For a company that dominates the way that Amazon does, its profits are minimal compared to its revenues. Between 2007 and 2013, its revenues grew from $14.8 billion to $74.45 billion. But in that same time, Amazon saw its profits drop from $436 million to $273 million.
These relatively small profits are due, in no small part, to Amazon continuing to invest in new enterprises, but Amazon’s shareholders have been exceptionally patient until now. However, with Amazon’s stock down 18%, investors are not quite as optimistic about the future of the company.
Profitability is now a big issue. A lot of time has been taken and effort made to develop the front end of the Amazon website to improve things in that area, and appease any disgruntled shareholders. Other measures adopted include raising the price of its prime membership and re-categorizing many products from ‘prime’ to add-on items.
But on the horizon is another potential headache for Amazon – shipping. FedEx has announced plans for dimensional weight pricing on all ground shipments (due to take effect January 1st). The effect of this is that Amazon – along with other eCommerce providers – will be under increased pressure to get the packaging of customers’ orders right. Given Amazon’s almost infinite assortment of products, this is no minor task.
Amazon has tried to address this by filing a patent for what they call an “anticipatory shipment algorithm.” In other words, attempting to calculate a formula that will provide a solution to this profit sapping dilemma. Up to now, no solution has come forth.
Amazon appears to find itself in a vicious cycle – one of flat lining profits. Jeff Bezos’s famous line, “Your margin is my opportunity,” was based on the premise that by continually increasing the economies of scale that Amazon can operate within, eventually, this would pay off in a big way. Though an increase in shipping costs was to be expected as the scale of operations became bigger, disproportionately higher costs were not. Factor in unexpected external issues like FedEx’s new “dimensional weight pricing” policy, and the problems become trickier.
All this has led to the increased perception that Amazon is fundamentally an unprofitable business model. There’s very little room for maneuver in terms of increasing its net profit. What little room there is leaves the company vulnerable to losing customers to the increasing competition from other marketplaces.
Amazon hopes its new shipping policy will break the cycle. It has recently sent an email to third party sellers informing them of tighter shipping policies that are taking effect. One of these was put in place on November 13, 2014 – removing the one day shopping option as a US domestic shipping option for your merchant fulfilled items on Amazon.com. Last month, Amazon also changed the way it calculates sellers’ late shipment rate (LSR), a metric factored in to their Order Defect Rate performance standings.
It seems that Amazon is finally feeling the pressure that comes with disappointing profit margins, but some commentators are surprised at how long it’s taken to get to this point. The question is, how will Jeff Bezos and the other key decision makers in the organization look to arrest this perceived decline? It will be interesting to see whether the culture of this eCommerce giant is about to be re-defined.