Wall Street will at least have a clear view now into the full costs of their huge ambitions…”


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